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In case you hadn't noticed, Bear Stearns (BSC) is trading much higher since opening on Monday around $3/share. The reports say that JP Morgan Chase (JPM) is buying BSC for the price of approximately $2/share... so what gives? Why is BSC trading so much higher?
I've read several explanations today on why we're seeing that behavior. Could be that:
1.) Investors are hoping the deal will sweeten for whatever reason (perhaps expecting a higher bid from another institution?)
2.) Short sellers are covering their shorts, which last week supposedly made up 54% of the float.
Dave was interested to find out more about reason (2), so here's what I told him.
First check out: http://finance.yahoo.com/q/ks?s=jpm
Look in the right-hand column of the page and check out stats like "Shares Short" and "Short % of Float". Respectively, those #s represent the total number of shares shorted and the ratio of "shares short" to the Float. The float is smaller than the number of outstanding shares, since it represents the number of shares held by the public whereas "outstanding shares" includes all shares issued, including those shares held by insiders. Those numbers are reported to the public at minimum on a monthly basis.
As of 26-Feb-08 the "Short % of Float" percentage was 18.7%: http://finance.yahoo.com/q/ks?s=BSC
Contrast that 18.7% to JPM's 1.3% short % of float. Huge difference! Lots of people were betting that BSC stock was going to fall, so they sold shares short. The report I read indicated that last week Bear's Short % of Float hit a whopping 54%... holy cow!
Stocks that are heavily shorted, and thus have high short % of float #s (and/or high short ratios [1]) can undergo a short squeeze if a large number of those who have short positions re-buy the shares (cover their short) in a small period of time. Short squeezes can cause crazy stock pops because they create an unexpected buying demand. During a short squeeze, shorts might scramble to cover in the event of good/unexpected news, or perhaps in BSC's case massive numbers of people are locking in their profits (since presumably they had "sold short" at a higher price, say, in the $30+/share range and now can re-buy the shares to close their short position @ < $7/ share -- pocketing the difference as profit).
Not sure exactly what the scoop is, but it sure is interesting to follow! (yep, I'm a geek like that)
[1] short ratio aka "# days to cover" = the ratio of total # shares short / average daily volume. Or in other words, if the daily volume doesn't change, it will take "short ratio" # of days for all shorts to cover their shorts.
I'll catch up with more PE discussions later!
Full disclosure: I have no positions, long or short, in any of the stocks mentioned in this entry at the time of writing.
I've read several explanations today on why we're seeing that behavior. Could be that:
1.) Investors are hoping the deal will sweeten for whatever reason (perhaps expecting a higher bid from another institution?)
2.) Short sellers are covering their shorts, which last week supposedly made up 54% of the float.
Dave was interested to find out more about reason (2), so here's what I told him.
First check out: http://finance.yahoo.com/q/ks?s=jpm
Look in the right-hand column of the page and check out stats like "Shares Short" and "Short % of Float". Respectively, those #s represent the total number of shares shorted and the ratio of "shares short" to the Float. The float is smaller than the number of outstanding shares, since it represents the number of shares held by the public whereas "outstanding shares" includes all shares issued, including those shares held by insiders. Those numbers are reported to the public at minimum on a monthly basis.
As of 26-Feb-08 the "Short % of Float" percentage was 18.7%: http://finance.yahoo.com/q/ks?s=BSC
Contrast that 18.7% to JPM's 1.3% short % of float. Huge difference! Lots of people were betting that BSC stock was going to fall, so they sold shares short. The report I read indicated that last week Bear's Short % of Float hit a whopping 54%... holy cow!
Stocks that are heavily shorted, and thus have high short % of float #s (and/or high short ratios [1]) can undergo a short squeeze if a large number of those who have short positions re-buy the shares (cover their short) in a small period of time. Short squeezes can cause crazy stock pops because they create an unexpected buying demand. During a short squeeze, shorts might scramble to cover in the event of good/unexpected news, or perhaps in BSC's case massive numbers of people are locking in their profits (since presumably they had "sold short" at a higher price, say, in the $30+/share range and now can re-buy the shares to close their short position @ < $7/ share -- pocketing the difference as profit).
Not sure exactly what the scoop is, but it sure is interesting to follow! (yep, I'm a geek like that)
[1] short ratio aka "# days to cover" = the ratio of total # shares short / average daily volume. Or in other words, if the daily volume doesn't change, it will take "short ratio" # of days for all shorts to cover their shorts.
I'll catch up with more PE discussions later!
Full disclosure: I have no positions, long or short, in any of the stocks mentioned in this entry at the time of writing.
