Last Days of Bear Stearns

WSJ

1. Lost Opportunities Haunt Final Days of Bear Stearns
2. Fear, Rumors Touched Off Fatal Run on Bear Stearns
3. SEC Will Scour Bear Trading Data

By KATE KELLY

interviews with more than two dozen current and former Bear Stearns executives, directors, traders and others involved in the action paint the first detailed picture of the fractious last weeks before the Fed helped underwrite J.P. Morgan's purchase of the trading powerhouse.
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Months before regulators pressured the firm to sell itself, nervous traders futilely begged Mr. Schwartz and his predecessor, James Cayne, to raise more cash and slash Bear Stearns's huge inventory of mortgages and the bonds that backed them.
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At 5 a.m., Mr. Geithner convened a conference call with top government officials, including Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson Jr., to discuss the fallout from allowing the brokerage to collapse. They saw ripples spreading to thousands of firms world-wide that would involve trillions of dollars and take days to sort out. As the meeting wore on past the hour mark, Mr. Geithner warned that time was running out. Certain important credit markets were about to open. "What's it going to be?" he demanded.

Financials Capital Increases

Well, in regular intervals we get to hear the latest update of how much USD the banks had to write down so far. According to Bloomberg this has been USD 383 billion so far. You wonder how the banks were able to survived these massive writedowns. To my knowledge there has been only a single real casualty (not considering hedge funds), namely New Century. IKB, Northern Rock, West LB, Countrywide, Bear Stearns have all been knocked out but still got saved by someone (except for Countrywide in all cases by the tax payer).

Well, the reason all the other banks survived so far is, also according to Bloomberg, they increased capital buy a whopping USD 270 billion. Also, still counting.

E.g. the latest UBS capital increase will create 760 million new shares. Before the crisis UBS payed lots of money to buy back shares for up to over CHF 70 per share to bring the number of shares outstanding down to some 2'054 million shares. After this capital increase (for an expected CHF 21 per share - just compare this to the brilliant previous share buy back program!) and including the previous sale to Singapore etc. the new number of shares outstanding will be exactly 2,932,567,127 shares. Almost 43% more. A nice dilution for the existing shareholders :).

BTW, with almost 3 billion shares outstanding and Friday's share price of CHF 29.94 this will amount to a market cap of CHF 87 billion. To justify this with a meager P/E ratio of 10, UBS will have to earn after tax net income of CHF 8.7 billion. Well, wealth management might be able to earn 10 billion pre tax alone, but with still a lot of uncertainty about the existing risky positions and big question marks about the future earnings power of the investment bank, I fail to see the current upside potential. But then, I could buy some now for twenty one a share...

Buffett On Bear Stearns

From Bloomberg:

``The worry was that there would be contagion; it was a very real worry,'' Buffett said. ``If Bear Stearns had gone, the next day, somebody else would have gone. It could've been a very, very, very chaotic situation.''

Buffett, 77, said he was contacted in March before JPMorgan, the third-biggest U.S. bank by assets, agreed to buy Bear Stearns. The person calling him, whom he wouldn't identify, was ``someone responsible'' and wasn't from the Federal Reserve or the Treasury. The call lasted about half an hour, Buffett said.

Too Big for Buffett

``As I understand it, Bear Stearns had $65 billion due on Monday and I didn't have $65 billion,'' Buffett said. ``I couldn't get my mind around that situation in the required time.'' New York-based JPMorgan was the right buyer for Bear Stearns, he added.

And from MarketWatch:

Some investment banks and commercial banks are too large and complex to run, Berkshire Hathaway Chairman Warren Buffett said Saturday.

"There are firms in terms of risk that are conducting themselves in a way that makes them too big to manage," he said.

Such financial institutions are designed to survive only until there's a shock to the system that may only occur once in 50 years, Buffett said.

