Monday, March 17, 2008


On 3/17/08, Lamar Jones wrote:
Current events remind me of the 80's with the S&L crisis. I cannot forget the sweetheart deal BofA got in Texas. In fact that is what started the good ride for McColl and the old NCNB.

I must confess that the fear is very strong and every time we all ask, "Is this the next Great Depression?". I do not believe that is the situation but I can certainly not blame the weak of heart ( I was once a "professional" and remember the doom and gloom the day of the '87 crash....never forget it. It was also one of the best buying opportunities both short term and long term!)

BTW- did you not predict the current real estate mess?

My problem is that I predicted that there would be a mid cycle slow down, a rebound and then a great real estate mess. As we know, if this is only a mid cycle slow down it is one of the biggest on record.

This cycle has been "different" in that during the 2001 recession, real estate did not get slammed. Instead, real estate was super strong because excessive world wide savings pushed interest rates to historic lows. As expected, the 2001 recession was a manufacturing recession but normally manufacturing recession are tough enough to ultimately drag real estate into the same ditch.

With baby boomers still at prime buying ages, it has been difficult to determine how strong the rebound buying will become after the current crunch is over. The question on everyone's mind is, "IS THIS THE BIG ONE"? The fact is, with variable rate mortgages are about as cheap now as they have ever been, it is natural to assume that bargain hunters will clear the market. The sales prices are low enough to make buying to rent an attractive business model.

You are certainly right about the sweet NCNB deal. Big banks become super big when they buy competitors at deep discounts. As always, the government "goes along" with these deals to "save us all".

In regard to the aftermath of 1987, I was fortunate enough to be able to buy heavily in the days after the crash. The returns over the next year were fantastic, all the way up until the invasion at the start of the Gulf War. Like it has been said, "This too shall pass".

On Mon, Mar 17, 2008 at 7:36 AM, Jack Miller wrote:

In a deal reminiscent of the deals of old, JP Morgan - Chase just bought Bear Stearns for $2 per share. The purchase was made with a loan from the Fed! The Bear Stearns office building is worth $2 per share but Bear Stearns did not have what JP had, access to the Fed. This problem has been fixed but, as the saying goes, too little too late for Bear Stearns.


Sunday, the FOMC took the unusual action of flinging the discount window wide open. The rate was cut a quarter percent but the significant action was to open the window to firms like Bear Stearns. Of course, when Bear Stearns collapsed, the topic of discussion immediately become "who is next?". The rank smell of fear which has been in the air is suddenly suffocating. It can be seen on the face of small investor and large, but, would Bear Stearns have been sold if it had had the backing of the Fed? No way! The FOMC is now accepting all sorts of paper at the discount window. I have not studied the balance sheet of Bear and I do not have an inside view but I am confident that if Bear Stearns had been allowed to swap triple A paper for T-Bills at the window, the T-Bills would have provided Bear the liquidity to stay solvent long enough for the value of the triple A paper to recover enough. No, I don't know how much would have been enough for Bear but I know that there is much paper trading at deep discounts to par that will ultimately be paid off at par. I simply do not see a collapse coming in the housing market. With world wide unemployment rates near record low levels, the great majority of people are going to make the payments on their homes and foreclosed homes will be absorbed by the market. Indeed, there are plenty of indications that the worst of the housing crisis is over.

In the case of Bear Stearns, JP Morgan and the FOMC rode to the rescue. The FOMC provided the artillery to save the ranch from the Indians and then turned the keys over to JP. Again, this deal is reminiscent of the deals done by the old man JP Morgan, more than 100 years ago. THE RICH HAVE ONCE AGAIN SNARED A BIG CHUNK OF ASSETS AT CENTS ON THE DOLLAR. Shares in Bear Stearns traded at $150 not so long ago and for $60 in recent weeks.


The JP Morgan deal for Bear Stearns is one of three indications of SMART MONEY BUYING that I will mention here. The second is the Smart Money Index as reported by Hayes Advisory. The smart money buying index made a major bottom on or about January 21 at an index value of 3,400. It has since climbed to 5,200! in just two months time! The ratio of smart buying to emotional buying has jumped by a larger percentage as buying by the emotional public has collapsed. This is a classic situation near a market bottom, where the public sales at low prices and the smart money buys at low prices.

The third indicator is the Gambrill Insider Buying Index. This index is computed by studying the government required reports from 3,000 public companies. Purchases by executives and directors must be reported to the federal government. This indicator is "smoking". Executives at 3,000 firms are making a clear statement that they believe their stocks are cheap.


Like always, when the market seems to be in free fall, it is hard to dig deep into pockets to buy at low prices. Women shoppers do better than men at this game. Women love to buy bargains. When there is a "going out of business sale", most of us are pleased to pick up goods at deep discounts. Stock market sales occur when people are afraid that prices will go much lower still. At a going out of business sale, there is the temptation to wait until prices are marked down again; 70% off might be changed to 80% off tomorrow. Of course, the risk is that the item you have your eye on is taken by someone else. Those who miss the 70% off deal are inclined to look around for the next sale to start. Those who miss the last sale end up paying retail.

Think about what would happen at a going out of business sale if a bank were to offer 100% financing on the 70% off goods? The wholesale buyer would "take it all". In recent weeks, the "smart money" is snapping up bargains. Will the buying pace be stepped up now that the FOMC has offered virtually unlimited financing?

In the case of Bear Stearns, JP bought at 99% off the price of 60 days ago and did so with 100% financing. What a deal?


No, you do not qualify for the JP Morgan deal. You simply cannot make the kind of money JP Morgan can make. Still, you can tag along for the ride. The insiders are buying, they are digging deep. They understand that "panics are short". With many goods available at 70% off, they are not waiting to find out if 80% off will be available. If they buy at 70% off and have to ride through 80% off, so be it.