Patently, they don’t “call ‘em surprises because you expect ‘em;” and, Friday’s Bear Stearns (BSC) news was a shocker. That “shock” took the DJIA from “up” nearly 50 points at 9:40 a.m. to down some 300 points at 10:00 a.m. And from there stocks never really regained their composure, causing one Wall Street wag to lament, “Stocks never bottom on a Friday as participants tend to brood over the weekend and show up on Monday in ‘sell mode!’” Which brings us to this week, and once again we are terming this week “kiss and tell time.”
Either the various indices will confirm the Dow’s breakdown, or we will be left with a glaring downside non-confirmation. In either event, we believe that many of our recent “long” recommendations will NOT breach their respective reaction lows.
To this point, we had a discussion with a particularly brilliant portfolio manager last week, who in addition to being adroit at valuing stocks, is skilled in the art of “game theory.” His comments went something like this:Jeff, as a portfolio manager I have to buy something since I am not paid to sit on cash. One name that makes sense to me currently is Microsoft (MSFT). The shares are down nearly 30% since December 2007, the company is growing its earnings and is entering new markets. Further, China and India are becoming better business partners so while the piracy issue is still a problem, it should be less of one going forward, implying its patents will be ‘sticker.’ Moreover, Microsoft is loaded with cash and there are no CDOs on its balance sheet. Additionally, I think the proposed Yahoo! (YHOO) acquisition won’t get done and that should give the stock at least some kind of rebound rally.
“Fair enough,” we replied, “and would add that over 50% of Microsoft’s revenues come from outside the U.S., which in our opinion is a decided plus.” (MSFT is followed by our outside research correspondents).
The call for this week: I told the media all day Friday that my guess was that JPMorgan (JPM) would buy out Bear Stearns by Monday because it made all the sense in the world. Indeed, while Morgan has always been a big player in derivatives, Wall Street has never considered the firm impactful in equities and research. Therefore, in one fell swoop JPM could get the intellectual capital, the personnel, and a book-of-business that was decades in the making. Furthermore, with JPMorgan’s balance sheet backing them up, many of Bear’s structured vehicles will likely find better “footing.” We think it is a brilliant move on Jamie Dimon’s part.
As for the equity markets, they are clearly involved in a “selling panic,” while the commodity and Treasury markets are into “buying panics.” However, for the well prepared investor this kind of volatility affords opportunity. Remember, the Japanese kanji symbol for the word “crisis” consists of two characters. One of them represents “danger,” the other “opportunity.” We continue to invest accordingly.