March 17, 2008

Who could ever imagined that a stock, not too long ago, that had a market cap of $20B, could be taken out shortly thereafter by a rival company for $2/share or $236M? That is exactly what happened with Bear Stearns today and according to the market’s reaction to its buyer, JPMorgan Chase, got a deal. However, the major indices suffered, though the Dow finished in the green, this is primarily because JPM was up over 11% on the day. The major question that everyone is asking at this point is whether BSC is alone in this financial collapse, or are there still more to come. Because of this uncertainty, we saw a large number of banks take a beating today. Most of your banks outside of JPM got taken down on average anywhere from 5% to 15%. The likelihood of the matter is that it will probably get worse before things get better.

We have the Federal Reserve holding their regularly scheduled FOMC meeting tomorrow, in which they are expected to announce another rate cut. The Fed Funds Rate currently stands at 3%, but many are expecting a slashing of anywhere between 75 to 125 Basis Points. The Fed Futures has already priced in a 75 BP cut; how the market reacts to news of a Fed cut will be interesting. On one hand, if they cut too little (i.e. 25 or 50 BP’s) the market will be unhappy and sell-off further, but if they go to the other extreme and cut 75 to 100 BP’s then the market could panic over how aggressive the Fed is cutting, because perhaps they realize that the economy really is in major trouble. So they could be caught between a rock and a hard spot tomorrow. The key will be to find the middle ground – our expectations at Shareplanner is a 75 BP cut. How the market will react is the million dollar question. But we all shall soon see come 2:15pm tomorrow.

Let’s review the charts…

NASDAQ broke through its lows from January. It is now at the same level that we were at last Monday. Whether the bulls can hold their ground and use the news from BSC as a bottom and subsequent rally point will be what determines whether the index can finally start making some positive gains once again.


S&P bounced off of the January lows. Strong likelihood that we test those lows again tomorrow, if the market doesn’t like the news coming out of the Fed. However the very fact that the S&P was able to manage to hold those lows amid the horrendous news out of BSC, is positive to say the least.