"That may not be in the interest of a 62-year-old executive, who will be around for the next three years to worry about that," he said.
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If Bear had failed, one or two other investment banks would probably have collapsed within a few days, he said.

Bear had roughly $14.5 trillion of derivative contracts outstanding the day after it was bailed out, he said.
"The parties that had those contracts would have had to establish the damages that they could claim against that estate very quickly," he said.

"Imagine the damage of everyone trying to unwind those contracts," Buffett said. "That would have been a spectacle of unprecedented proportions. It would have resulted in another one or two more investment banks going down in a few days."

Another Buffett Interview

Another Warren Buffett Interview at the Wharton School.

Personally I have a hard time to understand why returns and risks should be correlated. So I found this funny:

Well, we don't think about cost of capital or risk-adjusted. I mean, we don't want to take any risk, and we don't.

And about deciding for projects:

If I say the internal rate of return we demand is 15.83, it'll be 15.84. I mean, you just can bet on it. I've never seen a project that doesn't meet your hurdle rate, you know, if they really want to do it. We don't go through those charades. And it saves my time, saves their time.

Attitude towards drawdown:

Berkshire Hathaway (BRKA, Fortune 500) stock itself has gone down 50% three times since I bought the first stock in at 7 3/8. In 1974 it got cut in half. In 1987 it got cut in half. In 1998, 2000 or so it got cut in half. So that doesn't make any difference. I mean, I just don't worry about it. I worry about permanent loss of capital. I worry about making the right businesses. I worry about keeping the managers happy. Everything else pretty much takes care of itself.

T. Boone Pickens

Video interview at Bloomberg with T. Boone Pickens. It is 1 1/2 hours long but very well worth the time.

00:00:00 Introduction; Pickens's career 00:17:11 Oil supply, demand, prices; natural gas 00:28:40 U.S. reliance on overseas oil; coal 00:39:50 Alternative energy; wind, solar power 00:46:45 Nuclear energy; U.S. energy policy 00:55:58 Pickens responds to questions.

Pointer is from The Big Picture.

Deutsche Bank Trendlines 2

When looking back at Deutsche Bank from the close at Friday 2008-05-02 till today, it had been pointed out to me in a blackboard, that the last Friday in a bar char shows a gap upwards and the open and close of that day are very close to each other. So this is supposed to be some bearish candlestick pattern (named something with a star).


Indeed, last week went mostly down.


The steep upwards trend has been also broken. If we cheat a bit and take the slightly shorter upwards trendline, that might hold and maybe there is a chance of swinging back upwards.

BTW, I removed two days from Eastern from the price history. Not sure this is the right thing to do, yet, now the downtrend looks a bit different compared to the chart drawn on Friday. With this dataset the first downtrend actually has not been broken. Thought a 62 day breakout still has happened (just considering the close). The price has now also gone through the second downtrend again.


Last not least, two insiders, Kevin Parker, head of DB asset management, and also the head of finance group sold 41'182 and 1'397 DB shares each. Hmmmmm. The EUR 4.50 dividend is being payed out on 2008-05-30 and they just sell before.

Trading Calendar

Xetra
SWX

Deutsche Bank Trendlines

Wow, Friday's close (EUR 78.33) is exactly on the down trend that is almost a year old! The latest up trend is very steep and hasn't been breached so far. Will be interesting to see what happens this week.

And! Friday's close is also the highest high for the last 62 trading days.

Buffett On Mars/Wrigley

CNBC interview: Buffett On Mars/Wrigley

Moody's

Here is a brand new NY Times article from Roger Lowenstein (author of Warren Buffet - great book, and the better known book When Genius Failed: The Rise and Fall of Long-Term Capital Management), at Yahoo you don't need a login:

Triple-A Failure

From 2002 to 2006, Moody’s profits nearly tripled, mostly thanks to the high margins the agencies charged in structured finance. In 2006, Moody’s reported net income of $750 million.

