The subprime mortgage mess took yet another victim as Bear Steams (NYSE: BSC) reported its first loss as a public company when it was forced to write down $1.9 billion dollars in investments related to subprime mortgages, according to Bloomberg. Analysts expected a much lighter hit. This loss is $1.2 billion more in write-downs than predicted.
Bear Steams also was hit harder than its chief rivals Citigroup (NYSE: C), Morgan Stanley (NYSE: MS) and Merrill Lynch (NYSE: MER) on the trading side so overall revenue for the fourth quarter resulted in a net loss of $854 million or $6.91 per share. A year earlier fourth quarter results were a net income of $563 million, or $4 per share. Bear Stearns is the second-largest underwriter of U.S. mortgage bonds and it paid dearly for that lead role.
Bloomberg said the firm underwrote $7.3 billion of U.S. bonds, which was 17% less than last year and it managed just $1.18 billion in equity offerings, a 28% decrease. Yet Sanford Bernstein analyst Brad Hintz does see a rainbow at the end of this cloud. He told Bloomberg that he believes that we're heading into a recession and that's when traditional investment banking activities, such as mergers and acquisitions slow, while cuts in interest rates can help Bear's bond business. So Bear could benefit from the recession that's now looking more and more likely.
Since the loss was much greater than anyone predicted, expect the stock to fall today, but early trading made the stock price look like a yo-yo going up and down.
Whether what a CEO does in his spare time is important or not, The Wall Street Journalgives the impression that Bear Stearns (NYSE: BSC) chief James Cayne spent too many hours golfing and play bridge when two of the firms hedge funds were in trouble this summer.
The news about Mr. Cayne spending hours out of the office during the problem period in July is already well-known. But in the lead story at the paper's online edition, reporters for the paper write about Cayne's schedule, his habit of not having his cellphone with him at certain times, and rumors that he smokes marijuana to relax.
The paper also reports that when the hedge fund crisis was at its worst "Mr. Cayne left for Nashville to play in the bridge tournament, accompanied by his wife, Patricia, who is a neuropsychologist and another avid bridge player." He stayed in the city for most of the next ten days.
The WSJ wants to make a virtue out of playing detective, which is fine, but whether it helps shareholders in Bear Stearns is another question.
CEOs of large companies often leave the management of problems in the hands of other senior executives. There is too much activity and too many problems to go around for one person to spend close to full-time on any one. Whether Mr. Cayne did or did not allocate his time correctly during the failure of two of the investment bank's hedge funds will always be a matter of conjecture.
What is certain now is that history will re-write the roles of people like Cayne and Merrill Lynch (NYSE: MER)'s Stan O'Neal. They will be cast as villains. And perhaps they should be. But playing bridge during a crisis is never going to look good.
Douglas A. McIntyre is an editor at 247wallst.com.
Chinese investors feel that they got burned when they took a stake in big private equity firm Blackstone (NYSE: BX). That IPO did not do well, so the disappointment is understandable.
But the Chinese may be back. According to a report in the FT, the China Social Security fund, which manages over $62 billion in assets, has its eyes on KKR, Carlyle, and TPG. The fund is interested in a stake of 9.9% in at least one of the companies. The British newspaper quoted one analyst on the potential investment: "'China's interest in buying into overseas financial intermediaries is clearly part of a deliberate strategy,' said Isaac Meng, an analyst with BNP Paribas in Beijing. 'The government is hoping to do a better job in exporting its capital than the Japanese did in the 1980s.'"
That may all be well and good, but members of the US Congress are already concerned about the investment of China's Citic Securities in Bear Stearns (NYSE: BSC). It is unclear how such an investment would compromise US interests, but Congress could try to block these deals on the grounds that large investment and LBO firms control a huge portion of the investment capital in the US. They would not want any Chinese influence in the process.
The Congressional posturing on the matter is a red herring, but meddling by the federal government could simply make the Chinese wary of moving capital into the US. If Congress leaves the matter alone, Wall Street firms are likely to have Chinese shareholders.
Douglas A. McIntyre is an editor at 247wallst.com.
