Morgan to pay $2 per share for Bear Stearn

[nine]

Nine,

In the prior decade I did not have a problem going long for months at a time and I still go long but I pick and choose and go long for minutes at a time. I run the fantastic NxCore datafeed HotList which gives me all trades on whatever exchanges I am subscribed to and gives me a report as often as every second. I have an application which I wrote that interfaces with the HotList and pinpoints the liquid and volatile issues which of course BSC was prime on Friday. My rules are simple - making a litlle bit is far better than losing any. So, the "dance" went as follows as shown by the attached 10 second chart:

1. I waited until I was sure the lows were increasing - the first "yellowed" area on the plot and then went long.

2. I continued to watch until the first decreasing low occured and then sold - the second "yellowed" area.

I would have sold if the price had gone below my buy price by any amount at any time. I miss a lot of the potential upswing with these rules but I sleep better at night and a few percent for a minutes work is great.

Don't ever feel badly about what you might have missed but be very thankful for all you have gained.

~Bob

Thanks Bob,

I found this on another site ... already borrowed from somewhere else ... glad you were not long at this point

 

[A Dashing Blade]

“will acquire rival Bear Stearns for $2 a share in a move aimed at averting spreading panic” Do they reckon everyone will think, ‘ Thank God - that $2 a share certainly alleviated all my anxieties. I think I’ll bet the farm and load up on financials tomorrow’. I doubt it. They’ll be thinking, ‘If BS is only worth $2, the others must be way over-valued. Fucck this, I’m dumping everything’.

This is not an equity friendly bailout, it a debt friendly bailout.

 

[luckyd1976]

GS beat
LEH beat
MS beat

Looks like it was isolated and contained

 

[grantx]

DB,

I don't understand what your saying. Could you clarify?

Lucky,

"Looks like it was isolated and contained" or unrealsied/yet to be unravelled.

Grant.

 

[A Dashing Blade]

The whole financial system is based on trust (some would say smoke & mirrors) yes?

Any bank's debts eg customers deposits etc have been lent out of the order of 20 times to borrowers, this gearing is why runs on a bank are so destructive and why central authorities cannot allow one to happen.

The Fed/JPM's solution guarantee's Bears Stearns debts at the expense of shareholders equity.

 

[grantx]

DB,

Thanks for the explanation.

Grant.

 

[luckyd1976]

DB,

I don't understand what your saying. Could you clarify?

Lucky,

"Looks like it was isolated and contained" or unrealsied/yet to be unravelled.

Grant.

With all of the other US investment Bankers beating the Street. It proves 2 things to me. 1) The risk profiles/B models were different. 2) There's No more write downs to come.

The Feds actions by opening up to the investment firms was/is historic because they are taking on the "Tier 3" assets (unmoveables) and swapin to "Tier 1" (treasuries) this makes everyone's balance sheet liquid.

Example: Let's just say we are half way through the US housing mess. And all of the Investment Banks were levered to 75% of their collaterals. By moving the Tier 3's and clearing the needs of collaterals for them, they can withstand the remaining US housing mess to come.

The Fed contained it, for the US Investment Markets.

 

[grantx]

Lucky,

It was only recently that analysts were saying the full extent of the damage would not be known for at least another six months(if not more) - I don't think we have seen the last of it, and certainly not in Europe (and India and China). This isn't simply a US problem, it's international with the ramifications for inter-dependent world trade.

Re the housing problem. I think this is far from over. As more and more people return to variable rates over the next 6 months, the problem will become worse with the increasing defaults once more hitting all the lenders and slicers and dicers (is the Fed going to bail out once once again?). The question may then be, how will the government finance its increasing budget and trade deficits - through higher yields?

Swapping junk for treasuries is a short term solution to a longer term problem, no better that a quick fix. I presume you think the markets will recover - I think we are going south, the deep south.

Good Trading,

Grant.

 

[luckyd1976]

Lucky,

It was only recently that analysts were saying the full extent of the damage would not be known for at least another six months(if not more) - I don't think we have seen the last of it, and certainly not in Europe (and India and China). This isn't simply a US problem, it's international with the ramifications for inter-dependent world trade.

Re the housing problem. I think this is far from over. As more and more people return to variable rates over the next 6 months, the problem will become worse with the increasing defaults once more hitting all the lenders and slicers and dicers (is the Fed going to bail out once once again?). The question may then be, how will the government finance its increasing budget and trade deficits - through higher yields?

Swapping junk for treasuries is a short term solution to a longer term problem, no better that a quick fix. I presume you think the markets will recover - I think we are going south, the deep south.

Good Trading,

Grant.

