JPMorgan's Higher Bear Stearns Bid Spurs Market

(25 March 2008) JPMorgan Chase's increased bid for Bear Stearns helped spur stock prices, infusing investors with the hope that the market has bottomed and will now rebound. Investment experts don't share this rosy outlook, however, and foresee more pain to come.

Facing shareholder discontent at Bear Stearns, JPMorgan yesterday upped is offer for the investment bank from US$2.52 to US$10 a share. It also negotiated to buy 39.5% of the company without a shareholder vote so that the transaction would close quickly and JPMorgan would increase its chances of retaining Bear Stearns' employees and clients.

The U.S. market reacted positively to the news, with the S&P 500 rising 3.1% today. Shares oversees jumped as well, up 2.12% in Tokyo, 6.4% in Hong Kong and 6.07% in Mumbai. The S&P 500 is now up 5% since March 16, when JPMorgan made its initial bid for Bear Stearns, backed by the U.S. Federal Reserve.

The Bear Stearns buyout development, coupled with promising news in the U.S. housing sector, seems to have given investors a boost of confidence and convinced traders that a rally is in the offing. The National Association of Realtors reported yesterday that sales of existing homes rose 2.9 percent in February, the first gain since July 2007.

Most seasoned market watchers remain skeptical, however, and believe the market has further to fall.

"The Bear Stearns rescue addressed a liquidity problem," John Plender of the Financial Times wrote in an editorial today. "Even so, this is not just a crisis of liquidity."

It is, as we all know, also a housing crisis, and although yesterday's housing numbers were "cheering," Plender writes, "there remains a huge overhang of newly built inventory, which guarantees that prices will continue to fall, thereby raising further questions about the value of all manner of mortgage-backed paper that is no longer traded because markets have dried up."

As housing prices fall, more and more homeowners are seeing their equity disappear and even becoming negative - they owe more on their home than they can sell it for. If you add to this the current difficulty in getting loans, what you have is a recipe for continued economic difficulties.

"Households will be doing precious little to drive economic growth this year or next," wrote Plender.

T.J. Marta, a fixed-income analyst at RBC Capital Markets, agrees. "The U.S. consumer is getting hit by a destruction of wealth in housing," he told the Associated Press. "They're getting chewed up by high energy and high food prices. And their earnings growth has peaked ... and it's going to soften. None of this paints a good picture for the consumer going forward."

Joining in the chorus is Carl Riccadonna, an economist at Deutsche Bank Securities Inc. in New York. "Consumers are going to pull back pretty sharply," he told Bloomberg News. "The labor market is starting to deteriorate and income growth is barely keeping pace with inflation. These are all pretty negative omens for what's to come."

"I'm not sure that the fundamental economics are still turned enough and that we went down enough in a lot of cases to have this be the real bottom," Denis Amato, chief investment officer at Ancora Advisors in Cleveland, told the Associated Press. "It may be one of many bottoms."