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Historically, when the Fed has started cutting rates, investing in financial stocks has proven profitable for investors. Will the same hold true in today's easing cycle? Probably not.
The Bear Stearns (NYSE: BSC) model for its mortgage business might point to problems ahead for the financial industry in general. The financial services industry has done an outstanding job during the past twenty years developing new products and marketing them to institutions who specialize in buying these new instruments -- primarily hedge funds. With mortgage hedge funds, publicly traded vehicles such as mortgage REITs and other investors now shutting their doors to these products, who gets stuck with them? You guessed it! The investment firms and large commercial banks.
Now let's go to $300 billion of private equity debt that needs to be placed. Who is buying that up? While some institutions are, much of it is staying on the books of the investment firms and banks. Will funds be formed to invest in this debt? Yes, but it will take time.
After hitting a one-year high of $172.61 in January, the stock fell to a one-year low of $99.75 in August. This morning, BSC opened at $129.30. So far today the stock has hit a low of $126.95 and a high of $129.40. As of 11:15, BSC is trading at $127.39, down $4.19 (-3.2%). The chart for BSC looks neutral but improving, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bearish hedged play on this stock, I would consider a January bear-call credit spread above the $165 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in 4 months as long as BSC is below $165 at January expiration. Bear would have to rise by more than 33% before we would start to lose money. Learn more about this type of trade here.
Troubled Sprint Nextel Corporation (NYSE: S) is searching for a replacement for CEO Gary Forsee, and expects to have a new person in place by December, reported the Wall Street Journal.
Two Bear Stearns Companies (NYSE: BSC) collapsed mortgage related hedge funds, that lost $1.6B, have drawn an investigation from the U.S. attorney in Brooklyn, NY, reported the Wall Street Journal.
The Financial Times reported that the U.K. economy will be affected by the global credit crisis, according to Chancellor of the exchequer Alistair Darling, who said that while the U.K. economy is in a strong position to ride out the impact, growth projections will be lowered from the current 2.5%-3%.
Sotheby's (NYSE: BID) has benefited from Wall Street's equity market gains, with high-end investors piling money into art, and Rommel Dionisio of Wedbush Morgan Securities sees the stock going to $60 in a year.
Amid concern that it might miss the Street's Q3 forecast, is Polycom (NYSE: PLCM) oversold at $26? Yes, says Greg MacArthur, president of investment outfit Viewpoint2000.
Stereotaxis (NASDAQ: STXS) makes a computerized magnetically controlled navigation system that guides devices used in minimally invasive cardiac arrhythmia surgery, and Standard & Poor's rates the stock a Buy, in part because of its order backlog of $55 million.
British bank Barclays PLC (NYSE: BCS) withdrew its takeover offer for ABN Amro Holding NV (NYSE: ABN) on Friday, saying not enough shareholders tendered their shares. This leaves a consortium led by Royal Bank of Scotland PLC in position to buy ABN Amro in a deal worth €70.5 billion (US$99.9 billion), the largest takeover in the history of the financial industry.
Yahoo! Inc. (NASDAQ: YHOO) shares are up over 2.2% in premarket trading after Alibaba.com Corp., a unit of China's Alibaba Group, which is partly owned by Yahoo! won approval from the Hong Kong Stock Exchange to sell up to $1 billion worth of shares in its long-anticipated IPO.
The U.S. attorney in Brooklyn is investigating the collapse of two mortgage-related Bear Stearns (NYSE: BSC) hedge funds whose failure this summer cost investors an estimated $1.6 billion, according to the Wall Street Journal. The criminal probe is in the early stages and has yet to generate subpoenas.
Spring Nextel Corp. (NYSE: S) shares are up over 2% in premarket trading after the Wall Street Journal reported it has quietly launched a hunt for a successor to CEO [subscription] Gary Forsee amid investor pressure. The board hopes to name a new leader by early December.
