The Economy Guy

World stock markets were rocked by the Bear Sterns collapse. The US market started out down, went way up, and ended just a little up at 21 points.

The Bond market showed what people were really thinking. The 10 Year Treasury hit 3.31% at the close – a massive fall in interest rates. Everyone is looking over their shoulder to see what company will fall next.

The currency markets finally went wild. The Euro hit over $1.59 today, as did all other major currencies hit new highs today.

Gold hit a new high too, but oil and gasoline got scared that the recession could be for real, and finally cracked.

In the news today…

The big news today was the sale of Bear Sterns to JPMorgan (as predicted by the EconomyGuy last Friday) The surprise was the bargain basement price of $2/share, for a total of $236M.

Here is the deal. JPMorgan buys Bear Sterns for $236M; the FED guarantees that JPMorgan won’t lose any money by taking over all their crap securities; in fact, the FED will lubricate the deal by throwing in $30B of liquidity and use those crap securities as collateral; and the Bear Sterns shareholders are left with next to nothing. Oh, BTW, the Bear Sterns skyscraper in Manhattan is estimated to be worth $1B all by itself. JP Morgan got the BARGAIN OF THE CENTURY.

Let’s look at this disaster with hind sight. Bear Sterns confirmed its book value at $85/share last Wednesday; but on Sunday it was worth only $2/share. How could that happen? Simple. Bear Sterns lied. I hope that doesn’t give you a good feeling; in fact, I hope it scares you a little. What that means is that one of the major investment banks in the US lied. Who else lies?

The FED also announced a reduction of 0.25% of the Discount Rate on Sunday. That is only a precursor of what is to come tomorrow when the FED meets and will be dropping the Fed Funds Rate. The only question is “How much?” I wonder if Las Vegas takes odds on what the answer is. My guess continues to be 0.75% or 1.00% reduction; and my guess is really backed by the money being bet in the bond market.

Tonight’s Dinner Conversation

We saw the currency market crack today. It did NOT gap, as I warned could happen, and that’s the only good news. Otherwise, it was a sheet rout. The Euro lept more than 3 cents before pulling back. The Yen moved as much also. If you remember in one of my past editions, I said the Euro was set to test $1.60. I never imagined it would be this soon. The European Central Bankers and all European Finance Ministers are sweating bullets right now as they see their own economy get sucked into the downward spiral being imposed on it by the USA. Europe lives on exports. Now they have to compete with US products that will be prices much less than the equivalent European products.

Tonight’s question is “How will this all turn out? Will Europe impose export controls?”

Here are today’s Numbers:
Dow Jones 30 Industrial - 11,972 (Up 21 points)
10 Year Treasury Bond - 3.31% (Down 0.11%)
Euro - $1.5732 - a NEW HIGH of $1.5904 was hit during the day.
Gold - $1003 (Up $3) - Gold reach a NEW HIGH OF $1017 interday today.
Oil - $105.58 (Down $4.53)
Gasoline - $2.50 (Down $0.19)