Investor Sentiment

A Confidence Game

By, 03/17/2008

Story Highlights:

  • Bear Stearns secured a short-term loan from JP Morgan to combat short-term liquidity problems.
  • Rumors, rather than fundamentals, seemed to spur the panic.

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(Editor's Note: MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)

After trying to convince everyone rumors of their demise were greatly exaggerated, Bear Stearns today got a short-term loan from JP Morgan to ease "significantly deteriorated" liquidity position. This comes two weeks before the Fed's scheduled Term Securities Lending Facility (TSLF) is set to officially kick in, giving the impression Bear couldn't survive until March 27 without emergency funding. Yet Bear's CEO maintains they have plenty of capital. Come again?

Run on the Bear?
By Liz Moyer, Forbes
http://www.forbes.com/home/wallstreet/2008/03/14/bear-stearns-schwartz-biz-wall-cx_lm_0314bear.html

Let's rewind. Earlier this week, rumors swirled Bear was becoming insolvent. Its stock price declined. But more significantly, other financial institutions refused to trade with Bear as a counterparty—essentially cutting off the lifeblood of its business model. The financial community reacted to the rumor mill by shutting off Bear's normal liquidity sources and thereby created the pinch.

Bear still claims solvency—and they ought to know better than anyone. Yet the Street still panicked. Why? A simple lack of faith. Bear has been among the biggest originators and owners of mortgage-backed securities (MBS). To get sufficient short-term liquidity to meet various obligations they would likely need to use these MBS as collateral. But thanks to the sub-prime spiral, no one currently believes in any MBS—their street value is next to nil despite their longer term intrinsic value, which is likely still substantial.

To get cash, Bear needed a two-week jump on the Fed's novel borrowing facility for securities dealers. They found one, using commercial bank JP Morgan as a middleman. Why would JP Morgan want to get involved in the first place? After all, they're no charity organization. Clearly, they stand to gain something. For those fear-stricken over today's market action, that's food for thought.

But if Bear's really not in such imminent danger, then why the broad market sell-off today? The event was another blow to confidence. Rumors and innuendo snowballed: "If Bear might fail, what firm will be next, and then which one after that…?"

Given a bit of time, facts and fundamentals will prevail. Until then remember—a shortage of confidence is the stuff archetypical bull market corrections are made of.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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