Tuesday, March 25, 2008
The Bear Raid
The developments involving Bear Stearns the last few weeks won't do anything to build Wall Street's credibility and probably will lead to new regulations and perhaps the end of unregulated hedge funds. Given the action in Bear's put options and short sales of Bear's common in the week before the demise of the company, it certainly appears that it may have been the victim of an old fashioned bear raid, no pun intended.
It was in the interest of hedge funds holding large short positions in Bear to talk the stock down and advance the rumors of its liquidity problems. Add to that the very bearish put purchases in large amounts at far off strike prices (with very short expirations) that the Wall Street Journal reported last weekend, and you have the elements for suspicion already. Finally, the liquidity squeeze was triggered when repos didn't close as planned and other creditors basically called in their chits at the same time, events that certainly look orchestrated. Remember, Bear's clients tended to be institutional, not retail, so this was not merely a panicky run.
Now we have the spectacle of the sale price for the company quintupling, indicating as we knew, that the company was not really bankrupt, only squeezed.
It's just another example of hedge funds taking advantage of their unregulated status and the recent loosening of exchange rules (such as the removal of the short sale uptick rule) to act aggressively and with no regard for the integrity of the markets. My prediction - we will be hearing much more about this and similar episodes and there will be a regulatory backlash in the financial markets.
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Meanwhile, the stock market has moved higher, perhaps the result of the availability of funds at very low interest from the Fed's discount window coming into stocks. The Motley Fool site today suggested that an arbitrage is taking place since solid dividend paying stocks are now yielding more than the interest charged at the Fed discount window. Whatever, the reason, the stocks I have been purchasing over the last 75 days or so have had a nice move. I thought that they might also benefit from cranking in higher inflation, which hurts stocks in the short run but improves nominal prices in the longer run. No complaints here though, when we can take nice profits during what most believe to be a bear market.
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If you saw Counting Crows on Letterman last night, you can see the electric performance level that has attracted such a devoted following. They did their new single, "You Can't Count on Me" from the new album. I think the song is only fair by Adam Daritz standards, though the chorus is catchy and he was clearly wound up. I am anxious to hear the rest of the album to judge whether Adam's self assessment (that he is burned out as a songwriter) is accurate. He is clearly not burned out as a performer.
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Enjoyed watching the NCAA's first two rounds, there were many great games, a few stunning upsets, and it's good to see Villanova play as well as it did. I'll be watching the next 2 rounds from Orlando, where I will be on business over the weekend. So unless I do a post from there, this will be it until at least Tuesday.
Meanwhile, for those of us who are baseball fans first, that season is here before you know it, and hope is alive again at Shea, following last year's devastating fade out.
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Yesterday, I sold 100 shares of Lindsay Manufacturing (LNN) from the IRA, the first sale since early January. The price was 97.49, for shares purchased 10/12/98 for 12.4375 (yup, that was when you would buy sixteenths of a share). A decent long term return, in what was mainly a period of low inflation. Of course, as per the strategy, this was only part of the holding, since LNN continues on my buy/hold list.
It was in the interest of hedge funds holding large short positions in Bear to talk the stock down and advance the rumors of its liquidity problems. Add to that the very bearish put purchases in large amounts at far off strike prices (with very short expirations) that the Wall Street Journal reported last weekend, and you have the elements for suspicion already. Finally, the liquidity squeeze was triggered when repos didn't close as planned and other creditors basically called in their chits at the same time, events that certainly look orchestrated. Remember, Bear's clients tended to be institutional, not retail, so this was not merely a panicky run.
Now we have the spectacle of the sale price for the company quintupling, indicating as we knew, that the company was not really bankrupt, only squeezed.
It's just another example of hedge funds taking advantage of their unregulated status and the recent loosening of exchange rules (such as the removal of the short sale uptick rule) to act aggressively and with no regard for the integrity of the markets. My prediction - we will be hearing much more about this and similar episodes and there will be a regulatory backlash in the financial markets.
--------------------------------------------------------------------------
Meanwhile, the stock market has moved higher, perhaps the result of the availability of funds at very low interest from the Fed's discount window coming into stocks. The Motley Fool site today suggested that an arbitrage is taking place since solid dividend paying stocks are now yielding more than the interest charged at the Fed discount window. Whatever, the reason, the stocks I have been purchasing over the last 75 days or so have had a nice move. I thought that they might also benefit from cranking in higher inflation, which hurts stocks in the short run but improves nominal prices in the longer run. No complaints here though, when we can take nice profits during what most believe to be a bear market.
--------------------------------------------------------------------------
If you saw Counting Crows on Letterman last night, you can see the electric performance level that has attracted such a devoted following. They did their new single, "You Can't Count on Me" from the new album. I think the song is only fair by Adam Daritz standards, though the chorus is catchy and he was clearly wound up. I am anxious to hear the rest of the album to judge whether Adam's self assessment (that he is burned out as a songwriter) is accurate. He is clearly not burned out as a performer.
-------------------------------------------------------------------------
Enjoyed watching the NCAA's first two rounds, there were many great games, a few stunning upsets, and it's good to see Villanova play as well as it did. I'll be watching the next 2 rounds from Orlando, where I will be on business over the weekend. So unless I do a post from there, this will be it until at least Tuesday.
Meanwhile, for those of us who are baseball fans first, that season is here before you know it, and hope is alive again at Shea, following last year's devastating fade out.
-----------------------------------------------------------------------------
Yesterday, I sold 100 shares of Lindsay Manufacturing (LNN) from the IRA, the first sale since early January. The price was 97.49, for shares purchased 10/12/98 for 12.4375 (yup, that was when you would buy sixteenths of a share). A decent long term return, in what was mainly a period of low inflation. Of course, as per the strategy, this was only part of the holding, since LNN continues on my buy/hold list.
