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First, I have to say, it is really astounding, how a formerly first league player can so quickly go bust. Just one year ago, in January 2007, the stock of Bear Stearns (BSC) traded for $170, and now it has been "sold", or I should better say liquidated, for $2 in shares of JPMorgan (not even cash, meaning the price could drop even more).

Now, the first reaction might be: oh no, watch out, I must liquidate all my stocks tomorrow Monday first thing! And if you look at the Asian stock markets which dropped up to 5% you could be right. But remember that BSC already dropped 50% on Friday, when Asian markets where already closed. Some might be tempted to think that this was the end of the financial system as we know it.

Nevertheless the US markets "only" dropped 1.6% (DOW), 2.08% (SPX) and 2.26% (Nasdaq). The markets also didn't close at the worst level of the day, despite being a weekend, where traders don't like to keep positions overnight in an uncertain environment.

Why is the takeover by JPM bullish? For example, it eliminates one of the major players. Then, the Fed has agreed to provide $30bn to bolster Bear's balance sheet which had the most exposure to crappy loans ($13bn). This eliminates the risk that Bear would have to liquidate their assets at fire sale prices, which would have caused turmoil.

It is also very important that the Fed immediately acted, unlike the Fed did in 1930 (which was a cause for the Great Depression) or the Japanese central bank did after the 1990 stock market, credit and housing bust. The Banks can now borrow short term funds and lend long term. Since the spread between short and long term rates is very wide now, banks will make a decent profit and thus improve their balance sheets.

Furthermore, as the Ft.com reports:

With Bear’s headquarters alone valued at about $1bn, Mr Dimon’s main preoccupation will not be whether the deal ends up boosting earnings – JPMorgan has already said that the takeover would add $1bn a year to profits – but to decide what to sell and what to keep.

People close to the deal on Sunday night said JPMorgan was almost certain to retain Bear’s prime brokerage business, giving it critical mass in a market where it does not now have a presence.

Bear’s securities clearing unit is a reliable cash-generator and is likely to be kept. Its energy trading unit could be a nice add-on to JPMorgan’s existing franchise. However, the advisory business and some of its fixed income operations are likely to be sold or significantly downsized.

Certainly there are going to be a lot of Job cuts among the 14'000 employees of Bear. However JPM will also gain new talent. Also payrolls will probably decrease, thus increasing JPM's future earnings.

So, maybe, there is again going to be some selling tomorrow Monday, but I still believe that the lows for the general stock market have been reache. Especially if the Fed will cut rates aggressively again on Tuesday, March 18. I expect a 1% cut.
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The chart as a bonus, just horrible:

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I agree it is a bullish indicator.  Most of my positions are now bullish as well.  But bulls also poop so watch out below.  This will be bankruptcy month for some other stuff as well.  Lets get it over with, I say. 

There may be a suprise in the afternoon hours.  This may well be a big horseshoe day.  Watching Asian markets is funny sometimes.  They overreact and the next day we go up and they feel stupid.  This happens a lot.

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What is also important is that this deal eliminates Moral Hazard, since Bear Stearns shareholders have been wiped out. Apparently, the employees owned up to 1/3 of the company. This will give a signal to other banks and investors to take less risk.

As a sidenote, my banker, the poor chap, had all his fortune in his bank (UBS), because he trusted his employer. He has lost more than 50%. It shows you that you simply can not trust your employer, even if they play in the premier league. Enron shareholders and employees will remember... and agree...

ALWAYS diversify through different sectors!

 

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November 14, 2007: Camistocks calls for a bottom in the stock market.  The Dow closed at 13231.01. 

November 26, 2007: Camistocks calls the bottom in the stock market.  The Dow closed at 13289.45.

12/6/2007: Camistocks calls for a bottom in "certain sectors," recalling the 1998 bear market.

12/11/2007: "Personally I still don't expect a retest of the lows, just a consolidation."  Dow close: 13432.77

are we noticing a trend yet people?

1/23/2008: Check out this winner blog here from camistocks.  Money quote: "Not all subprime loans are going to be worthless, despite what the bears will tell you." Well, cami, according to one bear (Bear Stearns), you are right.  2% of marked-to-model value certainly isn't worthless!  I suggest all Fool readers read that blog for it's comedic value.  And then after that go read SpecBear's August 2007 blog for a dose of truthfulness and commonsense.

Here are some other money quotes from that blog:

"Right now the most important thing is that markets must calm down. And they have done so already, because the spread between LIBOR and the Fed Funds rate has normalized again."

"Sovereign wealth funds, what are they? They are funds created by states to manage their huge accumulated reserves more effectively. So they will not only buy safe treasuries and other government's bonds, but also stocks or real estate or whatever."

"The US housing market will pick up again at one point. People from all over the world still want to immigrate into the US, just ask the illegal aliens!"

LOL cami.  i'm having a hernia laughing from all these quotes.

1/30/08: Cami makes fun of a bearish commentator.  Dow close: 12442.81.