Now don’t get me wrong. I believe the markets are going down to. (65ema/260sma Daily Chart Long-Term trend trader)

But I do believe the FED stabilized the US housing market securitization structure. Most experts agree that there still will be Foreclosures. But the FED has taken more than 4yrs of bad paper off the market. So the bankers can handle the remaining 6-9 months, little in comparison, bad paper coming. And all the experts expect this summer to be the peak of US paper resets. This peak is the stop of the Mortgage backed bond mess.

However, the Earnings will continue to be weak in all markets for some time (consumer lead recession). A Good ol fashioned recession... Spending/Revenues/Profits all shrink. I'm bearish until 65ema/260sma crosses on SP500 and earnings show signs of returning

Now the Oversees paper, sorry but the Fed wont be buying those. Imagine that, the US created this mess and sold it off to the rest of the world.

I expect the overseas banks/hedge funds/managers who purchased this paper will still continue to see significant write downs and trouble to come.

The question may then be, how will the government finance its increasing budget and trade deficits - through higher yields?

You brought up a very good point here. Higher yields only makes the problem more expensive to handle, unless they are able to sell a TON more than they have recently. Yields are the Reason the MortgageBacks were such a great sell for the last 4+ years. Alas I am only a lowly trader hopefully one day smarter people than I (in congress) can get thier act together to solve this one. Meanwhile I'll trade it to make a profit from it up or down...

 

[Rhody Trader]

.. Alas I am only a lowly trader hopefully one day smarter people than I (in congress) can get thier act together to solve this one.

This might have been the funniest thing I've read this year!

All you have to do is hear the questions these people ask and the opinions they express when the Fed chief does his periodic visits to the Hill and you'll quickly realize they most of them have absolutely no clue what's going on.

On top of that, they are too reactionary, operate too slowly, and have too many conflicting interests to do a good job solving problems of this sort. They'd just make a bigger mess.

 

[grantx]

LuckyD,

I detect an emerging general agreement. But let’s not celebrate yet.

“the FED stabilized the US housing market securitization structure”.

I would prefer to use “neutralised”, not “stabilised”. By way of analogy, if you kill someone who threatens you with a gun, you neutralise them – there is no more potential threat. If you merely knock them unconscious, they are temporarily stable, ie they could come back and blow your brains out.

“Earnings will continue to be weak in all markets” due to the “consumer led recession”. I agree. However, surely there has also got be re-examination of fundamentals, and a ultimately a revaluation, of major banking stocks, specifically the contribution to earnings of CDO’s, MBS’s, structuring, underwriting, sales, repackaging, slicing and dicing. Perhaps our analyst friend, John can address this.

All the Fed has done, right or wrong, is play pass the parcel.

Many people who diet successfully succumb to temptation resort to bad habits and find they are back to square one. In two or three years (if not sooner driven by the competitive edge) the banks will resort to type with a few cosmetic safeguards, with damage revealed a few years down the line after they’ve received massive bonuses.

Grant.

 

[grantx]

LuckyD,

As I said above. From Reuters:

"Goldman, Lehman outlooks cut to "negative" by S&P"

By Jonathan Stempel

"NEW YORK (Reuters) - Goldman Sachs Group Inc's and Lehman Brothers Holdings Inc's credit rating outlooks were cut on Friday by Standard & Poor's, which said volatile markets could result in lower profit and revenue.

S&P revised its outlook to "negative" from "stable" on Goldman's "AA-minus" and Lehman's "A-plus" long-term credit ratings, suggesting a possible downgrade in one to two years."

Full article:

Goldman, Lehman outlooks cut to negative by S&P | Reuters

Grant.

 

[Rhody Trader]

“the FED stabilized the US housing market securitization structure”.

I would actually argue that. The Fed accepting all that funky collateral doesn't really alter the fact that all that paper is still out there and will at some point land right back on some bank's balance sheet again one day.

To my mind, the more significant move is the move to allow Fannie and Freddie lower reserve requirements, so to speak. The fact that they can now buy (as opposed to accepting as collateral) something like $200-300 billion in mortgage paper helps facilitate refinancing activitity, which then will then help to clean up some of that bad old paper - not all, but at least some. It also loosens things up for new mortgages for home purchases.

I do not think it solves the housing issure right away, though, because part of the problem is excess supply. Until that is soaked up (or demolished) prices cannot stablize for anything but a short period without a major economic upturn to drive new demand.

Not that I'm an expert or anything, so take this opinion for what it's worth.

“Earnings will continue to be weak in all markets” due to the “consumer led recession”. I agree. However, surely there has also got be re-examination of fundamentals, and a ultimately a revaluation, of major banking stocks, specifically the contribution to earnings of CDO’s, MBS’s, structuring, underwriting, sales, repackaging, slicing and dicing. Perhaps our analyst friend, John can address this.