The New York Times reports that Merrill Lynch & Co. (NYSE: MER) CEO Stan O'Neal is out. The company has not picked a replacement, but O'Neal will not keep his job, after the brokerage took an $8.4 billion charge for failed credit and mortgage-related investments in the third quarter.
But one has to wonder why he should be the one to take the fall. His peers at Citigroup Inc. (NYSE: C) and Bear Stearns Cos. (NYSE: BSC), both of which also took huge write-downs, are still employed.
O'Neal was a product of his times. He saw that Merrill did not make as much money as it could, so he pressed the firm more deeply into investment banking and underwriting debt for LBOs. The firm began to invest more for its own account and some of those investments were risky.
O'Neal was a brutal cost-cutter and was willing to fire those closest to him if it suited him. His strategy improved the firm's profits and share price, but he cared nothing for what it cost in morale. He most likely ended up with few allies within his own company. Being a friend was too dangerous.
Merrill's stock price was $35 in early 2003. In January of this year it traded near $100. Even after all the earning trouble, the share price has doubled in under five years.
Last year, Merrill had net income of $7.5 billion, well above the $4.4 billion in 2004.
But, losing $8.4 billion is unpopular, so whatever O'Neal had done for the firm in the past has been forgotten.
Douglas A. McIntyre is a partner at 247wallst.com.
Chuck Prince, CEO of Citigroup (NYSE: C), needs a few friends. Not the kind he can go fishing with.
Prince's job may be on the line now that Citi has announced that its Q3 profits will drop 60% from last year. According to MarketWatch, the bankblamed "dislocations in the mortgage-backed-securities and credit markets, and deterioration in the consumer-credit environment."
Prince finds himself in a position not unlike that of James Cayne, the head of Bear Stearns (NYSE: BSC). Both financial institutions now have taken very big hits on their watches. Both can blame subordinates, but that may not cut it with their boards or public shareholders.
What saves them? For starters, UBS (NYSE: UBS). The Swiss bank has just reported similar problems in its fixed income portfolio. If the bad news spreads to Bank of America (NYSE: BAC), Lehman (NYSE: LEH) and other global money center banks and investment firms, Prince may be viewed as a victim of a train wreck that almost none of the large firms could avoid. He will, in essence, look as stupid as all of his peers.
TheStreet.com's Jim Cramer highlights the latest example of how people were scared out of the market at exactly the wrong time so you won't get spooked next time.
When Sowood and the Bear Stearns (NYSE: BSC) (Cramer's Take) leveraged investment funds blew up this summer we were supposed to get ready for a wave of redemptions that would buckle the market.
"Just wait until October" became a familiar refrain as hedge funds were expected to get shelled, causing tons of stocks not to trade the way they should as unnatural margined selling took its toll.
But here we are in the first week of October and spreads for arbitrage, a pure tell for fund redemptions, are tightening, not loosening. The averages are at or are close to hitting new highs and we haven't heard of any funds about to go belly-up. The only ones that would fail, I believe, would be short funds.
I bring up this sore but positive topic because when things were really bad at the end of August yet redemptions hadn't overwhelmed the market, we figured it might just be a September phenomenon. Making things a little more likely, too, were the funds that were exposed to all of these exotic instruments based on mortgages.
So far it looks like the huge hedge fund redemptions and failures aren't going to happen, perhaps courtesy of the Fed's rate cuts that now do seem to have bailed out a lot of managers who have made wrong moves. That's the "moral hazard" that everyone was fretting about so much before the Fed acted.
But I think that instead, you should let this memory of "redemption worry" be a reminder of the phantoms that freak people out and make them leave the market at what now represents 1,000 points on the Dow.
Oddly, there are still some stocks that seem pressured down more by fear than by fundamentals. Genesis Lease (NYSE: GLS) (Cramer's Take) and Aircastle (NYSE: AYR) (Cramer's Take) both have terrific yields, a function of the decline in the stocks of aircraft lessors. Some of these are owned from hedge funds believed to be struggling. The other is Enterprise Product Partners (NYSE: EPD) (Cramer's Take), also with a good yield, that is in the energy transport business.
Neither industry is hurting but the stocks had some really weak hedge fund hands as shareholders.
These could be payoffs from the distressed period and redemption fears that drove them down.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer was long Citigroup.
