Profit Taking Tanks Markets
A pretty ugly day on the heels of the mega rally had the usual suspects shaking their collective heads today. When pressed the most cited reason for the sell off was "profit taking". I remember that term from the go go days of the Nasdaq boom. With a 420 point up day on the DOW followed by a 300 point down day, that only leaves 120 points of "profit" on the table!
So why was the market down? Who can say. I just find it amusing when stocks go down, they go down for no reason, but when they go up, it is all about solid fundamentals! This puts me in mind of a post I wrote some time ago which included the observation "Speculation is Good Unless its Bad". The pieces I have read have been bemoaning the "speculation" that is pushing oil prices, food prices, gold prices, all kinds of prices higher. This is clearly bad. Also mentioned with pure disdain is the short types "speculating" that perhaps another investment bank may go kaput and shorting the financial sector hard. That's bad too.
Speculation as it relates to real estate is great though, and in fact we need much more of it to push home prices back up where no one can afford one. Speculation in Google and Baidu is also welcome. Speculation that the FED will hand off their entire balance sheet to the banks is also welcome speculation.
So you see, it is all very simple. Stock go up on solid fundamentals. Home prices and tech stocks are the correct ways to speculate. All that other stuff is evil. Perhaps the treasury can get the government to pass a bill outlawing such practices? I wish I was kidding, but in this environment you never know.
I Tried to Save Bear Stearns and All I Got Was This Lousy T-Shirt!
I had mentioned the action in BSC stock last night. All kinds of buying and swings. Many simply dismissed the action as a bond type coverage thing, but a look at the volumes and the price action seemed to me to be more than just that. Today we get this report:
Joseph Lewis May Act at Bear Stearns
Wednesday March 19, 5:58 pm ET
British Billionaire Joseph Lewis Plans Action to Protect 8.4 Pct Bear Stearns Stake
NEW YORK (AP) -- British billionaire Joseph Lewis plans to take action to protect the value of his 8.4 percent stake in Bear Stearns Cos., which is being acquired in an emergency deal with JPMorgan Chase & Co., according to regulatory filing Wednesday.
In a Securities and Exchange Commission filing Wednesday, Lewis reported holding 12.1 million shares of the New York-based investment bank. He holds the stake through Aquarian Investments Ltd., Cambria Inc., Nivon Inc. and other entities.
Nivon bought more than 500,000 Bear Stearns shares on March 13 for $55.13 apiece, just days before Bear Stearns agreed to be acquired for $2 per share.
Lewis said the shareholder group will take "whatever action that they deem necessary and appropriate to protect the value of their investment in the shares," including encouraging Bear Stearns and third parties to consider an alternative transaction.
One small note about this: Remember when you hear or read people saying "this is what the big boys are doing with their money, and they know what they are doing" is about as useful as a 20 cent stamp. This was a big boy money move and it resulted in buying BSC at $55 and then watching it collapse. Good move!
My main point tonight again channels my post from last night, and it is that the FED has no idea what it is getting itself into. The reasons why "moral hazards" and "intervention concerns" should be taken seriously is perfectly encapsulated by this story. If those consideration were not important, they would not need quotation marks!
The FED moved quickly to dissolve BSC and have JPM take them over. The problem is that the FED is now dealing with the same banking fools that:
- Think they know everything
- Think they are smarter than anyone else
- Thought they could accurately price mortgage risk
- Thought things would never go wrong
- Are terribly greedy
- Will not accept anything that does not conform to above points
So instead of taking the $2 and their lumps, major investors in BSC stock are trying to wiggle out of the FED rescue deal, and either re-float the company, or get MUCH better terms of sale. Possible litigation could be a problem, as well as any possible alternate bidder.
And who is to blame for this? The FED of course! BSC shareholders have seen the FED open up their balance sheet for the investment banks disposal (they will dispose of it all right!), given a 30 Billion dollar backstop to JPM to take over BSC, lowered the FED rate yet again, and allowed Fannie and Freddie to loan even more money than they have available. With all those changes, why not try and get something out of BSC? In this new environment, could BSC survive on it's own? Who knows, but when $2 a share is staring you in the face when you bought a boat load at $55, anything seems reasonable.And thus we arrive at the crux of the FED's problem. Wall Street is not just going to sit tight and say thanks to every move by the FED. They will want more. They will want things done on their terms. They will want to dictate various things. The FED is supposed to be an independent entity, but now it is just another big hedge fund with a US Seal on their office doors. Welcome to the mud pit Mr. Bernanke, I think you will fit in quite nicely.
It is so awesome that the shareholders are giving the FED the finger over this. Ungrateful?, Yes. Brazen?, yes. Smart move?, Nope. It is highly unlikely any other option can be done for BSC. The FED would look absolutely ridiculous if their force fed rescue failed to materialize. This event will occur more and more as the FED tries to solve problems as they arise inside of two hours instead of stopping and thinking about the long term view.
So was the entire financial system on the brink of collapse last week? If BSC went broke, would we have to live in caves, trade beads, and use rock coins? Would a disaster have occurred? Or would things have been basically fine? I don't know, and neither does anyone else.
If we had transparency from the banks about what in the hell they are doing. If we had truth from the FED. If we had journalists and a media that was interested in REPORTING FACTS and not sound bites. If we had people that were responsible for their action. If, If, If...
If we had these things we could make a call. If we had these things things would be less dangerous. We do not have any of them, and so the game goes on.
Please vote in the new poll!
Have a good night.