A Week in the Rearview - week ending 3/21/08
In the headlines
A look at some of the market movers over the past week:
- JPMorgan (NYSE: JPM) announced that it will be acquiring Bear Stearns (NYSE: BSC) for $2 per share
- The Federal Reserve cut the discount rate 25 basis points and gave investment banks like Goldman Sachs (NYSE: GS) access to the discount window
- CME Group (NYSE: CME) announced it is acquiring NYMEX Holdings (NYSE: NMX)
- Economic indicators are still making a weak showing
- Brokerages Goldman Sachs and Lehman Brothers (NYSE: LEH) reported better than expected earnings
- The Federal Reserve cut 75 basis points from the federal funds rate and the discount rate
- Housing starts continued to tumble
- Visa (NYSE: V) raised the largest IPO in US history
- Capital requirements were relaxed at Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) allowing them purchase more mortgages
- Commodities fell sharply from their nosebleed levels
- Nike (NYSE: NKE) earnings showed that not everybody is hurting
- CIT (NYSE: CIT) dropped sharply on liquidity concerns
Commentary
It was an action packed week despite the fact that the market was only open for four days due to the Good Friday holiday. It was a particularly volatile week, but the S&P 500 finished up better than 3%, leading many commentators to debate whether we’ve seen a bottom to this downturn or we’re experiencing a “bear market rally.”
Though the week started with declines on Monday, the small drop was considered a positive start to the week given the Bear Stearns news. On Sunday, it was announced that JPMorgan will be buying Bear Stearns for $2 per share in a deal partially engineered by the US Federal Reserve amidst severe liquidity concerns and risk of bankruptcy at Bear. The $2 per share offer represents a dizzying fall from the stock’s peak of $170. The reaction to the outcome of the Bear situation was likely muted due to the strong and decisive action by The Federal Reserve.
The sentiment at the start of the week was stoked further on Tuesday by a strong earnings showing by Bear Stearns’ competitors Goldman Sachs and Lehman Brothers, along with the announcement by The Federal Reserve that it is cutting its target rates by 75 basis points. The news had markets soaring, and the S&P closed the day up more than 4%. Though investors reversed some of those gains on Wednesday, the markets charged back on Thursday to finish the week on a high note.
Credit card company Visa also made major waves during the week, completing its $19 billion IPO. The IPO is the largest in US history and is notable not only because it was completed in the current environment, but that it was priced even higher than originally expected.
Looking ahead
Just as it’s important not to get overly cautious when the markets are depressed, it’s likewise important to not get overly excited when the markets are exuberant. The events of the week were notable, but they were notable just as much for showing how severe the current situation is as they were for the gains on the major indices.
Bear Stearns was one of the largest brokerages and investment banks in the US and has existed since 1923. The company survived multiple bear markets including the Great Depression. So the collapse of this venerable institution gives a good snapshot of just how dangerous current conditions are.
But of course, the past week’s events also highlight the fact that we have a flexible, adaptive, and resilient financial system which is rapidly adjusting itself to recover from the excesses of the past few years. It is likely that there is an ample amount of bad news still ahead, and the economy has certainly yet to show signs of a recovery, but long term investors can sleep well knowing that the big picture for the US and global economy remains positive.
As always, the best approach is to invest steadily in a diversified set of asset classes, not getting swayed by current market sentiment or the investment flavor of the week.
