Posts filed under “Short Selling”

Why Has Bear Stearn’s Stock Been Rallying?

Bear Stearns (BSC)
1 minute chart, March 17-18, 2008


Note the red horizontal line above is at the $2 mark. 
Since the announcement of the $2 dissolution of Bear Stearns, the stock has undergone a puzzling rally.  After gapping down 94% or so Monday morning, the stock of BSC traded up to $7+.

Floyd Norris posed the "Great market puzzle" of the day:  Why was Bear Stearns stock trading so much above what Morgan plans to pay?

Today’s WSJ notes that Bear’s stock has soared 23%. Their answer: "bets that J.P. Morgan will have to pay more for the firm, setting the stage for a high-stakes game of brinksmanship with investors in one corner and the Fed and J.P. Morgan in the other."

I think that’s wrong.

There is a simpler explanation, one that might surprise you: BOND HOLDERS are buying up Bears loose stock. As much as they can get. 



Consider: there is ~$75 billion in outstanding bonds (see Bloomberg screen below), and another $75 billion in other miscellaneous paper. (UPDATE: The NYT pegs it at $300B).  Prior to the BSC/JPM deal’s announcement, the BSC Bonds were trading for 80 cents on the dollar.

Imagine your fund owned a one billion dollars worth of Bear bonds (mark to market = $800 million).  Isn’t it worth buying 10  million shares or so at $3 – 4 or so dollars a share? You will get $2 per share in JPM stock, so buying it a few bucks over the takeover price isn’t all that risky. Remember, insiders own 30%, and Joe Lewis also owns about 10%.

So as mad as the accumulation appears, its actually quite rational — IF YOU ARE A MAJOR BOND HOLDER, and are doing this to capture voting stock. (All the other idiots buying BSC are pretty much fucked).


Bear Stearn Bond Issuances


Also on the case: Felix Salmon, David Neubert   

As I have been saying, this was an orderly liquidation — not a bail
out. The Fed would have been embarrassed to have Bear Stearns go belly up on
their watch — even though the official coroner’s pronouncement was a deadly cocktail of a love of mortgage backed
securities mixed with weak risk management. The thinly traded mortgage-based paper got marked lower and lower because NO ONE ELSE WANTED THEM. That is what caused the run on the bank, and not any whisper campaign.

Quite bluntly, its tough to see who else can come in at any sort of premium. The structure of the JPM deal is unique — they have the Fed’s $30B
backstop (no one else has that guarantee); They also are guaranteed
Bear’s HQ — its essentially a break up fee if the deal does not go through (making Bear worth $1.1B less to anyone else).


UPDATE: March 19, 2008 9:48am

I just noticed the NYT has a piece on this same issue: It’s Bondholders vs. Shareholders in a Race to Buy Bear Stearns Stock — They also state the total outstanding Bear bonds are $300B …



Quick Opening Reactions
Floyd Norris
NYT, March 17, 2008,  10:14 am

Bear’s Run-Up Sets the Stage For Epic Clash
Speculators Ignite Rally, Driving Shares Up 23%;
Disbelief on Deal Price
WSJ, March 19, 2008; Page C1

It’s Bondholders vs. Shareholders in a Race to Buy Bear Stearns Stock
NYT, March 19, 2008; Page C1

Category: Corporate Management, Derivatives, Psychology, Short Selling, Trading

Bove: Fed Rescue for Bear Stearns

Category: Credit, Derivatives, Federal Reserve, Markets, Short Selling

Batten Down the Hatches!

Several weeks ago we discussed the likelihood of a tradable low being put in place. On January 23, 2008, we thought conditions were in place that would allow agile traders to play for a bounce — but advised that long-term investors avoid the sloppy tape. At that time, we suggested an 8, 10, or 12%…Read More

Category: RR&A, Short Selling, Trading

The Monolines Are F#@%ed!

Category: Corporate Management, Credit, Derivatives, Short Selling, Taxes and Policy

Fannie Mae: Ouch!

Category: Corporate Management, Credit, Derivatives, Earnings, Short Selling, Technical Analysis, Trading

Fannie Mae Looks Like Hell

Fannie Mae’s fuzzy math: Fortune magazine reported that the lender changed the way it discloses bad loans, which could be masking rising credit losses. “Investors might want to take a closer look at Fannie Mae’s latest earnings report. Lost in the unsurprising news of the mortgage lender’s heavy losses was a critical change in the…Read More

Category: Corporate Management, Credit, Derivatives, Short Selling, Valuation

Ursine !

Category: Markets, Psychology, Short Selling, Trading

Yeah! We’re #79! (of 83 global bourses)

Category: Investing, Markets, Short Selling

NYSE Short Interest Hits New High

Category: Data Analysis, Markets, Psychology, Short Selling, Technical Analysis

Can You Judge a Homebuilder By Its Book Value?

Category: Data Analysis, Investing, Real Estate, Short Selling, Technical Analysis, Valuation