TheStreet.com's Jim Cramer explains why lousy results from a U.K.-based firm bode well for American companies this reporting season.
Tate & Lyle's loss is our gain. That's the only way to think about the big decline in that U.K.-based sugar producer's stock this morning on news that the currency translation from dollars to pounds will kill it.
The declining dollar is going to make some of these earnings in the next few weeks jump off the chart. They will be so much higher than people think they will be for the big exporters, particularly those to Europe (we don't have much to go to Japan) that you are going to be blown away.
The big litmus test this earnings reporting period will be the exposure to these foreign currencies. We fret every day about the dollar, but it is a little ridiculous at this point -- meaning the currency is way too low.
Nevertheless, a Procter & Gamble (NYSE: PG) (Cramer's Take) will kill the numbers, so will a Coca-Cola (NYSE: KO) (Cramer's Take). I know these are at 52-week highs, but we are now going to have to start looking at stocks that haven't gone up that much this year. Take PG; it's only up 9%. That gives it some room. Same with Colgate (NYSE: CL) (Cramer's Take). Those still worth betting on; they can still run.
Oh, and don't forget, for the purposes of next quarter, Goldman Sachs (NYSE: GS) (Cramer's Take) will have more than 50% in earnings overseas. The firm is not going to report for while, but that's still another reason to own it -- and another reason to expect that a foreign company will take a stake in Bear Stearns (NYSE: BSC) (Cramer's Take) before long despite the Buffett denial. If a stake is taken, I doubt it will be domestic.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer was long Goldman Sachs.
The answer to individual stocks is that if they havae had a huge run, you have to be careful about getting in. Goldman Sachs deserves to sell off, given its recent run. That statement is not indicative of whether there are skeletons in the closet or that Goldman didn't mark securities right. It has to do with not being a pig.
I feel the same way about CAT, which was at $70 not that long ago. Same with many of the banks. It is difficult to buy here.
That said, I think that there are more gains ahead, so what's the point of waiting?
Next week is an important week as Lehman Brothers (NYSE: LEH), Goldman Sachs (NYSE: GS), Bear Stearns (NYSE: BSC) and Morgan Stanley (NYSE: MS) all report the results of their respective August 31 quarter end. Giant Merrill Lynch (NYSE: MER) reports later in October as its quarter ends September 30, but signaled today that sub-prime credit issues would obviously weigh down the financial results. The reason Merrill Lynch "spoke up" about the issue now is that it is about to close on the First Republic Bank acquisition.
The issue for these five major brokerage firms is not the condition of the August 31 quarter and Merrill's September 30 quarter. Consensus thinking is the results will be lousy at best. The principal issue will be to look at balance sheet damage and more importantly, guidance going forward.
The five big firms will survive this crisis as they have historically survived other crises. The point investors want to draw from hard, real numbers will be the outlook for these credit market obligations. Is the bleeding finished with? Is there more to come? One has to be careful not to confuse adjustable mortgages that are re-setting over the next 18 months with the underlying credit obligations supporting those loans. Two different issues.
Intel (NASDAQ: INTC) volatility at 31into increase of third quarter revenue guidance.
INTC is recently trading up $0.25 to $25.72 (12:32 p.m.).
INTC says, "as a result of stronger than expected worldwide demand for its computing products, INTC now expects revenue for the third quarter to be between $9.4 billion and $9.8 billion as compared to the previous rang of $9 billion to $9.6 billion."
INTC will report EPS on 10/16.
INTC October option implied volatility of 31 is above its 26-week average of 28 according to Track Data, suggesting slightly larger risk.
BSC is recently flat but originally was up $3.05 to $108.16 when the Dow Jones reported that Aquarian Investments is holding a 6.97% stake in BSC for investment purposes.
BSC overall option implied volatility of 59 is above its 26-week average of 42 according to Track Data, suggesting large price movement.
Volatility Index S&P 500 Options-VIX up 0.46 to 26.69; 10-day moving average is 23.95.
Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
Goldman Sachs (NYSE: GS) volatility trending lower after last week's spike. GS closed at $177.89. GS September option implied volatility of 40 is below of level of 60 from last week but still above its 26-week average of 33 according to Track Data, suggesting larger price fluctuations.