3/11/08: And I quote: "I think the DOW and the SPX have probably successfully retested their lows." Dow close: 12156.80.

I will give you credit for being bullish on gold, but at this point that should be obvious to anyone.  Your track record on stocks, unfortunately, is completely out-of-line with reality, and this blog is just another in a string of predictions that will prove to be wrong.  If you keep writing bullish blogs, eventually you will be right - just like even the blind squirrel finds an acorn now and again.  The other criticism I have is that there are plenty of technical traders I've seen that have made bookoo bucks shorting the market, not just on the fundamentals but on the technicals too.

And how does this deal eliminate moral hazard?  30b backed by the Fed, which means my tax money.  If anything this creates more moral hazard.  This is not hard, you don't need charts or zillions of 10Q's to figure it out - it's common sense.  What happens if UBS and/or Lehman goes down this week?  Then what?  Is the stock market going to bottom then?

The only people who are suprised by this BSC thing are the same people who are suprised that New Century went out of business, suprised by Enron, surprised that oil is over 100/bbl, surprised when they get wet when it's raining and they don't have an umbrella...

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Doug, first, thanks for reading my blogs so thouroghly!

-all my bottom calls where indeed bottoms, as the general stock market was always higher a few weeks later. The stock market doesn't only consist of housing stocks and investment banks, on which you are apparently focusing.

-Again, not all subprime loans are going to be worthless.

-I'm glad my blog makes you laugh. most blogs are simply boring or cynical or angry.

-I am actually bullish on gold since many years and have warned of recession since spring 2007.

-If you would take just one minute and click on my score, you will see that my stock selection isn't that bad... In fact more than 13 stocks have a score of +100

-moral hazard is eliminated, because all the shareholders and even employees of Bear have lost their money. It may cost you some tax money, but at least the financial system continues to fonction. How else would you be able to cash in you shorts?

-and lastly, why are you so angry? Did you have a bad day? 

 

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You can be a bull on commodity related stocks, but cheerleading the rest of the market?

This is far from over, this is just one of the leveraged "investment" banks being taken down. BSC is not even a top 25 derevative holder, more will likely be taken down.  

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Abitarecatania, I really hope I don't sound like a cheerleader. However, as I have stated so many times before: the news always sounds terrible at the bottom. And the Bear Stearns liquidation really fits into this category.

Re. the derivative problem, for example JPM, the "derivative king" is supposed to crash since 2000. They didn't

I am currently watching CNBC and they are making on doomsday.

US companies that have a big share of their business in exporting will do better and better the more the dollar falls. Apparently currently earnings from exports make around 50% of earnings in the S&P 500. This should increase.

Nevertheless, as a foreigner I can simply not invest in US companies since the declining currency is eating up my profits. US based stockholders however will make money.

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I recommended this post strictly because Demon Doug did such an awesome job refuting you.
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Zanibel, I'm very sad to read this. If you don't like somebody, why just ignore?

On the other hand, thanks for your rec, because more people will read my post and will decide if I was right or wrong. 

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Don't be hurt, cami.  It's good for people need to see the both sides of the issue.

I like reading your blog, btw.  I just don't often agree with your opinions.  Anyway, it looks like you are a popular CAPS player, whether I agree with you or not.

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There is nothing to add to DemonDougs demolition.

I think you are actually very close to the truth Camistocks. You even said it yourself: "Nevertheless, as a foreigner I can simply not invest in US companies since the declining currency is eating up my profits. US based stockholders however will make money."

No we wont! Purchasing power is the whole point. The best performing stock market in the world is Zimbabwe. For arguements sake (and based on the mostly calm responses to your critics!) I'm going to assume you're Canadian. If I had put my money into a Canadian stock in Canada last year and the stock had been a dog with zero growth I would have made 22% when I repatriated the money back to the US. Canadians (and almost every other country) have got richer compared to the US even if they have done nothing.

The other point no one has mentioned in your assumptions is that the US has exports to sell. We dont. Boeing is booked out for years and refuses to increase capacity as doing so last time nearly put them out of business. There is a truly vast quantity of near new Cat products for sale at bargain prices. There a few exceptions to this sorry tale. The US has decided that it is too cool to get its hands dirty actually making things. Heck, we're the "knowledge" economy. Building and selling real products is so last century. We are going to sell CDO's to the world! It's a game that will never end!

You do constantly call bottom and you are not calling temporary bottoms. There is simply less money around to pump up the market at the moment. Until that changes it will move lower. 

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The culprits are beginning to pay the price for their risky investments.  Thats bullish to me.  There are many bullish signs.  That doesn't mean there's a bottom yet though.  Just means the set-up for a great recovery is taking shape.  I would just ask, what kind of bottom is camistocks calling for?  A short term bull bottom in a bear environment or a DJIA bottom -  period? There is a difference.  The small bull ralley's (sucker ralleys if you will) have been going on as they always do. 

There are several things in the NBER that conflict and make no sense.  But then, nothing makes sense right now anyway.

