Thursday, March 13, 2008

"Smart Money" is Buying, So Should You!

One of the propagandas constantly offered by the financial media is "you should buy because smart money is buying". We heard this throughout the fall in the financials as Arabs/Asians were buying stakes... just do a search for "dinosaurs" on the blog for earlier posts about how dangerous this line of thinking is to your portfolio. Even non Arabs/Asians are being blown up by the financials. Back in September 07, Joseph Lewis, a billionaire was adding to a huge stake (now nearly 10%) in Bear Stearns (BSC). The stock was trading $105-$120 or so at the time, down from a 52 week high of $160. Trumpets blaring, the financial media (and many investor managers who appears as pundits in these outlets) told us "the bottom is in", "kitchen sink quarter" and "smart money is buying" financials - so should you! (feel free to do a search for word "kitchen" on how I was bemoaning this 'advice' last fall, and said we had another 10 sinks in the house to work through)

Conclusion: Oops. Bear is down to nearly $50 today on solvency fears. Ouch. Now if you are a billionaire with a nearly 10% stake, this stinks, but you still have your 8 houses, 3 yachts and private jet. Life will go on. If you are a regular Joe investor and you listened to the hype - well you just took a bath that is going to take a long time to recover from. Now in today's era you could call your government representative and ask for a bailout of your stock losses as it's the "in thing" to do nowadays, but I digress. Once again, this dangerous drumbeat of "the bottom is in, in financials" that has been espoused for months on end by various and sundry sources is simply dangerous to people's portfolios.

Now for the good news - according to the analyst cites in this story (who is well respected), Bear will not be allowed to go bankrupt. Why? The Fed will bail it out! Awesome! Your tax dollars hard at work again. More things to rejoice. What a country!
  • Whispers that the New York-based bank is in trouble dragged the company's stock to its cheapest price since just after the September 11th terrorist attacks. Punk Ziegel analyst Richard X. Bove said people are worried that Bear Stearns has a lot of investments it will not be able to sell. A distaste for risk in certain corners of the bond market has depressed the value of a slew of types of investments and drained liquidity from the market.
  • Bear Stearns lends money to hedge funds, some of which are running into trouble themselves, Bove said. Some of these beleaguered hedge funds are surrendering their investments to Bear Stearns, which only piles on more paper the bank is unable to sell, he said.
  • Bear Stearns' stock plummeted more than 13 percent to $53.41. The stock earlier in the session touched as low as $50.48, the cheapest trade since 2001. The shares, which neared $160 last April, are down more than 20 percent this week and down 30 percent so far this year.
  • He said that fear makes sense, but he does not think the Federal Reserve will allow that to happen. The Fed would bail Bear Stearns out before allowing the bank to dump upward of $275 billion of tainted investments on a market that currently has little appetite for risk, he said.

Fantastic! I wonder if he CEO will get a bonus from this as well - I mean it's only fair - he is under a lot of stress, he deserves at least $50 million for his pain.

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