Stocks finished mixed-to-lower Monday after Dow component and banking giant J.P. Morgan (NYSE:JPM) $40.30 +10.29% said late Sunday evening that after some prodding by the federal government, it was buying Bear Stearns (NYSE:BSC) $4.81 -83.96% for roughly $236.2 million, or $2 a share in stock.
Treasuries saw some defensive buying with the 13-week, 5-year and 10-year yields all closing at new 52-week lows (price highs). Only the longest-dated 30-year yield ($TYX.X) managed to hold a close "well above" its 1/23/08 low yield close of 41.75, or 4.175%.
J.P. Morgan said late Sunday evening the deal was fast-tracked by the federal government to avoid a Bear Stearns bankruptcy, with the Fed also essentially making the takeover risk-free by saying it would guarantee up to $30 billion of the troubled mortgage and other assets that got the nation's fifth-largest investment bank into trouble.
J.P. Morgan said it would guarantee all business - such as trading and investment banking - until Bear Stearns' shareholders approve the deal, expected to be completed during the second quarter. The acquisition includes Bear Stearns' headquarters, which is one of the world's tallest buildings and reportedly worth more than $1 billion.
JP Morgan / Bear Stearns (Montage) - Daily Interval
Deutsche Bank's Mike Mayo said "One reaction is shock that a company that reaffirmed its book value at around $84 on Wednesday can be worth $2 per share four days later on Sunday."
I (Jeff Bailey) can only echo Mr. Mayo's comments, and I would think some of Bear Stearns' executives would probably do the same.
It is always a "shock" to see any company go bankrupt, but not always a surprise.
In Friday's OptionInvestor.com Market Monitor, I contemplated seriously the selling of a NAKED put in BSC for the March $15 Puts for $1.50, thinking to myself "JPM will buy them, maybe $30/share."
Maybe it was the "luck of the Irish" that had me canceling that order with the thought that BSC may well be headed for bankruptcy, and a low-ball or take-under purchase was in the cards with RISKS really unknown.
While we may find out differently, I do think that many of Bear Stearns' executives spoke the truth early last week when they said they did not have liquidity issues. However, when clients started withdrawing/transferring assets to other banks/brokers, suddenly liquidity became an issue and a run on the bank.
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The "bottom line" as I see it is that I (Jeff Bailey) can't think that anyone knows for certain what their liquidity will be the next day.
The arrangement (JP Morgan / Fed) was the first of its kind since the 1930s with Bear Stearns getting a 28-day loan from J.P. Morgan with the government's guarantee that J.P. Morgan would not suffer any losses on the deal.
At almost the same time the deal was announced, the Fed said it approved a 25 basis point cut in its lending rate to banks (discount rate) to 3.25% from 3.50%.
Sunday's discount rate move found a strong bid for Treasuries as investors rate-watchers seeing the possibility that the FOMC could slash it target rate on fed funds 100 basis points to 2.00% from 3.00% tomorrow.
March 30-day Fed Funds futures (ff08h) settled 97.47 (100 - 97.47 = 2.53%) suggesting 100% probability of at least a 50 basis point cut at tomorrow's FOMC meeting (02:15 PM EDT).
Shares of Lehman Bros. (NYSE:LEH) $31.75 -19.12% were hit hard, but finished well off their lows of $20.25.
Today's internal benchmarks probably don't do justice as to some of the price action from Sunday evening's session and this morning's cash open.
April Mini Gold futures (yg08j) traded as high as $1,033.70 Sunday evening, but settled up $3.20, or +0.32% at $1003.00. Friday's settlement was $999.80.
The U.S. Dollar Index (DXY) was trading 71.40 at today's 04:00 PM EDT hour after having fallen to historic lows of 70.70 Sunday evening. At this morning's 09:30 AM EDT tick, the DXY had recovered to 71.33.
US Dollar Index (DXY) - Daily Intervals
As I type (07:45 PM EDT) the DXY trades 71.48. From what I've been able to ascertain, the DXY's action really seems to be a driving force regarding "sentiment" towards equities.
This observation is really being made on an intra-day basis where it just seems that the major averages soften up when the dollar moves to an new hourly low, but tend to firm, or even see some PRICE gain when the dollar "firms" just a bit.
The dollar, or any currency at this point seems to be trading both on MONETARY policy, and oil's trade.
I've shown a couple of different charts for the DXY, but one of the primary ways I'm trying to "define" the DXY is by the October relative high (when the SPX/SPY found its all-time high) now Sunday/Monday's "low."