Alcoa Inc. (NYSE: AA) announced yesterday it would take charges of $845 million as it closes in on the sale of two businesses - packaging and consumer products, and automotive castings - enabling it to focus on new growth opportunities.
Rio Tinto (NYSE: RTP) shares are up nearly 1.5% in premarket trading despite being downgraded to Hold from Buy by ABN Amro, mostly on valuation. Wachovia Securities downgradedMonster Worldwide, Inc. (NASDAQ: MNST) to Market Perform from Outperform, citing recent evidence of a slowdown in its North America Careers division. Walgreen Co. (NYSE: WAG) was downgraded to Sell from Buy at Banc of America Securities.
Chuck Prince, CEO of Citigroup (NYSE: C), needs a few friends. Not the kind he can go fishing with.
Prince's job may be on the line now that Citi has announced that its Q3 profits will drop 60% from last year. According to MarketWatch, the bankblamed "dislocations in the mortgage-backed-securities and credit markets, and deterioration in the consumer-credit environment."
Prince finds himself in a position not unlike that of James Cayne, the head of Bear Stearns (NYSE: BSC). Both financial institutions now have taken very big hits on their watches. Both can blame subordinates, but that may not cut it with their boards or public shareholders.
What saves them? For starters, UBS (NYSE: UBS). The Swiss bank has just reported similar problems in its fixed income portfolio. If the bad news spreads to Bank of America (NYSE: BAC), Lehman (NYSE: LEH) and other global money center banks and investment firms, Prince may be viewed as a victim of a train wreck that almost none of the large firms could avoid. He will, in essence, look as stupid as all of his peers.
TheStreet.com's Jim Cramer highlights the latest example of how people were scared out of the market at exactly the wrong time so you won't get spooked next time.
When Sowood and the Bear Stearns (NYSE: BSC) (Cramer's Take) leveraged investment funds blew up this summer we were supposed to get ready for a wave of redemptions that would buckle the market.
"Just wait until October" became a familiar refrain as hedge funds were expected to get shelled, causing tons of stocks not to trade the way they should as unnatural margined selling took its toll.
But here we are in the first week of October and spreads for arbitrage, a pure tell for fund redemptions, are tightening, not loosening. The averages are at or are close to hitting new highs and we haven't heard of any funds about to go belly-up. The only ones that would fail, I believe, would be short funds.
I bring up this sore but positive topic because when things were really bad at the end of August yet redemptions hadn't overwhelmed the market, we figured it might just be a September phenomenon. Making things a little more likely, too, were the funds that were exposed to all of these exotic instruments based on mortgages.
So far it looks like the huge hedge fund redemptions and failures aren't going to happen, perhaps courtesy of the Fed's rate cuts that now do seem to have bailed out a lot of managers who have made wrong moves. That's the "moral hazard" that everyone was fretting about so much before the Fed acted.
But I think that instead, you should let this memory of "redemption worry" be a reminder of the phantoms that freak people out and make them leave the market at what now represents 1,000 points on the Dow.
Oddly, there are still some stocks that seem pressured down more by fear than by fundamentals. Genesis Lease (NYSE: GLS) (Cramer's Take) and Aircastle (NYSE: AYR) (Cramer's Take) both have terrific yields, a function of the decline in the stocks of aircraft lessors. Some of these are owned from hedge funds believed to be struggling. The other is Enterprise Product Partners (NYSE: EPD) (Cramer's Take), also with a good yield, that is in the energy transport business.
Neither industry is hurting but the stocks had some really weak hedge fund hands as shareholders.
These could be payoffs from the distressed period and redemption fears that drove them down.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer was long Citigroup.
In his excellent blog The Big Picture, market commentator Barry Ritholz Ritholtz [sorry Barry!] gave a powerful slap to the report that Warren Buffett is in talks with Bear Stearns (NYSE: BSC) to buy a share of the company. Using language a bit saltier than we use here at family friendly BloggingStocks, Ritholtz made it clear that the idea that Buffett would get involved with Bear Stearns is pure bull . . . well, let's just say that bears use the woods for certain purposes and leave it at that.
