Tuesday, March 25, 2008

One Wounded Bear & Two Gov't Officials Wake Up the Bulls

WOW! The recent developments surrounding Bear Stearns (BSC) stock will likely be a case study for Investment Finance majors for decades to come. We want our readers to understand the integral part that politics and psychology have played since the $2.00/share offer on March 16th. If JPM had offered $10.00/share right away, BSC shareholders would have demanded more, perhaps $20.00, but with such a miniscule starting bid, JPM set themselves up for a win-win situation. BSC shareholders on the other hand were set up for a lose-lose situation. Ironically the Bulls have been awakened by the hurt, battered down Bear.
We suspect that JPM was coaxed into the ‘take out’ (actually more of a ‘take under’) by government officials, specifically Hank Paulson and Ben Bernanke. The financial sector was under great stress and government action had to be taken to avoid a greater panic. Do we think it is a good or bad thing? Well, that all depends upon which side of the trade you were on.
We’ll not pass judgment on the ethics of the transaction. The market is humbling and you have to take what it gives you, study it and learn from it. Our goal here is to educate, to expose the truth, and eventually enable our readers to profit from logical psychological analysis and not simply luck or accounting data. Forward-looking insight is what we promise to teach you.
The political and psychological mechanics of the BSC/JPM deal must be remembered and appreciated for future reference. After studying the near collapse of Continental Bank in 1981, we understood how influential Paul Volcker was as Fed Chairman in getting emergency financial deals done behind closed doors, literally at four in the morning! Politics and psychology have been around for a long time and are clearly evident with the JPM/BSC deal. Respect them and make a note of them for future trading: we did. BSC shares are still down an amazing 85% from one month ago, even though the shares are up over 100% for those who bought on Friday. What looks like a huge winner today for a few wise traders is still a huge loser for BSC employees or anyone who bought and held from much higher levels. Take note.. even one wounded Bear can wake up the Bulls (with help from the government officials that is.. ).
Thanks for understanding the Psychology of this political Call.

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