Note the 1/22/08 inflection high for the DXY, then the 2/26/08 "break down" low. The most recent RELATIVE HIGH for the S&P 500 (SPX.X) came on 02/26/08 and 2/27/08, and today we tested the and briefly violated the 1/23/08 low.
S&P 500 Index (SPX.X) - Daily Intervals
The "only" technical level I saw in today's Market Monitor at 01:24:14 PM EDT that I observed as some type of potential technical support was the mathematically derived (from 2007's high/low/close) yearly S2 (support 2).
The 1/23/08 low holds the CLOSE again and I want to leave my conventional 0% at that level. Note still the 02/26 and 2/27 relative high and my observation of how on a "bigger picture" basis, the dollar's break to a then new low, seemed to have buyers stepping back from the SPX.
Again, I'm unable to make a DXY=SPX price comparison (If the DXY trades XX.XX then the SPX will be trading XXXX.XX). All I can do is make a DXY up, then firm to higher SPX, or DXY down, SPX softening to lower analogy.
SPX Yearly Pivot Levels (Table) -
My year 2008 forecast was for a "modest recession" and it was based largely on technical analysis, using both quarterly and YEARLY pivot levels, as well as historical trade for the SPX.
Under the "For" 2009, those highs, lows, and Year Close is what is CURRENTLY underway for 2008. In essence, so far this year (2008) we've seen SPX trade a high of 1,471 (1-point above 2008 Yearly Pivot) and today we observed a trade at 1,257 (2-points below Yearly S2).
I would say that in 2001, we probably saw a "modest recession" turn "sharp recession" in some part due to 09/11/2001 (terrorist attacks).
Let's call Bear Stearns (BSC) what it is. A "bank failure" that is "rescued" by JP Morgan.
The question I still don't think ANYBODY knows the answer to is "who, if any other bank is next?" And if there is another "bank failure," who will be willing, or able to step up to the plate?
As such, I would want to at least have some technicals, or PRICE comparisons to the year's 2001's low (For 2002 is 2001's high/low/close) and 2002 (For 2003 is 2002's high/low/close).
Let's simply think for now that Bear Stearns is somewhat similar to "9/11" when on 9/10/01, the SPX had just traded a new 52-week low of 1,073.
I dare say at this point, that some of the same "sentiment" towards equities and dollar action holds true for DXY and oil.
Oil's price in my opinion becomes a bit "tricky" to predict even now, but my current bias with the build in unleaded stockpiles (+10% vs. year ago), and U.S. crude oil stockpiles down "just" 4.21% from year-ago levels (as of Wednesday's EIA data), is that oil prices could fall after this Wednesday's April Crude Oil (cl08j) futures settlement.
Much of the "roll" will have taken place late last-week and early this week (traders long crude futures will take possession). However, with unleaded inventory now up 10% versus a year ago, I'm thinking refiners may not be "stockpiling" oil at these level, or buying the commodity, but looking to see if they can't get some type of price relief in oil before they start buying again.
Perhaps get some STRENGTH back in their dollar?
US Oil Fund (USO) - Daily Intervals
It wouldn't be abnormal for any trader short the USO above the most recent 02/20/08 March futures contract settlement date to be looking to get squared up in their trade. While the "fundamentals" didn't look like oil should head higher, it "must have been" the weaker dollar that had traders gobbling up oil to record levels.
Those that could "take the heat," or come up with cash for margin, will likely want to get squared up around USO $80.00. If the dollar can show some STRENGTH above the fibonacci levels, then I would think oil might "soften up" a bit below the $80.00 level.
Much of today's economic data took a backseat to what was happening with the brokers and bankers, but the data should be noted.
U.S. industrial production fell by 0.5% in February, while capacity utilization declined to 80.9% from 81.5%. Economists were looking for a -0.1% decline in production and capacity utilization of 81.2%.
The New York Fed manufacturing index fell to -22.23 in March, eclipsing a record-low of -19.6 set in November 2001.
Meanwhile, the U.S. government said the Q4 2007 current account deficit narrowed, sliding to $172.9 billion. Economists had forecasted a $184 billion deficit.
In addition to JPM buying BSC, the Chicago Merc (NYSE:CME) $449.20 -7.58% said it reached a definitive agreement to buy Nymex Holdings (NYSE:NMX) $84.30 -11.57% for $9 billion. Deal terms were unchanged from late January, though indicative value had fallen by around $2 billion, reflecting uncertainty over the regulatory climate (i.e. consolidation of commodity brokers being anti-competitive).
Intercontinental Exchange (NYSE:ICE) $122.41 -6.79% slid $8.92/share and traded
an intra-day low of $110.29.