Was that the bottom?

I wrote on March 11th that I had thought we had hit bottom. On March 10th, the S&P established a double-bottom, and the market rallied off of that bottom on the 11th.

One week ago, the market did break through that bottom, as news of Bear Stearn's fire-sale bailout rocked the markets. However, markets recovered from that shock, and actually ended last week positively.

Today, the major indexes are up multiple percent on news of the higher-priced BSC buyout, CIT financing, better-than-expected home sales, and just good feelings. One can almost feel the fear slowly trickling out of the market - and if they don't want to go by feelings, the VIX, often called the "fear indicator" (but actually a measure of options volitility) has fallen from an intra-day high of 35 last Monday to 25 today.

Thankfully, the pathetic-performing financial in my portfolio have begun to pick up some lost ground - Countrywide has moved from $4/share last Monday to over $6 today. (As I love pointing out, Countrywide is in the process of being purchased by Bank of America - at this time, that deal would close at $7.80 based on BAC's share price). I added 30% more CFC at $4.44, and I sold off that block at $6.20 today. I'm holding the rest until the merger close or, at least, the arbitrage gap starts to narrow.

I also bought CIT at $9.90 in the pre-market today as I thought they'd announce good news about financial backing; they didn't even have to announce anything to be up about $3 today. I have an itch to sell now and take my nice daily gain, but I think I'll use my seemingly well-timed entry as a basis for a long-term investment. After all, CIT has fallen from about $60/share, and until recently, its business was not tainted by the subprime fiasco.

I missed out on Freddie and Fannie - I thought were good vehicles to play a housing/economic recovery because of slightly less danger due to their quasi-government status. Both were trading near (or below) $20 last Monday; both are above $30 today.

One of the most interesting aspects about this rally is the depth of companies participating in it. It may be short covering (which I never regard as a bad thing), but many general market laggards are performing, or even outperforming, the overall indexes as they rally. For example, Buffalo Wild Wings, a company that I regard as undervalued, continued to slide and suffer as the markets fell in January, February, and March. However, starting last Tuesday, BWLD reversed the trend, and share price has increased from $20 to $26 in the past four sessions. (Note: The increase is partly due to an analyst upgrade). Crocs and eBay, two more laggards, are both up 15% percent in the last week.


I'm not 100% certain that the market won't face pressure in the coming days, weeks, or months, but the combination of technicals (double bottom, higher lows), data (housing numbers, Fed opening discount window, BSC bailout) and mentality may just mean that the bottom is in.



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Wall Street Values BSC at $90/share

Wait... hold on a second... Didn't Bear Stearns close at less than $5/share today, because of the pending buyout at $2/share?!?

Well, it's true that Bear's market cap at the end of today was $650 million, a horrifyingly low number based on its value of more than $20 billion less than one year ago.

But here's another way to measure the value of Bear Stearns; JPMorgan's price increase today.

JPM shares were up $3.77 today, as the company announced that it was planning to acquire BSC at $2/share. Clearly, investors think that JPM is getting a great deal, as it was one of the only financials to rally on a day when the XLF, the S&P Financial Sector ETF, fell 2%.

So, about that $90/share valuation...

JPMorgan was up $3.77 today, and there are 3.4 billion outstanding shares. Therefore, JPM's market cap increased $12.8 billion today. If you divide that $12.8 billion by Bear's 136 million outstanding shares, the value of JPM's increase translated into Bear shares would price BSC at $94/share.

Now I don't think that BSC is worth $90 per share; there are clearly issues that BSC needs to resolve. However, it does show that investors, whether they are right or wrong, value Bear at much, much more than $2 share.

So what does this mean?

I certainly don't think that the deal will close at $2 share. Today, Bear shares were changing hands at more than twice that much, implying that another party would make a higher offer or that JPM needed to raise its price. The offer does have to be approved by Bear's shareholders, and I think that the 1/3 of shares owned by company employees will lead the vote against the current buyout offer. The Fed did guarantee Bear funding for 28 days, and JPM's new backing of obligations will last a year, as the deal is pending, so Bear's shareholders have some time to think about what to do.

Now, as confidence is restored, the discount window is open, and JPM is insuring obligations, Bear might not need to sell itself at all. As I disclosed before, I own a tiny stake in Bear, and I won't be adding to it at these prices; the uncertainty just isn't worth risking more money. I paid $30 for my shares - thankfully not $50 or $100 or $150 - and I may never see that $30 price again.

Just as many negative factors came together over Long Island, forming the perfect financial storm that capsized Bear's stock, clearing skies, and promise of cheap, available, and guaranteed money may just prove to be a lifeboat for Bear shareholders. Whether it means a buyout at $10, $20, $30, or $50, or the continuation of Bear operating independently, this display of valuation by JPM's investors shows that Bear is worth a lot more than $2/share.




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JPMorgan Plunders Bear Stearns

I was absolutely shocked to see the headline; Bear Stearns bought out at $2 per share.

Prior to the news release, the low estimate of merger-price speculation was at $15/share, a discount of 50% from Friday's closing price. Many analysts expected Bear to fetch more than the $30 closing price from a potential suitor.

I do not understand how Bear's board members sold themselves out for $2/share, or $236 million. The value of their headquarters was estimated to be $12/share by Barron's - why would the board sell out to an offer so far below the value of Bear's tangible assets?

I guess there may be some ghosts on the balance sheet, but I am honestly dumbfounded by the $2 price. I wish I could say I did not own BSC (or was short), but unfortunately, I bought a few share on Friday as I thought that the buyout would be for more than peanuts.

Hopefully another bidder comes along, as it appears as though Bear is a steal at this level. Also, the deal is subject to shareholder approval; considering that employees own an estimated 1/3 of the company, I don't see all of those people losing much of their nest eggs without a fight.

In other news, the Fed also cut the discount window.

As the shockwaves from both events hit investors, futures plummeted. All major indexes are now looking to fall at least 1% tomorrow.

Who wins? It's hard to say. It looks as though shareholders of any US stock will lose tomorrow, and certainly, the evaporation of billions of dollars of BSC will not help millions of investors' portfolios.

As my title suggests, it looks like JPMorgan has stolen itself a building, a clearing house, and many other businesses for far less than the market was valuing them at. Though I'll only get one share of JPMorgan from my BSC, I may look to add more as this may provide very lucrative once cooler heads prevail.


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My Birthday Wish: A Bull Market

Well, I'm 19 years old today... and it's probably the least monumental birthday ever. Other than a few small monetary gifts, it's life as usual. [If anyone is feeling especially generous - stevof@gmail.com is my PayPal account. :)]


So what else is new - oh yeah, the market is tanking.

Thankfully, I sold a third of my Thornberg shares yesterday near $3/share to lock in neutrality for the trade... now, even if the rest of my TMA falls to zero, I'll break even.

I bought some Bear Stearns (BSC) today as a trade, but my lower stop loss was just touched and I was forced out. It has now moved up a couple dollars, so I don't know if I'll get back in (its in my Ameritrade account, where commissions are $10 each way... I should be using my Tradeking account, with $5 commissions). BSC is attractive because it is down like 70% in the past year, but it is clearly having problems operating, so there may be more attractive beaten-up financials.

I also bought some Etrade a few days ago as a speculative play; it's also priced for bankruptcy, while I expect the company to survive and recover.

I also have an order in for American Eagle (AEO) LEAP calls right now - as a teenager (I can only call myself that for another year), I'm familiar with their business. The stock has fallen 50% over the past year, and valuations are at a historic low.






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