So why is Ritholtz so suspicious? First, he points out that Buffett once had a horrible time running Salomon Brothers and is not likely to voluntarily climb back into the trading (and Wall Street ego) pit. Second, the value of Bear Stearns is very much up in the air, which hardly fits Buffett's investment profile. (Ritholtz argues that much of Bear Stearns' recent income, weak as it is, is really an accounting trick based on the reduced value of its own debt.) And third, Buffett has been critical of the fancy financial footwork that Bear Stearns and other firms have engaged in, once calling derivatives "financial weapons of mass destruction." All of this makes Buffett a very unlikely investor in Bear Stearns.
Why, then, the rumor? Follow the money. On Thursday, Bear Stearns suddenly sold $2.5 billion worth of 10-year notes. The sale came a day after the report in The New York Times of the rumored Buffett interest. According to a report on TheStreet.com, quoted by Ritholtz, the sale "comes just a day after Bear shares surged nearly 8% on rumors that the Wall Street firm was near a deal to bring in a big outside investor. One report said Bear has been talking with billionaire value investor Warren Buffett. On Thursday, Bear Stearns took advantage of that momentum and some strong demand in the corporate bond market to raise some money."
Quite a coincidence, no? Makes you wonder who started the rumor. But whatever the source, let it serve as a reminder to be careful in the presence of bears of all kinds.
TheStreet.com's Jim Cramer explains why lousy results from a U.K.-based firm bode well for American companies this reporting season.
Tate & Lyle's loss is our gain. That's the only way to think about the big decline in that U.K.-based sugar producer's stock this morning on news that the currency translation from dollars to pounds will kill it.
The declining dollar is going to make some of these earnings in the next few weeks jump off the chart. They will be so much higher than people think they will be for the big exporters, particularly those to Europe (we don't have much to go to Japan) that you are going to be blown away.
The big litmus test this earnings reporting period will be the exposure to these foreign currencies. We fret every day about the dollar, but it is a little ridiculous at this point -- meaning the currency is way too low.
Nevertheless, a Procter & Gamble (NYSE: PG) (Cramer's Take) will kill the numbers, so will a Coca-Cola (NYSE: KO) (Cramer's Take). I know these are at 52-week highs, but we are now going to have to start looking at stocks that haven't gone up that much this year. Take PG; it's only up 9%. That gives it some room. Same with Colgate (NYSE: CL) (Cramer's Take). Those still worth betting on; they can still run.
Oh, and don't forget, for the purposes of next quarter, Goldman Sachs (NYSE: GS) (Cramer's Take) will have more than 50% in earnings overseas. The firm is not going to report for while, but that's still another reason to own it -- and another reason to expect that a foreign company will take a stake in Bear Stearns (NYSE: BSC) (Cramer's Take) before long despite the Buffett denial. If a stake is taken, I doubt it will be domestic.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer was long Goldman Sachs.
TheStreet.com's Jim Cramer believes that if this chatter proves true, this major index could rocket to his target for it.
If the Bear Stearns (NYSE: BSC) (Cramer's Take) chatter is true -- that Warren Buffett, among others, could buy a stake in the broker -- we could quickly blow through Dow 14,000.
I say that because the weak link in the Dow is the financials. You get Citigroup (NYSE: C) (Cramer's Take) up through the $50s, JPMorgan (NYSE: JPM) (Cramer's Take) to the $50s and AIG (NYSE: AIG) (Cramer's Take) to the $70s -- all of which would happen if the financials ignite -- and you can be within spitting distance of my 14,548 target. Don't forget that American Express (NYSE: AXP) (Cramer's Take) could ramp on that move, too.