Bear Stearns (NYSE: BSC) volatility trending lower after last week's spike. BSC closed at of $114.75. BSC September option implied volatility of 59 is below a level of 72 from last week and still above its 26-week average of 40 according to Track Data, suggesting large price movement.
Lehman Brothers (NYSE: LEH) volatility trending lower after last week's spike. LEH closed at $58.54. LEH announced the closure of its subprime brokerage unit, BNC Mortgage, on 8/22. LEH September option implied volatility of 54 is below a level of 75 from last week and still above its 26-week average of 38 according to Track Data, suggesting large risk.
Wednesday the market spiked 150 points at the end of trading. Thursday, it rose 100 right before trading closed. But today that trick didn't work -- instead the Dow fell about 281 points, according to AP.
AP's explanation is that S&P downgraded the debt of The Bear Stearns Companies, Inc. (NYSE: BSC) because of its exposure to the distressed mortgage and corporate buyout markets. And its Chief Financial Officer Sam Molinaro, described conditions in the credit market as the worst he'd seen in more than two decades.
Similarly bad credit news has been around the markets for weeks. But earlier in the week the market spiked at day's end, as I noted above. Today, not so much. Nobody really knows, except the traders, but my guess is that hedge funds have expected this bad credit market news to tank the market so they shorted it. When the market did not drop as much as expected, they decided to cover their short positions before the close of trading. This last minute buying drove up prices.
Maybe today the hedge fund managers left for their 5,000 acre Hampton estates early. So there was no short covering at the end of the day to give the market a pick me up. Something to think about as you cut your grass this weekend.
Everything's big in Texas. Look at the state's Teacher Retirement System (TRS). In all, it has about $112 billion in assets.
Interestingly enough, the pension fund wants to devote about a third of its assets to alternatives, such as hedge funds and private equity funds. This is according to a story in the Wall Street Journal [a paid service].
Yes, when you take a look a the SEC filings of the Blackstone Group (NYSE: BX), Fortress (NYSE: FIG), and KKR, you will see that alternative investment can post strong returns.
Despite this, the TRS strategy is certainly gutsy. Keep in mind that alternative investments can be fairly illiquid. What if it gets tougher to do IPOs or get sound exits on these investments?
Or, what if there is a meltdown, as seen with the subprime hedge funds at Bear Stearns (NYSE: BSC)?
Even the pros can make big blunders. And it could be bad news for pensioners.
On the other hand, TRS's move is certainly good news for the private equity world. Simply put, there's likely to be many more assets under management -- and that means lots of juicy fees.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
Bear Stearns Companies, Inc. (NYSE:BSC) has jumped on the exchange traded funds (ETF) bandwagon, and will be launching its own actively-managed fund, the Current Yield Fund. If approved, the fund will invest in money market and short-term debt, including US bonds, foreign debt, and corporate bonds. According to the prospectus field with the SEC, "Unlike an 'index fund' which seeks to achieve, as closely as practicable, the total return of the securities comprising a specified market index, the Fund will be actively managed by its portfolio manager. In other words, the portfolio manager will have discretion to choose securities for the Fund's portfolio consistent with the Fund's investment objective."
Analysts predict that if this fund launch is successful, Bear Stearns will move to launch other actively-managed ETFs. Should you take a look at the Current Yield Fund? Probably not. Actively managed funds are nearly always inferior to passive index funds (especially bond funds), and ETFs will always be most attractive in their original form: as passively managed index funds that are easy to trade.
The subprime mortgage mess took yet another victim as 
The New York Times reports that 
TheStreet.com's Jim Cramer highlights the latest example of how people were scared out of the market at exactly the wrong time so you won't get spooked next time.
Next week is an important week as 
Wednesday the market spiked 150 points at the end of trading. Thursday, it rose 100 right before trading closed. But today that trick didn't work -- instead the Dow fell about 281 points, according to 
Everything's big in Texas. Look at the state's 
Best & Worst in Money 2008: Most shocking financial collapse
Closing Bell: Stocks slump as AMD, AT&T, GM and Merck decline
Global Q&A: A rocky road, but profits ahead