 Nevertheless, BEAR STERNS lied their eyeballs out just the other day.  This kinda of thing is just what they deserve for the lack of transparency.  Good riddance!

Go J.P. Morgan!

 Wish I could recommend this twice, a lot of good info on this blog.

 

 

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mickey, me a Canadian? thanks for the laugh, I am from Switzerland. :-) You have probably not read many of my posts, as you would have known.

Yes the US economy is currently to 80% a service economy. This will change IMO. Today most of the manufacturing has been outsourced to China. China has no quality control and a low skilled workforce. We have recently read enough news about crappy products from China. Also, China is still a communist dictatorship.

The dollar has fallen very much against most currencies, so much that many countries including China who pegged their currency to the dollar are suffering from high inflation. This is already leading them to revalue their own currencies.

Many US companies will start to manufacture in the USA again, since there is quality control and a skilled workforce. Today's manufacturing in developed countries is usually done by robots. So Americans won't need to "get their hands dirty". On the other side many people actually love to make things with their hands and get their hands dirty.

My bottom calls are usually for any correction or even bear market. Please read my blogs thoroughly. I reserve the right to be wrong.

Who will buy stocks? Well first the shorts, who will have to cover. Second, there is a whole lot of money on the sidelines. Third foreigners with a long term perspective (who believe that the dollar will recover in a few years). The USA is for sale.



Zanibel, thanks that is very kind.

cluelessmorgan, as I said I am just calling for important bottoms. However since the entire mood is so negative and the USA is now in a recession IMO, I will be so bold to call for THE bottom. However that doesn't mean that the stock market has to shoot up immediately. It can go sideways for many months. And again, I reserve the right to be wrong.

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Comments on this post are a great indicator of the markets and the humane nature...

(1) We're only slightly better than lemmings

(2) We LOVE theorizing after things have happened

(3) We don't like people who're not like us ("go f**k yourself pumper")

Am sure all of us would have been saying the opposite to bears in summer of '07. "Fed is not asleep, you know", "Market just hasn't understood these complex securities enough to appreciate them" and like. We are the reason market swoons both ways so much and is so much fun.

I am claiming I am not immune to these fallings but I try and catch myself - I fail a lot, but I try. A Swiss saying goes - "When one shuts one eye, one does not hear everything." Try and keep that damn eye open, comrades!

Anyway, good job, Cami! Your blogs are one of the few I have on my Live Bookmarks and I enjoy reading your perspective. 

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cami: I have no anger.  I have what is called "schadenfreude," and I also take pleasure in pointing out where people are unrealistic and very, very wrong, as your track record has shown - save for commodities, where we agree and I do give you credit for that.

Ah, switzerland - so I'm sure you understand German and what that means.

Also, I sort of mistook what you said about moral hazard, but I believe you are wrong about your conclusion. An elimination of moral hazard means that banks will continued to take on more debt and risks than they otherwise would, and will continue to fund bailouts of financial companies that don't deserve it.  As far as cashing in shorts, if you short a company and it goes to zero, you have your money.  No derivatives or counterparties needed.  Now, if you have puts, you might get screwed, but the chance of defaults on put derivatives should be part of the investment thesis at this point.  But because we have eliminated moral hazard, there's no chance of pricing that into a put option now, is there?

I firmly believe the financial companies should be allowed to be flushed down the toilet.  In 1907 a lot of Wall Street went BK and we survived.  In 1929 wall street went down - but the depression didn't start for a couple of years because the Fed screwed over the economy along with Smoot-Hawley.  If 90% of all banks in the US went under tomorrow, would anyone starve?  I don't think so.  Will payments slow down, will the economy grind down slowly, will businesses slow down signficantly, will the rich stop getting super richer every day? Surely.  But would this be a bad thing?  It would be tough in the short term, say for a few months while private individuals with billions in reserves start their own, from-the-ground, banks, companies, and venture capital firms.

Of course we could keep bailing out banks and keep the bonus money flowing to the rich bigwigs and their 10s of millions of dollars in bonuses.  Because that's fair right?  Elimination of moral hazard means the CEO that ran BSC into the ground gets a 28 million dollar penthouse while half the employees lose significant parts of their life savings along with their jobs?  Right?

Your statement "What is also important is that this deal eliminates Moral Hazard, ... This will give a signal to other banks and investors to take less risk."

Elimination of moral hazard means more risk cami.  Not less.  More risk.  It's the market and the SWF's and investors that are going to cause the banks to take less risk.  The market should be allowed to do what it will do, we should go through the pain for a year or so and restart our economy.  We are ripping the bandaid of slowly, very painfully slowly, instead of just making one big rip of that bandaid.

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You mentioned in another post that americans should drive smaller cars.  The market is heading in that direction.  The current popular suvs are smaller (than in past) and (on the whole) people are more concerned about gas mileage.  The smart car is coming to the usa also. :D
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millionairefools, thanks, I appreciate your comment. 

Doug, let's agree to disagree.

zygnoda, yes, I hope so. I think I'm going to make a blog on the Smart car. 

 

 

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