Take a look at that Dow. It is overweighted in finance vs. resources. So you need that group to work to get to 14,500. A Buffet stake would say this: "The group's woes are way overdone and it is time to scoop these up." Nobody will think twice about it.
And if it happens, it will cause a panic to the upside.
Very high stakes. But Landon Thomas, the reporter at The New York Times who broke the story, is real good. I trust that he would not have run this without really having the story.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer was long Citigroup, AIG and Caterpillar.
U.S. stocks futures were higher this morning indicating a continuation of yesterday's trend: markets are poised to start higher. Reports that Warren Buffett may be buying a stake in Bear Stearns helped sentiment as investors await several economic reports due today.
Yesterday, stocks rallied after General Motors (NYSE: GM) and the UAW reached an agreement to end the two-day strike. GM finished the day 9.36% higher. Bear Sterns (NYSE: BSC) also contributed to the rally when it climbed 7.67% yesterday after the New York Times reported it is in talks with a number of investors including Warren Buffett. Overall, the Dow was up 119 points or 0.87%, the S&P 500 8 points or 0.54% and the Nasdaq composite added 15 points or 0.58%.
Today, several economic reports are due: - At 8:30 a.m. EDT, final second-quarter GDP reading will be reported and economists expect a revision to 3.9% from 4%. - At the same time, a key inflation figure, the PCE deflator is expected to come within the Federal Reserve's comfort range for inflation for the past 12 months. If that is the case, many will view this as potential for future rate cuts and markets may see further gains. If it comes above that range, markets may reverse the current bullish direction. - Still at 8:30, weekly initial claims are due. - At 10:00 a.m., investors can get yet another indication of the ailing housing sector with August new home sales. The rate of sales is expected to drop to 825,000 according to Briefing.com.
The dollar slipped to yet another all-time low against the euro on speculation a government report will show a drop in U.S. home sales, according to Bloomberg. This would strengthen the case for further rate cuts. Overseas, Asian markets rallied with several of them, including Hong Kong and Australia, hitting new record highs. European stocks were also higher so far today.
In some major corporate news, a group of investors led by private-equity firm J.C. Flowers & Co. that had planned to buy student lender Sallie Mae (NYSE: SLM) for $25 billion now wants out of the deal due to the current economic environment and legislation.
Starbucks Corp. (NASDAQ: SBUX) is down over 3% in premarket after a downgrade to Sell from Neutral at Banc of America Securities, lowering target from $27 to $23. The analyst said that expectations for a quick recovery are too high amid slowing growth.
The New York Times has reported that Warren Buffett is contemplating buying a sizable stake in the investment banking firm Bear Stearns (NYSE: BSC). No doubt the rumor affected the stock, which closed today at $123.00 per share, up $8.67 on the day. It had closed as low as $99.75 this past summer amid the news of two of its hedge funds being distressed over subprime loan investments.
It is said that BSC might be willing to sell about 20% of the company and that CEO James E. Cayne, is looking for as much as a 40% premium. A premium to what is the question? If you add it to today's closing price you arrive at a value of $172.20, right at BSC's 52-week high of $172.61. I do not think Buffett or any of the other potential investors would be willing to pay this much or should pay this much. I do believe they would be willing to pay as much as a 20% premium, with an eye to obtaining the potential of a 20% remaining return if they can "set the ship right" and get back on a growth track.
Bear Stearns has been hit hard by the mortgage crisis and problems in the credit markets over the last few months. From early April to mid-August, shares of Bear Stearns lost nearly a third of their value, falling from more than $157 to $103 per share. In June, two Bear Stearns funds that made big bets on mortgage-backed securities were closed after suffering heavy losses.
Bear Stearns' CEO James E. Cayne reportedly demands a high premium for outside investors, as much as 40% above the public share price. But given the problems the company has been having, and the doubts that exist about its viability, Cayne would be wise to sell to Buffett at the market price. He may even want to give him a discount, given that a Buffett stake would send a very strong signal that Bear Stearns is here to stay.
