JP Buys Bear for $2 Share

A photo of the Bear Stearns building in New York taken this morning:

So what do you think? Did JP get a good deal or did Bear's stockholders get taken?

Hat Tip: CR

And the Bear Goes Down . . .

Perhaps it is fitting that the first major non-bank financial institution to go belly up in the credit crisis is Bear Stearns. After all, the similarities to Drexel Burnham are striking, Bear notoriously refused to help during the LTCM crisis and the symptoms were certainly there. But, while many suspected they were on weak footing, I think most were surprised how swiftly they went under. After all, this is a firm that didn't have a single loss in 83 years going into 2007 and then in two consecutive years posted its first loss and now is getting bailed out. There is no doubt in my mind that we have now entered a new phase of this crisis. The contagion has spread into banks and other financial institutions and the "global margin call" will most likely continue as all institutions brace themselves from counterparty risk by de-leveraging and raising as much cash as possible. As much as I dislike continuously discovering that Nouriel Roubini has been correct, he once again has pegged the next leg of this meltdown.

Usually in times like these we can rely on a few market sages to come out with some words of comfort. Typically the rallying call is that the US is a large and resilient economy with an educated, mobile labor force with a commanding position atop the world economy, yada yada yada. But today the people I respect the most are largely fearful.

1) My former professor Martin Feldstein:

Harvard University economist Martin Feldstein said a six-year U.S. economic expansion has ended and the downturn could be substantially worse than past contractions.

``I believe the U.S. economy is now in recession,'' Feldstein, president of the National Bureau of Economic Research, said in a speech at the Futures Industry Association conference in Boca Raton, Florida. ``The situation is bad, it's getting worse and the risks are that the situation could be very bad.''

Feldstein is a member of the NBER's business-cycle dating committee, a group of economists that marks the beginning and end of expansions and recessions. It could be months before the group officially declares when, if at all, a recession has started, committee members say.

Answering questions from the audience, Feldstein said the downturn could be the worst in the United States since World War Two. Feldstein said the federal funds rate, the Federal Reserve's benchmark lending rate, is headed down to 2 percent from the current 3 percent. He added that lower rates from the Fed would not have the same impact in the current downturn, in terms of reviving economic activity.

"There isn't much traction in monetary policy these days, I'm afraid, because of a lack of liquidity in the credit markets," he said.

Hat Tip: Guardian, Bloomberg

2) Former Treasury Secretary Robert Rubin:

Former Treasury Secretary Robert Rubin said on Friday that the current U.S. mortgage crisis demands fresh action to stabilize the market.

"I believe the risks are serious enough to call for substantial additional action in the mortgage area, assuming that measures can be adopted that, when the pros and cons are weighed out, are on balance sensible," Rubin told a conference at the Brookings Institution.

"With respect to economic risk ... I have been around financial markets for a long, long time and I believe that we are in somewhat uncharted waters," Rubin said.

While the current crisis might pass "without inflicting significant additional damage on the economy," the risks are great enough for him to call for action.

Hat Tip: Reuters

3) Former Treasury Secretary and Former Harvard President Larry Summers:

"We are in nearly unprecedented times with respect to the financial strains."

"I believe that we are facing the most serious combination of macroeconomic and financial stresses that the United States has faced in at least a generation and possibly much longer than that."

Summers, March 7, 2008 at Stanford. Here's the video of the speech.

Hat Tip: CR and Tanta

4) Jeremy Grantham:

Barron's: You, along with George Soros, have called this the worst financial crisis we've had in the post-war era.

Grantham: This is much more global than, say, the savings-and-loan crisis was. The world is obviously much more globalized than at any time since the late 19th century and much more interrelated in almost every way, certainly financially. To have the leading economy and the reserve currency having a major-league credit crisis would by itself make it more important than earlier ones.

Secondly, this occurred at a time of what I believe is the first global bubble in pretty well all asset prices, so there is a much greater degree of broad-based vulnerability. Then it is a question of degree, and how carried away the sloppy lending was: It was very carried away. Not just in the design of needlessly complicated instruments, but in the enthusiasm—recklessness one might say—with which they were sold.

Barron's: What about places to hide?

Grantham: That isn't something we can laugh off. Last time, there were plenty of opportunities: Bonds were cheap and TIPS (Treasury-inflation protective securities) were brilliant; real estate was cheap and REITs were brilliant. Even within equities, emerging markets were much cheaper than U.S. equities, and within U.S. equities, value stocks were only a little expensive and small-caps were only a little expensive and small-cap value was actually a little bit cheap. So you could really hide and could reasonably expect to make money, which we did in each of the three years of the bear market.

Since then, all those areas appear to have read the book on mean-reversion. Ten years would be a perfectly normal period of time to go from a peak of a great bubble [like the one in 2000], based on the history of bubbles and their aftermath, to the low. I have long thought that 2010 would be when we hit the biggest discount to fair value. Trend-line value on the S&P, by the way, in 2010 is 1100. (The S&P 500 traded at 1334 late last week.)

