Bear Stearns Bailout

The Feds have bailed out Bear Stearns.

Bear Stearns Cos. Inc. went on life support Friday, forced to accept an extraordinary bailout package after being deserted by the clients and counterparties at the heart of the Wall Street firm's business.

Triggering a sell-off throughout the financial sector, Bear shares slumped 36% to $36.71 during afternoon trading, their biggest one-day drop in at least two decades.

The upshot is this: there is so much uncertainty in the market right now that the major players are hesitant to do much business with anybody who has a large exposure to the mortgage business.

J.P. Morgan was involved as a conduit for the financial support from the Feds, as the Fed can only loan to a commercial bank. This loan is good for 28 days and buys some time to find a buyer for Bear Stearns or some other long term solution.

Don't be surprised other investment houses need to be propped up. Also, don't be surprised if J.P Morgan or some other commercial bank ends up acquiring Bear Stearns for a while.

Long term, I think the Fed's will end up having to buy up a lot of these bad mortgages. They are more or less doing that now anyway.

Stock Futures Slip

Well, the market jumped a bit following the Fed action the other day, and now some profit taking is occuring.

U.S. stock futures slip as FedEx trims outlook

LONDON (MarketWatch) -- U.S. stock futures pointed to opening losses Thursday after a strong week of Fed-inspired gains, with the investment banks back in the spotlight with results due out from Goldman Sachs and Bear Stearns.

S&P 500 futures slipped 5 points at 1,536.40 and Nasdaq 100 futures dipped 6.75 points at 2,057.25. Dow industrial futures fell 26 points.

U.S. stocks on Wednesday closed higher in the afterglow of the Federal Reserve's decision to slash interest rates by a half point. The Dow industrials rose 76 points, the S&P 500 added 9 points and the Nasdaq Composite rose 14 points.

For what it's worth, here's my take on where we are at:

1. First, I was surprised by the 50 basis point drop (I had predicted a 25 point drop). That signifies that the Fed admits they overdid the previous raises (rare for the Fed to admit a mistake) and that the Fed is spooked about what they see in the economy.

2. The Fed sees both the threat of recession and increasing inflation in the near term. They can only deal with one problem at a time, so they decided to deal with the recession threat for now and will worry about inflation later.

3. This move should delay recession for about a year, just in time for the next election. Prepare to start hearing from the Clinton camp about the "worst economy in 50 years" again. That line worked for Bill in 1992, maybe it will work again.

4. I look for crude oil to approach $100 a barrel by next year. Consumption is still increasing, which means we are still at the inelastic part of the oil demand curve (thus price will keep being bid up) and conservation efforts are still not serious. Bottom line is, the price is not high enough yet for consumers to seriously cut consumption.