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The stock markets look ready to open down this morning after Wall Street digests yesterday’s key events. The Federal Reserve once again lowered the Fed Funds rate about 3/4 of a percentage point to 2.25%, disappointing investors who were looking for a full point rate cut. According to The Wall Street Journal, the move was a sign that the Fed is looking to rely on other options besides interest rates to stimulate the market (in order to keep inflation in check).

The Stock Market & Bank Stocks Rise

Also making headlines were better than expected earnings at major banks such as Morgan Stanley (NYSE: MS), Lehman Brothers (NYSE: LEH) and Goldman Sachs (NYSE: GS). All three stocks had suffered over the past year from uncertainty surrounding the subprime lending fiasco.  The market reacted positively to both major news items, as the Dow closed up about 3.5%.

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There’s nothing quite like a fire sale in the stock market - except, of course, when even the buyer (who just swapped a dime for a dollar) feels ill at ease with the transaction. Unfortunately, that seems to be the case now, as JP Morgan Chase (NYSE: JPM) announced yesterday that it was purchasing ailing giant Bear Stearns (NYSE: BSC) for the rock bottom price of 2 bucks a share.

Why So Cheap?

Bear Stearns is a product of the mortgage backed security implosion that has unfolded over the past year. The amount of mortgage securities it holds (which are essentially worthless) is in the billions - making bankruptcy certain in the absence of a buyout or government intervention.

The Fed, fearing a domino effect on Wall Street if the firm were to fold quickly, has been working hard to secure JP Morgan Chase as a buyer. They have even gone as far as putting up an unprecedented $30 billion in capital to finance Bear’s illiquid assets (i.e., mortgage backed securities). However, despite the Fed’s backing, management at JP Morgan is still sweating all of the uncertainty behind the deal. This was the key driver behind the firm’s per share offer price of $2.

Shareholder Mutiny Brewing

According to an article in The Wall Street Journal, Bear stockholders are extremely displeased with the buyout price. They argue that filing for bankruptcy is a much better option, as book value of the firm is believed to be far greater than $2 per share. Still, management position is that stockholders will agree to the deal (which is expected to close in June).

The Stock Market Reaction

All of this uncertainty and panic will send the major stock market indices lower. Even with an additional move by the Fed to lower the discount rate (which was also announced yesterday), the economy and the US dollar are in trouble. So, buckle up - I think we are in for a rough ride.

Tags: bear stearns

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Despite an initially positive reaction by the stock market to CPI data yesterday, the market headed into negative territory after a heavy dose of bad news from the Fed and Bear Stearns (NYSE: BSC).

Take One for the Team

The Federal Reserve announced it would work with JP Morgan Chase (NYSE: JPM) to float a cash-strapped Bear Stearns funds in order to keep the company in business. Their concern is that, given an already air-tight credit market, the entire economy would collapse if Bear were to suddenly go out of business. Why? Because nobody really knows how enmeshed Wall Street is when it comes to lending between firms. If one giant falls, several more may unexpectedly collapse as well. Even though it has been given a brief reprieve, most expect that the company will be sold to a larger bank or private-equity firm within a matter of weeks. After the news, BSC stock quickly lost about half of its value…ouch.

Enter the 2nd Bear

Or, I guess I should say the market has already entered the second bear market of the millennium (irrespective of how the Bear Stearns issue pans out) . Now the question is, will it be long or short? In my opinion, you have to hope for the best and expect the worst right now. Especially because I fear a larger problem with consumer credit (i.e., credit cards) could sneak up on the economy if we’re not careful.

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I bet you wouldn’t have guessed the Walt Disney Corporation (NYSE: DIS). If you’re like me, the name Disney immediately brings to mind an amalgam of animated cartoons, theme park rides, and lovable rodents. However, while having the market cornered in the rugrat space, Disney is actually a well diversified media giant that derives over half of operating earnings from its media networks and assets. Surprisingly, these networks include ABC, ESPN, SOAPnet, as well as equity stakes in Lifetime Television, and A&E.

Durable Competitive Advantage at a Discount

According to Barron’s Michael Santoli, the stock has fallen to unjustifiable lows as of late and is literally “the cheapest it’s been in 20 years”. Indeed, it certainly seems fairly cheap given a trailing P/E of 15.7 vs. the broadcasting / cable TV average at 19.2 and the S&P 500 at 18.3. While I can understand why investors may have unloaded the stock as fears of a consumer led recession continue to mount - I still see this as a possible long term opportunity to invest in a company with a significant durable competitive advantage.

Disney is Deeply Entrenched

Really, there is no denying that Disney permeates every aspect of our lives. In fact, several months ago I made the decision to buy a Blu-Ray player over an HD DVD player. Why? I read that Disney was on board exclusively with Sony’s Blu-ray format. The thought of parents having to explain to their kids why they couldn’t buy the 47th sequel to The Little Mermaid seemed like a nightmare waiting to happen. And, lo and behold, HD DVD is (ironically) going the way of Sony’s Betamax.

Related Links:

Barron’s: The Magic’s Back (subscription required)

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The latest edition of Barron’s brings some compelling facts about financial bellwether Wells Fargo (NYSE: WFC) to light. The bank, a large cap stock, is an efficient operator whose conservative approach has helped it weather the subprime storm. The fact that Warren Buffett’s Berkshire Hathaway is the bank’s largest shareholder isn’t exactly bad news either.
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Tags: Financial, Large Cap Stocks, money center banks, Stock Investment Guide

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