Just back from the Far East, and we wondered if we would be landing at the posh new Terminal 5. No such luck, still slumming it in the distinctly recessionary Terminal 3. It seems all is doom and gloom – the terminal restaurants offered tap water only. So much for fragrant waters from the valleys of Wales at £5 a pop...
The past six days seem to have shaken American capitalism as we know and love it. Imagine if a bank in Britain that had been open for 85 years was sold for 10% of its previously perceived value.
On Friday, US Treasury Secretary Henry Paulson thought the markets would be calmed by the announcement that the Federal Reserve had agreed to help bail out Bear Stearns. Wrong. The last thing he needed was President Bush giving a speech that day about the fundamental soundness of the U.S. economy. Dubya looked distinctly uncomfortable. What the US needed was Ronald Reagan, a leader, someone to reassure the world.
Over the weekend Mr. Paulson became convinced that an agreement to sell Bear Stearns had to be inked before markets opened again on Monday. Enter JP Morgan, stage left.
"We thought they would give us 28 days," an insider said, in reference to the terms of the Fed's bailout financing. "Then they gave us 24 hours."
The 85 year old bank was sold for the knock-down price of $2 a share. This sale price was 98.7% below where the shares were trading back in April last year. What a bargain!
‘Insiders’ at Bear Stearns, including directors and employees, own 38.7% of the bank’s shares; they will receive around $90m for their shares, compared with the $5.3bn they would have received when the shares were trading at $100 in December 2007.
Other big losers include Joe Lewis, the British billionaire, who lost an estimated $1.16bn on the stake he built up in Bear Stearns last year. He bought 11 million shares at an average price of $107, worth $1.18bn at that time. Now his stake will be worth just $22m.
The fat cats have not escaped this time around. James Cayne, chairman of Bear Stearns, lost $550m from the collapse. Alan Schwartz, chief executive of Bear Stearns, has seen $100m wiped off the value of his 1.03m shares in the past three months, and has lost $162m in the past year.
The terms of the Bear Stearns sale have some highly unusual features which readers may question. For instance, JP Morgan retains the option to purchase Bear’s valuable headquarters building in midtown Manhattan, even if the Bear Stearns board recommends a rival offer. So JP gets to keep a billion-dollar building no matter what happens next. If only Northern Rock had a nice office building, eh?
US$200 billion-dollar-man Ben Bernanke of the Federal Reserve surprised a few market sages when he only cut rates by 0.75% today. In the last Undercover in the City we highlighted his dilemma. Today he comes clean.
“Recent information indicates that the outlook for economic activity has weakened further,” the Federal Open Market Committee said in a statement today after meeting in Washington. At the same time, “inflation has been elevated, and some indicators of inflation expectations have risen.”
Tuesday saw markets recover, and it must have been important to the Fed that the Dow Jones closed even a few pips up on the day. We suspect some heavy profit taking under 11,800 from insiders who were short from higher levels, and who had the nod from the Fed that the markets would not be allowed to collapse after all.
Gold opened the week at a new high; with panic setting in it seems the yellow metal is all we want. After it touched US$1,070, BBC Breakfast then ran an article on gold being the only thing to hold in such difficult times. Buy the rumour, sell the fact, and once a move is being suggested in between weather reports and cornflakes, get out. Looks like we have seen a temporary top for gold, for now. Long term Undercover in the City readers will have been buying gold since $850, maybe now it’s time to take some profits and see where we hold for the next rally.
OK, now to the roadmaps... seems bottom pickers are out in force, and who can blame them, if JP Morgan can buy a bank for 10% of its value what can we acquire? Do punters dare?
FTSE 100: We had our break below 5700 and move to 5500 as expected. Then we saw a strong rally and we are back at 5700 tonight. We’re still bearish, we see strong resistance at 5950/6000.
DOW JONES: Good support (which may have been artificially inserted) at 11,750 has held the market and we closed tonight at 12,400 again. Hourly chart now has a double bottom at 11,750, we still have resistance at 12,800/13,000, but this could be a large wild range trade for a few days yet until the fundamentals stabilize. Stand aside.
S+P 500: Again a double bottom formation on hourly charts, look for tests of 1350 and 1400 which is still stronger resistance.
Be careful out there...
M005e & "M"
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