I don’t know about your portfolio, but mine has taken a hit since the start of 2008. Have you made any trades so far this calendar year?
I admit that as the market moves up or down, my brain goes through all sorts of scenarios that lead to riches.
These are huge moves, so why didn’t/couldn’t I see them coming?
As I mentioned in a previous entry, the truth I’ve embraced is that predicting movement of any one stock is incredibly hard. Predicting movement of a group of stocks is also incredibly hard. I’ve heard wise investors preach that trying to “time the market” is a loser’s game, and I’m sure that holds true the far majority of the time. Remember that even analysts, whose job is to rate stocks a buy, sell, hold, etc., are wrong a lot of the time. Their full time jobs involve making educated guesses about where a stock price will go.
Consider the analyst opinions of Sirius Satellite Radio (SIRI). Currently Yahoo! Finance’s Analyst Opinion page for SIRI shows:
So what, as the observer, am I supposed to do with this information? I don’t own shares of SIRI, but should I buy a lot, a little, sell short, or do nothing in order to make money with SIRI? Okay, so doing nothing to make money sounds a little nonsensical. But to do nothing instead of buy a stock before it drops could be looked at as not losing money.
*head explodes*
I want to remind you that I’m not knocking analysts or what they do for investors, but my point again is that predicting stock behavior is damn hard.
Going back to my original question (Have you made any trades so far this year?), my personal answer is yes. I haven’t sold anything; instead, I’ve bought more shares of two companies whose stock prices are lower than my cost bases. I consider the companies to be solid. In my mind they were worth buying in the first place, I’ve reevaluated, and I still feel like they’re worth buying. I’m taking advantage of what I perceive to be sensible buying opportunities. I bet sometimes even Britney Spears loves a good bargain (okay, maybe she doesn’t care at all, but that’s for sites like The Superficial to satirize).
Sure, these stocks might go lower. Sure, there could be a recession coming. Maybe we’re in one already? Then again, one might not show up at all and the markets could make a strong rebound next week. To make money as a market rebounds, it sure helps to be in the market.
I’m not suggesting that you immediately dump all your cash into stocks. Many even consider it prudent to maintain extra cash right now as protection against continued declines. If you’re a traditional investor committed to making money through buying stocks, though, then you’re probably interested in buying low and selling high (and/or by collecting dividends). Given that’s the case, at some point you’re going to have to put some cash to work. When and how that happens is up to you.
Long story short, many stocks have been dropping in 2008 and they might drop further. Do your homework, buy/sell in increments, and most importantly make some moola.
Best of luck to you!
Full disclosure: At the time of writing I have a long position in BAC. I do not have any positions, long or short, in any of the other stocks mentioned in this entry.
I admit that as the market moves up or down, my brain goes through all sorts of scenarios that lead to riches.
...if only I’d bought some January 7.50 Call options for Countrywide Financial (CFC) before news of Bank of America’s (BAC) CFC purchase was announced
...if only I’d sold short shares of Big Five Sporting Goods (BGFV) as it dropped from $25/share last summer down to $20/share and even farther down to the recent $11/share.
These are huge moves, so why didn’t/couldn’t I see them coming?
As I mentioned in a previous entry, the truth I’ve embraced is that predicting movement of any one stock is incredibly hard. Predicting movement of a group of stocks is also incredibly hard. I’ve heard wise investors preach that trying to “time the market” is a loser’s game, and I’m sure that holds true the far majority of the time. Remember that even analysts, whose job is to rate stocks a buy, sell, hold, etc., are wrong a lot of the time. Their full time jobs involve making educated guesses about where a stock price will go.
Consider the analyst opinions of Sirius Satellite Radio (SIRI). Currently Yahoo! Finance’s Analyst Opinion page for SIRI shows:
- 6 analysts rate SIRI Strong Buy
- 6 analysts rate SIRI Buy
- 7 analysts rate SIRI Hold
- 1 analyst rates SIRI Underperform
So what, as the observer, am I supposed to do with this information? I don’t own shares of SIRI, but should I buy a lot, a little, sell short, or do nothing in order to make money with SIRI? Okay, so doing nothing to make money sounds a little nonsensical. But to do nothing instead of buy a stock before it drops could be looked at as not losing money.
*head explodes*
I want to remind you that I’m not knocking analysts or what they do for investors, but my point again is that predicting stock behavior is damn hard.
