Bear’s Bargain Buyout
There’s a concept in marketing known as buyer’s remorse – the momentary guilt you feel just after spending money on something. We suspect JP Morgan’s top brass are experiencing the exact opposite feeling this morning – I’d call it smugness – after their weekend purchase of Bear Stearns.
OK, so Bear is far from being a fundamentally sound business. Last year it became a byword for the subprime crisis when two of its hedge funds collapsed. But when we look at the numbers it’s easy to see why JP Morgan should be pleased with itself. It got Bear for a mere $2 a share, or $236 million in total. Before the credit crunch Bear’s market cap was $140 billion.
Of course we now know the latter figure was too high. But Bear will still have some worthwhile assets, and JP Morgan’s taking a calculated gamble that they’re worth at least $236 million (not a great deal in investment banking terms).
Fleet Street Letter editor Brian Durrant welcomes the weekend’s deal, and the hit taken by Bear’s shareholders, as a deterrent against reckless business practices.
“Capitalism without business failures doesn't work. If the authorities have to step in to shore up the financial system, the shareholders must bear the brunt of the losses,” he says.
But the fallout reaches much further than the shareholders’ register. For starters, Citic, China’s largest securities firm, pulled the plug on its proposed $1 billion investment in Bear. And the Fed has moved quickly to try to force a smile onto the market’s face, cutting the rate at which it lends to banks to 3.25%, a 25-basis-point cut.
The Fed’s panic looks set to continue. I permitted myself a wry smile when I read this morning that Bernanke is expected to slash its main rates tomorrow by 75 basis points “to shore up confidence in the market”.
Not that this is a laughing matter, of course. Bear’s collapse is the latest in a string of such crises. It won’t be the last, and this is something we should be very worried about here in Britain. The UK economy is a geared play on the health of the world financial system.
When times were good they were very, very good for the City, the main driver of our economy. But now times are bad in the City, so expect them to horrid for the rest of us.
I take a further look at this in today’s Fleet Street Letter. Find out why the US-led financial crisis is about to make itself felt right here – and not just in the Square Mile.
Everything’s falling!
Thanks to the direction the Earth rotates it was the Asian stock markets that absorbed the news first. And they tumbled.
But Manraaj Singh expects a turning point later in the year, as Asia benefits from the liquidity the Fed looks certain to engineer. That’s not to say you have to wait until then, of course.
“We’re seeing opportunities opening up in Asia,” Manraaj tells me. To find out how Manraaj reckons you should play the Asian markets right now, click here.
The dollar fell too, although it took the pound down even further with it. Sterling went down 2% against the euro, reaching an all-time low. It also fell against the dollar and hit a 3-year low against the yen.
Where will the dollar go next? “Down!” seems to be the emphatic response from … well, everyone. After all, rate cuts seem imminent at the same time as the world turns away from the US in droves.
But Bill Bonner sounds a note of caution, reminding me of the adage “Buy the rumour, sell the news”. Since everyone expect a dollar plunge, could this not already be priced in? Might we even see a rally? Might it even be a good to time to hold dollar-denominated assets… OK, I won’t stick my neck out that far!
UK Inflation creeping higher
A survey of 31 economists suggests year-on-year inflation was higher in February than January. The economists’ median estimate was that consumer prices were rose 2.5% between February 2007 and February 2008. The same comparison for January yielded an estimate of 2.2%.
It all adds to the current uncertainty. A UK recession looms; to avert it, the Bank of England should cut interest rates. But inflation’s on the rise. The remedy? Raise interest rates.
Little wonder, then, that a statement today by Charles Bean, the Bank’s chief economist, was heavy on the vague. He expects “difficult conditions” to arise from the continued financial turbulence. “This could act as a drag on economic activity,” he says. The Bank’s playing its cards close to its chest. That is, if it has any cards.
British Energy in take-over talks
British Energy, the UK’s biggest power producer, revealed today that it’s in talks with a potential buyer. But they won’t say who.
“I think it’s EDF,” says Garry White. “The French are going to buy up our nuclear industry.”
Garry’s long been telling me how the French are set to benefit as more of the world goes nuclear. He’s bullish on uranium right now, too, but not just because of its power generating qualities. Garry reckons it’s the one of the few ways to invest in water, a commodity that’s getting ever scarcer.
Find out why uranium exposure is a must-have for your portfolio. .
Northern Rock accused of distorting the market
Northern Rock has been accused of abusing the guarantees it has from government to gain a competitive edge. A recent Best Buy table showed the Newcastle-based bank came top for 11 out of 19 savings products.
I don’t actually think this is anything new. I used to work for Northern Rock, and they were as aggressive with their savings rates as they were with their lending, taking great pride whenever they topped these tables. But right now is probably not the best time to be drawing attention to themselves.
The upshot is that 6,500 jobs could go as the bank is forced, under EU competition rules, to scale back its operations to avoid distorting the market.
That’s all for today.
Until tomorrow
Ben Traynor
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