I think you've left something out the picture here - namely the FAS requirement that all that stuff gets marked to market, which has been contributory to the problem the banks currently face. That thing fundamentally alters the landscape and will almost certainly prevent balance sheets from getting levered up the way they were previously.

 

[grantx]

John,

"the FAS requirement that all that stuff gets marked to market". I wasn't aware of this. When will this become effective? Do you know the FAS requirement number?

Grant.

 

[luckyd1976]

I think you've left something out the picture here - namely the FAS requirement that all that stuff gets marked to market, which has been contributory to the problem the banks currently face. That thing fundamentally alters the landscape and will almost certainly prevent balance sheets from getting levered up the way they were previously.

Exactly...

the financials now have the FED PUT (30Bil for Stearns mortgages with no Mark to Market requirements)

According to the IRS: "A trader in securities or commodities may elect under section 475(f) to use the mark-to-market method to account for securities or commodities held in connection with a trading business. Under this method of accounting, any security or commodity held at the end of the tax year is treated as sold (and re-acquired) at its fair market value (FMV) on the last business day of that year."

The MTM Accounting method was what was killing the Investment Bankers. The Fed has no reporting requirements and a lifetime trading horizon.

 

[brackfie]

bear sterns is a buy reccomendation from buffet

 

[grantx]

Lucky,

"The Fed has no reporting requirements and a lifetime trading horizon".

The same thought struck me regarding what it will do with all this dodgy collateral on its books. Well, doesn't have to do anything does it? It can remain there a lifetime and/or sink to zero value with no outside ramifications (I far as I can see). At worst, it would be an opportunity loss.

Grant.

 

[Rhody Trader]

"the FAS requirement that all that stuff gets marked to market". I wasn't aware of this. When will this become effective? Do you know the FAS requirement number?

After a quick search I found that it's FAS 157, which came into force as for November 15, 2007 for fiscal years starting thereafter.

This is NOT the same IRS thing quoted by luckyd1976. That one is for individual traders in regards to their annual filings. FAS 157 is for public companies (generally meaning the banks, of course) and their reporting. Since the Fed is not a public company, it has no reporting requirements as such.

Also, when the Fed takes something on as collateral, that security (or whatever) does not shift to the Fed's books. The bank doing the borrowing still owns it, not the Fed. It is only in a default that the collateral is actually taken ownership of in collection of the debt owed.

It's just like you putting your house up as collateral for a mortgage. The bank doesn't own your house. You do (If you doubt that, stop paying the property taxes and see who the local municipality goes after). If you don't pay the mortgage, though, the bank will seize the house and sell it to get their money back.

All of this is a rather long-winded way of saying these securities are still on the books of the banks in question, and as such are still subject to the market-to-market rules in the quarterly/annual reporting.

 

[grantx]

John,

Therefore, while the Fed's acceptance of lower rated collateral appears to be helping the banks, etc and praised in some quarters, the borrower is still exposed to risk on that collateral.

But, by way of analogy, if a homeowner is repaying a mortgage on a depreciating asset the gap between the value of the asset and the debt increases creating a deficit or shortfall (the situation with many current property owners). Calling in the debt does not solve the problem but merely stops further deterioration of the deficit.

In the final analysis, the net effect is a breathing period.

Would you say that’s about right?

Grant.

 

[Rhody Trader]

Therefore, while the Fed's acceptance of lower rated collateral appears to be helping the banks, etc and praised in some quarters, the borrower is still exposed to risk on that collateral.

But, by way of analogy, if a homeowner is repaying a mortgage on a depreciating asset the gap between the value of the asset and the debt increases creating a deficit or shortfall (the situation with many current property owners). Calling in the debt does not solve the problem but merely stops further deterioration of the deficit.

In the final analysis, the net effect is a breathing period.

Would you say that’s about right?

The Fed accepting this paper as collateral allows the banks to get funding in a way that they couldn't before because other banks wouldn't accept that stuff as collateral. As such they give the banks a chance to clean up the balance sheets and stablize themselves until the market calms down, develops more visibility, and starts pricing things in a more reasonable fashion.

To your example of the depreciating house, you're right. If the house value collapses then the coverage of the loan drops, which of course is why banks used to require a 20% downpayment. In banking, built-in equity cushion (so to speak) is often called a haircut - meaning some collateral item might be valued at 100, but would only receive 90 as its collateral value for lending purposes. I'm not sure if the Fed is doing that, though.

As for lower rated, I don't believe that to be a correct statement. I think they are still only accepting AAA paper. Of course you have take that rating for what its worth.