Going back to my original question (Have you made any trades so far this year?), my personal answer is yes. I haven’t sold anything; instead, I’ve bought more shares of two companies whose stock prices are lower than my cost bases. I consider the companies to be solid. In my mind they were worth buying in the first place, I’ve reevaluated, and I still feel like they’re worth buying. I’m taking advantage of what I perceive to be sensible buying opportunities. I bet sometimes even Britney Spears loves a good bargain (okay, maybe she doesn’t care at all, but that’s for sites like The Superficial to satirize).
Sure, these stocks might go lower. Sure, there could be a recession coming. Maybe we’re in one already? Then again, one might not show up at all and the markets could make a strong rebound next week. To make money as a market rebounds, it sure helps to be in the market.
I’m not suggesting that you immediately dump all your cash into stocks. Many even consider it prudent to maintain extra cash right now as protection against continued declines. If you’re a traditional investor committed to making money through buying stocks, though, then you’re probably interested in buying low and selling high (and/or by collecting dividends). Given that’s the case, at some point you’re going to have to put some cash to work. When and how that happens is up to you.
Long story short, many stocks have been dropping in 2008 and they might drop further. Do your homework, buy/sell in increments, and most importantly make some moola.
Best of luck to you!
Full disclosure: At the time of writing I have a long position in BAC. I do not have any positions, long or short, in any of the other stocks mentioned in this entry.
On 11 October 2007 the S&P 500 index climbed just over 1576. On 26 November 2007 it fell to nearly 1406. Why in Sam Hill did the S&P 500 to drop more than 10% in just over a month? I figure there are several reasons. For example, during that period:
Today the S&P 500 reached a high of just over 1508. What's different between now and then and why did we see a 100 point recovery in the S&P 500 from 26 Nov to 6 Dec? The recovery might have to do with the following:
Let's talk about the interest rate freeze for a moment. What short-term effects will that produce?
Also, since the holiday season often produces a large proportion of annual sales for retailers, it's logical to assume that if people feel better about their home situations, they're more likely to spend more $ during this holiday season. The macro-conditions listed above may have led to reduced expectations for retailers, and so if people spend more money than was anticipated, Bush's announcement may precede slightly higher-than-expected sales for retailers. It might be a good time to look into buying some of your favorite retailer...
All in all, to me it seems economic conditions look much better than they did a couple of weeks ago. Although the plan to freeze some mortgage interest rates may delay but not solve the mortgage "problem," perhaps a recession is farther away than many have predicted. Whether a recession is around the corner or far off in the distance, people are buying stocks and life's looking good for bulls.
I don't know about you, but I'm ready to dig my heels in and make $ome money. I hope you do the same. Good luck!
- The price of oil escalated to nearly $100/barrel
- The US dollar reached an all time low vs. the Euro
- Major financial institutions announced write-down after write-down, due to losses from mortgage-backed securities
- The media spread stories on the "credit crunch" and the "housing slowdown"
Today the S&P 500 reached a high of just over 1508. What's different between now and then and why did we see a 100 point recovery in the S&P 500 from 26 Nov to 6 Dec? The recovery might have to do with the following:
- Oil is trading for less than $90/barrel, with perhaps more downside since I figure some of the price increase was directly related to perceived risk of an American invasion of Iran (said risk has decreased after the much-discussed National Intelligence Estimate [NIE] was released earlier in the week)
- The dollar has recovered somewhat vs. the Euro
- The value of the write-downs may have been priced into the shares of financial institutions during the "correction"
- The media has been spreading word of a 25-50 basis-point rate cut at the upcoming Fed meeting on 11 December 2007
- President Bush outlined a plan to reduce the number of potential foreclosures by freezing some interest rates for certain mortgage holders
Let's talk about the interest rate freeze for a moment. What short-term effects will that produce?
- Fewer people will lose their homes to foreclosure, but some are still out of luck. These folks may have to negotiate to refinance at [ideally] lower rates*.
- More home-owners will feel better about their financial situations.
Also, since the holiday season often produces a large proportion of annual sales for retailers, it's logical to assume that if people feel better about their home situations, they're more likely to spend more $ during this holiday season. The macro-conditions listed above may have led to reduced expectations for retailers, and so if people spend more money than was anticipated, Bush's announcement may precede slightly higher-than-expected sales for retailers. It might be a good time to look into buying some of your favorite retailer...
All in all, to me it seems economic conditions look much better than they did a couple of weeks ago. Although the plan to freeze some mortgage interest rates may delay but not solve the mortgage "problem," perhaps a recession is farther away than many have predicted. Whether a recession is around the corner or far off in the distance, people are buying stocks and life's looking good for bulls.
I don't know about you, but I'm ready to dig my heels in and make $ome money. I hope you do the same. Good luck!