Hat Tip: Barron's

New Records are Not Good

This year has been a year of records. Here are some of the benchmarks we have hit in the three short months of 2008.

1) Gold rises above $1,000 an ounce:

Most-active April gold futures reached a new high of $1,001.50 on the Comex division on the New York Mercantile Exchange Thursday.

The metal has climbed steadily since 2001 after falling as far as $250s a number of times during the period from 1999 to 2001.

The several-year bull market accelerated rapidly since August after the Federal Reserve signaled it was easing monetary policy to shore up the economy amid worries about the credit markets due to sub-prime problems. In fact, to hit $1,000, April gold futures soared 50% since the Aug. 16 low of $666.40.

Hat Tip: WSJ

2) Oil first rises above $100, and now sits at a record $111:

Crude oil for April delivery rose more than $1 to hit $111 a barrel on the New York Mercantile Exchange in mid-morning trading. It was last up 85 cents, or 0.8%, to $110.77 a barrel. Crude has gained nearly $6 since Monday.

Crude prices, denominated in dollars, tend to rise when the greenback falls, as a weaker U.S. currency makes crude less expensive to buyers holding other currencies. It also eats into oil producers' dollar revenue and forces them to raise prices. The weak dollar is also pushing up prices of other commodities.

Hat Tip: Marketwatch

3) The Dollar falls to record lows against the Euro.

The euro has been on an upward trajectory since late 2001, but its rally has intensified since the credit crisis shocked financial markets last August and aggressive U.S. interest rate cuts sent dollar to record lows.

The latest, some say third, wave of the credit crunch in recent weeks has seen the dollar's broad decline accelerate and on Thursday the euro surged to records above $1.56 and the dollar broke to 12-year lows under 100 Japanese yen.

Policymaker protests are well underway.

Hat Tip: Guardian, Bespoke

4) The Dollar falls below ¥100 for the first time since 1995:

``Dollar-yen is going lower,'' said Ray Farris, head of foreign-exchange strategy at Credit Suisse in London. ``It will definitely overshoot our 98 forecast in the very near term. Our forecast was for the dollar to reach 98 in three months. The big question now is whether there will be intervention.''

Japanese officials are unlikely to intervene now in the foreign-exchange market because the yen is ``cheap'' compared with other currencies, Sakakibara said. The U.S. and Japan may intervene to weaken the yen should it break through 90 and head toward 80 per dollar, he said.

The yen's real effective exchange rate, measured against 15 currencies of major trading partners including China, Europe and Canada, is 99.5, according to Bank of Japan figures. The rate averaged 121.9 in the first quarter of 2004, when the bank last intervened on behalf of the Ministry of Finance.

Hat Tip: Bloomberg

5) Carlyle Capital becomes the next hedge fund implosion:

The credit crisis has claimed another victim.

Carlyle Capital Corp. said late Wednesday it expects its lenders will seize its assets, causing the likely liquidation of the fund, which until recently owned $21.7 billion in mortgage securities.

"Although it has been working diligently with its lenders, the Company has not been able to reach a mutually beneficial agreement to stabilize its financing," the fund said in a statement.

Hat Tip: WSJ

What Happens When Everyone gets a Margin Call at the Same Time?

Paul Krugman had a great op-ed piece today in the NYT appropriately named the "Face-Slap Theory." Here's a taste:

One consequence of the crisis is that while the Fed has been cutting the interest rate it controls — the so-called Fed funds rate — the rates that matter most directly to the economy, including rates on mortgages and corporate bonds, have been rising. And that’s sure to worsen the economic downturn.

What’s going on? Mr. Geithner described a vicious circle in which banks and other market players who took on too much risk are all trying to get out of unsafe investments at the same time, causing “significant collateral damage to market functioning.”

A report released last Friday by JPMorgan Chase was even blunter. It described what’s happening as a “systemic margin call,” in which the whole financial system is facing demands to come up with cash it doesn’t have. (A financial joke making the rounds, via the blog Calculated Risk: “Who is this guy Margin that keeps calling me?”)

You'll have to check out the article for yourself to read on.

Historical Corrections

Every now and then Bespoke Investment Group puts together a graph that really helps put current market events in historical perspective. The graph below is such a graph. It shows all market corrections in the S&P 500 dating back to 1927. You can see that this current correction is already longer than the typical correction, though it isn't as deep:


There have only been 4 corrections that have lasted longer than a year and roughly 6 that have led to declines over 35%. One final note, this current "correction" will only turn into a "bear market" if the S&P 500 falls below 1260.87, which is roughly 6% below the current level of the market.

Hat Tip: Bespoke

Only Funny Because it's True

Hat Tip: Barry Ritholtz

Obama, Medvedev, iPhone, TrimTabs

Here is the week in Preview:

1. Will Barack punch his ticket on this second version of "Super Tuesday" in which Texas, Ohio, Vermont and Rhode Island hit the polls? Barack and Clinton square off in what should be the deciding battle of the race for the Democratic candidacy.

