Monday, March 17, 2008


$2? That's what JP Morgan will pay for Bear Stearns in a bailout pursued, financed and strong armed by the Federal Reserve. When we look back on this years from now, people will wonder how Jamie Dimon was able to gain control of so much in assets for so little. The Fed's got his back on the riskiest stuff and JPM gets Bear's prime brokerage, asset management and investment banking businesses basically for free. Dimon will go down in history as one of the greatest negotiators to ever walk down Wall Street.

There are some unanswered questions surrounding the deal. What are the terms of the Fed loan being provided to JPM? Do they have any risk from the assets on Bear Stearn's balance sheet? Who bought all those puts last week on BSC? Were the put buyers counterparties to BSC? Would it be legal for a counterparty to hedge their risk buy purchasing puts? Was there insider trading? How much did the option market makers lose? Did Goldman Sachs and JP Morgan withdraw financing from BSC knowing that it would give them an opportunity to make money and buy the assets on the cheap? Will GS buy any of the assets from JPM? Will shareholders approve the deal? What if they don't? Can the Fed force the deal through?

The stock market, at least for now, seems to be taking the news in stride. After a swift 200 point loss, the Dow has recovered, trading down just 3 points as I write this. Of course, it's only 10:45 so who knows how we'll close, but I am encouraged by the action so far. The VIX spiked over 35 this morning which is very near the highs seen in the August and January sell offs. The AAII sentiment poll over the weekend showed just 20% bulls, so sentiment is decidedly negative. Is this the bottom? I don't know, no one does, but it's beginning to feel like it. Bottoms are often marked by a specatacular bankruptcy and while BSC didn't actually file Chapter 11, they certainly would have if the Fed and JPM didn't step in.

At this point the biggest problem with being a bull on stocks is that it is hard to see what would be the catalyst for a move higher. The economic news hasn't been as bad as the headlines suggest but it certainly hasn't been good. The credit markets just seem to get worse by the day. The dollar is still falling and inflation is higher than anyone at the Fed is willing to admit. Having said all that, it would seem that, based on today's action so far, the bad news is losing it's punch.

One thing that we can learn from looking at past bear markets and recessions is that the market will likely bottom before the economy does. If past recessions are any guide, the market will bottom at the trough of the recession when things are the bleakest. Can things get worse? Are we at the bottom yet? All I can say at this point is maybe.

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