Midnight Phone Calls

Bear Stearns CEO, Alan Schwartz, was interviewed on CNBC Wednesday afternoon, and stated that his company didn't have liquidity issues.

Less than 24 hours later, late night calls were being made to the NY Federal Reserve Chairman stating that Bear could not get financial institutions to deal with it and that they would have to default on Friday without intervention.

J.P. Morgan and the New York Fed arranged a package that will keep Bear afloat for at least the next 28 days. On March 27th, the 200 billion promised by the Federal Reserve to exchange "stinky cheese", will become available. Market players expect J.P. Morgan to acquire Bear sometime this week.

It's a legitimate question to ask, why don't they let Bear default? The answer in relatively easy, if officials allow that to happen, all of Bears toxic obligations will have to hit the market and be priced. Nobody, wants that to happen because then there would be a benchmark to value the rest of sub-prime debt. That, would have the possibility of tanking the entire system.

The whole debacle started back in the summer of 2007 when two Bear Stearns hedge funds collapsed. Could karma be so complete that Bear will be the beginning and end of the sub-prime crisis? Is it not scary that liquidity could evaporate so quickly? Watch out for Lehman Bros. and Merrill Lynch, put activity below their current prices (respectively) are beginning to heat up.

To the best of my knowledge, Bear Stearns has 470 billion of highly toxic obligations, with 260 billion of marketable securities. Not a bad ratio, but that 470b is the worst of the worst.

Back in the early 90's Drexel Burnham Lambert, a privately held entity collapsed and was able to pay 100% of obligations. Bear has money and assets, so if it goes under, it will be able to pay off a large portion of it's obligations, maybe that's why J.P. was so willing to step in.

This is the market test I've been waiting for, I expect more bad news to hit soon and how the market reacts to this news is going to be most telling.

It's going to be a crazy week, the Fed meets on Tuesday with a high probability of a 100 basis point cut in interest rates. Visa, comes out with it's IPO (initial public offering). Financial institutions will begin quarterly reporting. (watch for further write-downs) In addition, quadruple witching hour in futures and options is this week. Goldman Saks, the creme' de la creme' of Wall St. reports. They have the best analysts on the street, if they followed their own advice, it should be killer on the upside and could bail out the market on it's own.

Back in July and August of 2007 nobody said the market was at a serious top and to bail. Except Matt Lapointe and I. Now in late March of 2008, the doom and gloom in palatable. This bear market is gasping it's last breath IMO, I still stand by my assertion that one of these three levels will signal the end of the bear. 11,300 - 10,600 - 10,000 based on the djia.