Not surprisingly, Bear Stearns shares are up sharply on the news, closing at $123, up $8.76 or 7%.
Bear Stearns (NYSE: BSC) is recently up $9.76 to $124.16. The NY Times is reporting Warren Buffett & others are looking at a stake in BSC. BAC call option volume of 27,438 contracts compares to put volume of 29,491 contracts. BSC October option implied volatility of 44 is near its 26-week average of 43 according to Track Data, suggesting flat price movement.
Merrill Lynch (NYSE: MER) is recently down $2.04 to $70.08. Goldman Sachs-(NYSE:GS) says "MER appears to be caught in the cross hairs of a number of headwinds in the quarter -- leveraged loan losses, mark to market losses on their CDO exposure, and deteriorating mortgage fundamentals." MER call option volume of 21,310 contracts compares to put volume of 20,870 contracts. MER October option implied volatility of 41 is above its 26-week average of 30 according to Track Data, suggesting larger risk.
Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
Bear Stearns Companies (NYSE: BSC) -- implied volatility decreases after EPS as BSC rallies. BSC is recently up $4.23 to $118.96. BSC October option implied volatility of 40 is below its 26-week average of 43 according to Track Data, suggesting decreasing price movement.
Ford Motor(NYSE: F) -- implied volatility-risk collapses on tentative UAW agreement. Ford is recently up 33 cents to $8.67. General Motors Corp. (NYSE: GM) and the United Auto Workers announced a tentative agreement on a new national contract. Dow Jones reported, "The cost of protecting $10 million of fellow U.S. automaker Ford bonds fell to $590,000, after being in the $630,000 area on news of the strike at GM, according to a market participant. F's 7.45% notes due 2031 were up 1 point to 78.75 cents, according to MarketAxess." F October option implied of 35 is below a level of 52 from last week and below its 26-week average of 49 according to Track Data, suggesting decreasing risk.
Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
Ben Bernanke's Buyout Bailout (BBBB) -- September 18th's half-percent Fed Funds rate cut -- does not seem to have cured what ails the U.S. economy, but maybe we just need to give it time. The Associated Press reports that the housing market continues to weaken, consumer confidence is falling, and retail sales going into the holiday season are likely to decline. Meanwhile, Bloomberg News reports that inflationary expectations are back with a vengeance and DealBook notes that Credit Suisse is laying off 150 mortgage-backed securities workers -- suggesting that a loss of investor confidence in MBSs will create a painful fall on Wall Street.
Are we back to the 1970s? That decade was marred by Stagflation -- a long period of slow economic growth coupled with high inflation. There's plenty of data suggesting slow growth ahead:
Shopping growth slowing -- The International Council of Shopping Centers trimmed its September same-store sales growth estimates to between 2.0% to 2.5%, from the previous 2.5%.
Housing imploding --The National Association of Realtors reported that sales of existing single-family homes dropped 4.3% in August, compared to July. Sales at a seasonally adjusted annual rate dropped to 5.5 million units, the slowest pace since August 2002.
Consumer confidence weak -- The Conference Board's Consumer Confidence Index fell to 99.8, an almost 6-point drop from the revised 105.6 in August. The reading was below the 104.5 that analysts had expected. It marked its lowest level since a 98.3 reading in November 2005, when gas and oil prices soared after hurricanes Katrina and Rita hit the Gulf Coast.
Interview with the head of Xerox's (XRX) Webster research lab
General Electric (GE) Q3 quarterly results preview
Foreclosures double again, another wave is coming
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Historically, when the Fed has started cutting rates, investing in financial stocks has proven profitable for investors. Will the same hold true in today's easing cycle? Probably not.
Before the bell: Waiting for jobs report, futures
TheStreet.com's Jim Cramer highlights the latest example of how people were scared out of the market at exactly the wrong time so you won't get spooked next time.
In his excellent blog 
The New York Times has reported that 
Bear Stearns
