Attention, ticked-off Bear Stearns shareholders: It’s the government you should be mad at.
That was perhaps the most interesting piece of news to come out of the grilling that just took place on Capitol Hill. In testimony to congress, treasury officials admitted they were the ones demanding a super-low share price in the Bear Stearns-JP Morgan deal.
The logic was to “send a message” that the Fed’s historic move was not charity. By letting Bear’s investors get crushed, the Fed’s $30 billion backstop was supposed to look less like a golden parachute. Bernanke stated flatly, “We did not bail out Bear Stearns.” The awful price was intended to make that statement true.
In the “adding insult to injury” department, Bear Stearn’s CEO, Alan Schwartz, thought he had 28 days of leeway to find a white knight for Bear. He understood the Fed’s emergency loan provisions to be good for that long.
That was on Friday morning, March 14. Schwartz’ mistaken impression was corrected a few hours later. “No, you don’t have 28 days to find a buyer,” the Fed told him. “You have until Sunday afternoon.” Oops.
All parties -- the Fed, the Treasury and JP Morgan -- loudly defended the historic rescue. If the government had not acted as it did, they argued, all hell would have broken loose. (Not the exact words heard by the Senate Banking Committee, of course… but close enough.)
In other news, the Fed chairman openly admitted that a recession is “possible.” This type of plain-as-day statement (Gee whiz, really? Ya think?) counts as courageous candor in Washington.
The best sum-up of the whole sordid deal goes to economist Ed Yardeni in a note to clients: “The Government of Last Resort is working with the Lender of Last Resort to shore up the housing and credit markets to avoid Great Depression II.”
Yup. Yardeni pretty much nailed it. And how about the market?
Back at the Crossroads
After a joyous start to the second quarter, the major indexes are all once again at a crossroads. Take this snapshot of the Russell 2000 iShares, for instance (as of Thursday’s close). The bulls have momentum here, but they can’t be too thrilled about that vulnerable-looking wedge pattern heading into an area of clear resistance.
The Dow and S&P sport a roughly similar pattern. All are headed into prior resistance territory, even as the going is set to get tough again. The employment numbers are rolling out as I write, and boy are they ugly… the biggest monthly decline in five years.
Big Gains for DCT Readers
My pal, Cash McDash, is long and strong, as you may have read yesterday. I’m a little concerned, but not too much. The guy knows how to really pick his spots, and his plays often run contra to broader market moves. If I know Cash, he’ll find a way to come out grinning no matter which way things go.
Meanwhile, on the bearish side of the coin, our own Ann Sosnowski is making an absolute mint in these volatile markets.
You could say Ann has something of a split personality. On one hand, she loves finding recession-proof stocks for her Diligent Investor readers -- financial fortress type investments that represent the safest companies on the planet. On the other hand, Ann’s dark side comes out in her highly profitable trading service, Death Cross Trader. You’ll recognize the same enthusiasm and passion, but Ann isn’t looking for sound investments here. As the name implies, Death Cross Trader is all about finding highfliers that are ready to crash and burn… and then shorting them via limited-risk options positions as they fall.
If you haven’t added short trading to your investment arsenal, now is the time. As mentioned earlier, Ann is doing incredibly well for her Death Cross Trader readers… as the following “first-quarter update” shows.
Have a Great Weekend,
JL