BTW, Warren Buffett is a major shareholder of Moody's. In march there was a CNBC interview where he said this:

Well, it wasn't a mistake at the price we bought it. But in terms of the--the intrinsic business value of Moody's decreased last year. I mean, Wells Fargo stock was down last year. I don't think the intrinsic business value shrunk. In fact, I said I thought it probably increased a touch. And there's a lot of companies whose stock went down where the intrinsic business value did not go down, or maybe went up. But I--our holding a Moody's, which is a significant holding, they're--I don't think there's any question that the intrinsic business value of a Moody's shrunk last year, just as McGraw-Hill owns S&P and the S&P component of McGraw-Hill, it--they have less of a moat around them and they're going to be affected for a long time by the experience of the last couple years.

I think I remember he also said something that in order to dump the Moody's stock now, he would destroy the market and it is kind of impossible to sell now this big chunk, even if he wanted to. But maybe that was in relation to PetroChina, which he sold on the way up.
In case, click through here to the original reference.

Huge Charts

STOCKscreener.info has a new maximum size for charts. Have a look at this huge UBS chart.

Here is a (also new) more moderate square sized chart of Credit Suisse for the same time frame.

Regression Lines

Small feature, but I am not aware of other places on the web where you can see this for free. STOCKscreener.info has now linear regression lines available for stock charts. It is maybe just a fun feature, but here are a few examples:




To play around yourself, just click on any of the images.

Backtesting Moving Averages

Ever looked at a chart with a moving average (MA) and thinking if it would have resulted in an outperformance when buying and selling whenever the moving average would have been crossed. Even played around with different settings for the MA with whatever tool or web site you have used?

Now with STOCKscreener. i n f o you can SEE both, the moving average AND the backtested result immediately next to (below) each other:

Let's take the Euro Stoxx 50 Index and what everyone looks at, the 200 day moving average:

Buying whenever the moving average is crossed from below and selling on the way down, trading this index since 1987 would result in an overall gain of 436.65%.

Now this is indeed a decent outperformance of simply buying and holding. Buy and hold would result in a total gain of 307.55% (just 6.82% annually, before you get too excited:).

Here are the details of when the crossing (and buying and selling) of the MA took place.

So this is all nice and beautiful, but, maybe it is not very realistic that we would be able to get in and out of any financial instrument matching this index at exactly the prices of the intersections (for an index on top we would have to buy and sell an ETF, future, or mutual fund instead).
So let's say we do the same exercise with a transaction cost (and slippage) of 1% for a single buy or sell (so in and out costs us 2%).

Wow, all of a sudden the total return drops to a meager 54.33% (again, see the details here)! The big difference is because there have been 124 transactions, each costing us 1% of our capital, and then there is the compounding effect.

Hmm, ok, to make money in real life, what can we do. Of course, we can try to reduce the number of transactions while still capturing the big price movements. So here is the picture for using a 355 day moving average:

This reduces the number of transactions to 58, but as you can see above, still captures the big moves (and leaves out the big drawdown!). And the result improved a lot to 275.21%.
Still, not as good as the 200 day MA that had no transaction costs. If you look at the list of transactions, you will see that there are a view big profits and a lot of smaller losses.

We can introduce a third parameter, an extra threshold that needs to be crossed before a transaction will take place. This will avoid doing too many extra trades while the share price jitters around the moving average. So requiring the index price not only to cross but to cross an extra 1% before exercising a trade will more than half the number of transactions down to 22 and the profit jumps up to 453.36%, more than the initial result with the 200 day MA and NO transaction costs!

A threshold of 2% will increase the result even slightly more so. Anyway, the threshold will lead to fewer trades and a reduced number of small losses. But this also decreases the size of the big profitable trades a bit.

BTW, the moving average used is actually the simple moving average (SMA). Also, the results are as of 2008-04-14 and sure will change over time.

Feel free to play around yourself for an optimal set of parameters or experiment with other indices or stocks of your interest.