The Overnight Report (Monday): A New Deal For Bear Stearns

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By Greg Peel

I trust everyone had an enjoyable Easter break. For FNArena this meant a weekend out on the company’s luxury cruiser, on which we soon hope to be hosting lavish harbour cruise events for our subscribers. A photo of me on the bridge appears below.

The big news on Wall Street last night was JP Morgan’s increased bid for Bear Stearns. The market recognises that the original US$2 bid, which was agreed between JPM, the Fed and Bear Stearns, was largely symbolic. In other words, Bear was actually bankrupt. But there has been a big Bear shareholder backlash ever since, particularly given the US$236m bid was well short of even the US$1.2bn value of Bear’s New York headquarters.

JPM has now raised the bid to US$10, with the Fed’s approval. By doing so all parties believe this will put a deal to bed that needs to be put to bed as quickly as possible. One assumes JPM was probably happy to pay this amount in the first place but was under instruction from the Fed. For it is still, in reality, the Fed’s deal. JPM is just the conduit.

Under the deal the Fed will lend JPM US$30bn against the Bear portfolio, which will in turn be managed by fund manager BlackRock. JPM will take the risk on US$1bn only of that US$30bn, while the Fed will participate in any profits derived from the orderly unwinding of the portfolio. In other words, it’s as good as a temporary nationalisation. Bold speculators who bought Bear at UD$5 after the US$2 announcement have done well, and the shares closed at US$11.38, up 88%, as some traders are still prepared to speculate on a separate white knight appearing.

Either way, it was good news for financials as it implies there was more value in Bear than initially assumed. While financial sector stocks had a mixed session after the big rally on Friday, the broad market found another reason to be more confident. Adding to the happy glow were the latest housing data.

New home sales in February rose 2.9% – the first rise since October. The market was expecting another decline. Inventories fell 3%. The clue to the good result no doubt lies in the house price index figure, which at -8.2% year-on-year was the biggest decline since the National Association of Realtors began their tracking service in 1999. Now that house prices have fallen significantly, the buyers have started to get interested. And throw in what the Fed is doing, and what the government is doing for the sponsored mortgage lenders, and then a mortgage is becoming a little bit easier to obtain.

The home building sector jumped on the news, and helped the Dow to its 187 point, or 1.5%, gain. The S&P also added 1.5%. The other sector (outside of financials and home builders) to see renewed buying interest is the tech sector. The Nasdaq jumped 3% last night, to add to its 2.2% rise on Thursday. That’s the best two-day session in five years.

Tech has been another recipient of the switch trade, the one in which everyone is getting out of commodity stocks. It was a mixed night for commodities, following on from two sessions of solid weakness. The US dollar eased slightly against the euro, but continued its recovery against the yen, to be back over 100 yen. London metal markets were closed for the holiday.

So there were no movements in base metals. Gold pulled back from the precipitous fall of the past two sessions, adding US$5.10 to US$915.20/oz.. Silver also managed a slight bounce – US28c to US$16.99/oz. Oil continued its weakness, falling US98c to US$100.86/bbl, although the solid housing numbers did stem the tide of selling somewhat. There were also bounces amongst some of the softs. Wheat rose 3.3%.

The Aussie dollar – which has been yo-yoing on interest rates, carry trades, and its “commodity currency” status these past few sessions, managed to pull back about US0.8c to be US$0.9072. This means there has been little change since the Australian close on Thursday.

The SPI Overnight was closed last night, which leaves us with a total 447 point gain in the Dow since Australia took off for the holiday, but only 11 points up in the SPI in the Thursday session. One presumes we’ll do better than that today in the market, although it should be noted that BHP Billiton ((BHP)) and Rio Tinto ((RIO)) were each down over 5% in London on Thursday night. London was closed last night.

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