What an ignominious end to a prominent investment bank founded in 1923 by Joseph Bear, Robert Stearns and Harold Mayer. Bear Stearns was nothing short of Paddy-whacked on St. Patrick’s Day!
Evidence of the scandal is in the numbers. At the close of business today, Bear Stearns was worth approximately $650M, a drop of over $3Bn from Friday’s close. Meanwhile, JP Morgan Chase gained $12.5Bn! Did the transfer to JP Morgan create a wealth multiplier of 4X? Last week, Bear Chief Alan Schwartz suggested the book value of the company was $84 per share! Joe Lewis, the billionaire British currency trader who is the main investor in the Tavistock Group and had a billion dollar stake in Bear Stearns, predicted shareholders would reject what he called ‘a derisory offer’. Indeed speculation is building that shareholders will threaten an assault on the company’s takeover.
The forerunner to exaggerated stock movements in Bear Stearns and Lehman over the past week have originated from options trading activity. Enormous put buying at strike prices way out-of-the-money have yielded massive returns. Today huge call contract volumes opened on Bear Stearns strike 5 options for March so this rollercoaster may yet have another surprise in store if the stock again follows the heavy derivatives bets.
As we reported throughout the night, volatility was reaching extreme levels with Asia, the dollar and the futures all down substantially. If you were to glance at the end of day figures, you would have missed a colorful story throughout the day because the volatility translated into confusion. The Dow dropped immediately to session lows of 11,756 before climbing back to breakeven by 11AM and turning positive! By 1.25PM the lows had again been revisited. Bulls then returned as the Dow climbed from being down 200 to up 100! In the last half hour, it again dropped, but remained positive and squeezed out a 21 point gain. The end result? The Dow moved almost 1,000 points today!! Now if it can move 1,000 points up AND down during the day, is there any reason to believe it couldn’t move up OR down 1,000 points in a straight line in a day?
A measure of volatility, the VIX, spiked substantially intra-day reflecting market concerns that the declines could snowball. The VIX reached an intra-day high of 35.60 before pulling back to close at 32.24, still outside its upper Bollinger Band.
Our Dow target of 11,800 was reached intra-day and the bounce back was so sharp that it is tempting to think that the worst could be over. Tomorrow brings news from the Federal Reserve and, before the market opens, an earnings report from Goldman Sachs. As we mentioned in our intra-day update, many technical indicators are projecting a bottom forming at this stage but our own indicators still show potential for weakness. As a result, we will maintain substantial hedging until the market dictates that we should do otherwise.
From the chart action, we are increasingly leaning towards the view that Apple, which spearheaded a 40% decline in share price ahead of Google, may lead the way back also. Our projections were and remain that both Google and Apple will bottom this month ahead of the market whole. The current action from Apple is especially encouraing, once again holding its 5-day EMA after an intra-day blip. Google likely needs more time to find a bottom as was apparent from its action today, touching $412 intra-day – a level it reached and bounced from just 6 trading days ago also.
The extremes in volatility and pervasive market confusion kept us out from initiating any aggressive long-term positions today. But we won’t hesitate to take advantage of more declines in OptionsXpress. Now that 54% of the market capitalization is comprised of cash, we are relishing current selloffs because the profits will be all the greater when the market finds sense again!
Happy St. Patrick’s Day!