If Barack Obama defeats Hillary Clinton in Texas or Ohio tomorrow, he will take control of a unified Democratic Party and enter the race against John McCain with an already-established reputation as a political giant- killer.

Hat Tip: Bloomberg

2. Putin's hand-picked successor Dmitry Medvedev wins the election:

Dmitry Medvedev won Russia's presidential election, giving him a mandate to succeed Vladimir Putin. Russian monitors complained of election-law violations. Medvedev had 70.2 percent of the vote with 98.1 percent of returns counted at 7:30 a.m. in Moscow today, according to the Central Election Commission. The Commission will announce the result at 10 a.m.

Medvedev, 42, became the favorite after Putin named him as his chosen successor on Dec. 10. Putin then enjoyed approval ratings of more than 80 percent. A week later, Putin agreed to serve as Medvedev's prime minister, keeping a pledge to retain influence and setting the stage for a dual leadership that's unprecedented in modern Russian history.

Hat Tip: Bloomberg

3. Is Apple opening up the iPhone on Thursday?

Apple has invited the media to an event Thursday at the company's Cupertino, Calif., headquarters, where it plans to present an "iPhone software roadmap." One of the event's highlights will be a software-development kit that will let independent programmers build iPhone applications, according to Apple's invitation.

Hat Tip: WSJ

4. Labor Market Friday - The first Friday of the month should give us a taste of how many jobs we gained in February. But, thanks to Barry Ritholtz we've learned to not trust these numbers. After all the NFP data did overstate job growth by 14.4% in 2007. The more accurate data point is probably from TrimTabs:

TRIMTABS, which estimates employment growth using data from an online job index and an analysis of income tax withheld versus job creation rates, has been far more accurate than the Bureau of Labor Statistics. For example, in 2006, the government’s initial estimates of employment growth came in at 1.52 million jobs. But the bureau revised that data upward in February 2007, for a total of 2.24 million.
By comparison, TrimTabs’ estimates of 2006 employment growth, using real-time data, totaled 2.39 million jobs. The firm reported those figures to clients contemporaneously.

Last week, TrimTabs told clients it estimated that 77,000 jobs would be lost in February; Wall Street economists are calling for a gain of 30,000 for the month.

Since October 2007, TrimTabs estimates, the economy has lost about 175,000 jobs, the first sustained employment drop since early 2003.

Hat Tip: CR

Goldman's Call: CRE is Next

I have been speculating for some time that commercial real estate might be the next US asset class to take a hit. In fact I first wrote about this issue in May of 2007 in a post titled "Froth in Commercial Real Estate." We've been seeing turmoil in that marketplace for quite some time, but it looks like 2008 might be the first major leg down. Obviously any pronounced downturn will hurt businesses and commercial real estate. But, the longer and more pronounced the recession, the worse CRE could get.


Of all the Wall Street firms, Goldman has been perhaps the best at identifying major structural issues in the US economy over the past 2 years. They hedged against subprime better than any other firm, they have been correctly bullish on agricultural commodities, they saw the major bank writedowns coming and now they are calling for a major (20%+) CRE correction.

You can read the full article here. Or you can just read this ubiq-cerpt:

After suffering a beating from their exposure to home loans, banks and securities firms are about to take their lumps from office towers, hotels and other commercial real estate. And the losses could last longer than those from the subprime shakeout.

As the economy wobbles and financing costs rise because of the credit crunch, commercial-real-estate values are starting to slide, with analysts at Goldman Sachs Group Inc. projecting a decline of 21% to 26% in the next two years. That means misery for securities firms with exposure to commercial-real-estate loans and commercial- mortgage-backed securities.

William Tanona, a Goldman analyst, expects total write-downs of $7.2 billion by Bear Stearns Cos., Citigroup Inc., J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Morgan Stanley in the first quarter. Those firms had combined commercial-real-estate exposure of $141 billion at the end of the fourth quarter.

Goldman analysts predicts the financial damage from commercial real estate could last as long as two years, which would mean "a significantly longer tail than subprime." That is because only 28% of commercial-real-estate loans have been packaged into securities since 1995, while about 80% of subprime loans have been securitized; the higher level of securitization subjects the subprime assets to more-immediate mark-to-market accounting, which is playing out in the form of the write-downs that are dominating headlines.

I hate to say this, but I hope Goldman is wrong about the long tail effects of the CRE slodown. Hopefully the decline will be swift so that we can start putting this major real estate asset bubble behind us. For more on this issue check out this CNBC video.

In one final note I want to draw attention to the Markit CMBX indices. The particular index of note is the one that I first posted about back in July of 2008. At that point the CMBXNA-BB 3 index had a spread of 600 bps. As of today that same index has a spread of nearly 2000 bps:
Hat Tip: WSJ