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Thread: Explanation: Why Bear Stearns is trading $4

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    Default Explanation: Why Bear Stearns is trading $4

    Here's a simple explanation for why BSC is trading at $4.80 than the offer price of $2

    Short Answer: Options

    Some traders will give you wrong answers like Short
    covering and other clueless replies, but that is not what it is about.

    No Idiot is going to buyback a $50 Bill with a $100 bill (Unless some 'smart' Wall-street idiots)

    Long Answer:
    JPM is actually giving 0.054 shares to 1 BSC share.

    So, A BSC investor is not actually getting $2 cash, but a MAX (0.054x
    JPM, BookValue of BSC).

    That is the investor has a downward protection of 0.054x JPM stock and
    and upside potential of Actual BookValue of BSC. This is a classic
    option instrument where you get MAX (Stock-Strike, 0)


    So, BSC at minimum would trade at 0.054x of JPM's share price. But
    there is an upside potential for BSC.
    Between now and the actual close, good things can happen in this world
    and people may discover that the BSC's books is not bad at all and its
    equity value may be worth $5, $10, or even $30. There is a remote
    probability that such a thing can happen

    If BSC were trading at $2, (Technically at 0.054x JPM) Smart Investors
    would do the following

    Buy 1 BSC share = -$2
    Short 0.054x = +$2

    Total = $0

    I have two positions with $0 Invested from my pocket

    During closing, one of the two following scenario can happen
    i) BSC is really crap and the JPM deal is the best they can get. I use
    my 0.054 share that I get from JPM to cover my short. I make $0 here
    ii) I have different valuations for BSC books at varying
    probabilities. In which case BSC stock would grow accordingly. Lets
    take an example, BSC is worth 0.07x JPM(Say $3 for convenience) on the
    books

    I Sell my 1 BSC share +$3
    I Cover my 0.054x short -$2 and I make $1 here (or Technically 0.016x
    JPM)

    So there is an arbitrage opportunity at $2 (technically at 0.054x
    JPM), where you are essentially getting a 'lottery ticket' for free.
    Since in a free market, there is no such thing as free lottery ticket
    (which is really equivalent to a call option), BSC trades at $2 + a
    Call Option. The market has decided that Call Option is worth $2.50
    (considering BSC's huge volatility, it is a fair game)

    Note: For really advanced readers, I've ignored the interest rate
    implications that occurs when shorting a stock

  2. #2
    Tauries
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    Default Re: Explanation: Why Bear Stearns is trading $4

    Xanfiles1....hmmmm....hey aren't you that guy that came on here bragging about buyin Citi stock at $35 and then even more at $32??? Whats Citi at today?? Let's see....ah yes down another 1.16 to close at 18.62. How's that goin for ya?? Could ya maybe do us all a favor and start a web paige or write a book with all your great advice and knowledge...kthxby

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    Default Re: Explanation: Why Bear Stearns is trading $4

    Unlike others I didn't advice anyone to buy Citi. (Down 40%)

    The only advice I give is to invest in a basket World 1000 Stocks and World Bonds. In fact I advice against any individual from picking stocks unless you have read 10 previous years balance sheets (and annual reports) and come up with your own valuation. Also it helps if you have observed previous Mr. Market's manic depressions and euphoria

    Long term Investors should love current market (Whether you are an Indexed investor or a Value Investor)

    I have valued Citi to be more than $40. But, of course the management would have lied to me. But lets see 5-10 years from now how Citi fares. I've also picked some Blackstone at $16

    The Index is also severely underpriced at current interest rates.

    Other than that I hope and pray that S&P 500 stays below P/E 15 for the next 20 years (with GDP growing at a nice 4-5%) and go back to 20+ P/E when I actually start consumption

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    Default Re: Explanation: Why Bear Stearns is trading $4

    Quote Originally Posted by Tauries View Post
    Xanfiles1....hmmmm....hey aren't you that guy that came on here bragging about buyin Citi stock at $35 and then even more at $32??? Whats Citi at today?? Let's see....ah yes down another 1.16 to close at 18.62. How's that goin for ya?? Could ya maybe do us all a favor and start a web paige or write a book with all your great advice and knowledge...kthxby
    Short-term market fluctuations are unimportant if your valuation of Citi indicates long term shareholder value. There are value investor analysis all over the internets. You can pay for them or take a day and do it yourself.

    The financial sector is in the shitter. Do you honestly think Citi is going to fold or continue to be forever undervalued? I think its a good long-term bet for its sector.

    Market timing doesn't work anyway, not for most, not for long. Xan was guessing and his guess is as good as almost anyone's out there.

    "Have you ever been to American wedding? Where is the vodka, where's marinated herring?" - GB
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    Default Re: Explanation: Why Bear Stearns is trading $4

    Quote Originally Posted by Katrine View Post
    Short-term market fluctuations are unimportant if your valuation of Citi indicates long term shareholder value. There are value investor analysis all over the internets. You can pay for them or take a day and do it yourself.

    The financial sector is in the shitter. Do you honestly think Citi is going to fold or continue to be forever undervalued? I think its a good long-term bet for its sector.

    Market timing doesn't work anyway, not for most, not for long. Xan was guessing and his guess is as good as almost anyone's out there.
    Yea well, I need to get more photocopier paper for my warning messages aimed at the Sterns people since I ran out of it for the Enron folk.

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    Default Re: Explanation: Why Bear Stearns is trading $4

    Quote Originally Posted by Tauries View Post
    Xanfiles1....hmmmm....hey aren't you that guy that came on here bragging about buyin Citi stock at $35 and then even more at $32??? Whats Citi at today?? Let's see....ah yes down another 1.16 to close at 18.62. How's that goin for ya?? Could ya maybe do us all a favor and start a web paige or write a book with all your great advice and knowledge...kthxby

    hey, atleast some of us put it out there subjective to criticism... if you invest with any degree of risk, you are gonna make some mistakes- that's just the way it is. I don't see what you are buying
    Oh Canada, we stand on cars and freeze...

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    Default Re: Explanation: Why Bear Stearns is trading $4

    the Fed's 'fire sale' may be starting to unravel already ... which could leave the Fed holding the proverbial bag re 'unmarketable securities' it has accepted as collateral, and could leave JP Morgam Chase with billions of their own assets 'trapped' in Bear Stearns shares while they don't actually control the company.

  8. #8
    OdysseusNJ
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    Default Re: Explanation: Why Bear Stearns is trading $4

    Xan nice post, interesting read for someone who is mathy but only briefly acquainted with trading. Thx.

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    Default Re: Explanation: Why Bear Stearns is trading $4

    Quote Originally Posted by Melonie View Post
    the Fed's 'fire sale' may be starting to unravel already ... which could leave the Fed holding the proverbial bag re 'unmarketable securities' it has accepted as collateral, and could leave JP Morgam Chase with billions of their own assets 'trapped' in Bear Stearns shares while they don't actually control the company.

    http://www.telegraph.co.uk/money/mai...cnlewis118.xml
    The article is correct. But, it is much better than the alternative. Bringing the whole financial system down and the economy losing $1 Trillion

    At worst, the fed will end up with a bunch of overpriced homes. The US govt. spends 10x more money on many useless things than homes

    And by making sure Bear Stearns is dead, it also sent a message to Wall Street that careless risk taking has consequences.
    There definitely was not a meltdown

    All in all, it was a brilliant play from Ben, a move which will be appreciated 5-10 years from now

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