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There’s no such thing as a free crunch

The credit crunch claimed another victim after the stranglehold on Bear Stearns brought an end to the US investment bank’s 85-year independent history.

The bank was sold to JP Morgan Chase for the knockdown sum of £116m after its share price fell to just $2 a share as it lost more than 98 per cent of its value in the stockmarket.

Before the crisis, the bank had a market cap of £8.3bn and £189.7bn of assets under management.

Bear Stearns admitted to holding £23.8bn in mortgage-backed securities, of which £8.4bn may be difficult to value.

The US Federal Reserve was forced to step in with emergency funding to the tune of £14.89bn to help the deal go through with JP Morgan Chase.

The Fed again slashed interest rates last week by 0.75 per cent from 3 per cent to 2.25 per cent.

The Bear Stearns problems again brought volatility in global stockmarkets and signalled that the US economy is still facing trouble.

New Star UK alpha fund manager Tim Steer warns that the troubles at Bear Stearns – which also hit the headlines last June when its two hedge funds lost £800m – are not the end of the global crunch, with more banks on both sides of the Atlantic likely to hit problems. He says: “It is time for the banks to take their heads out of the sand and face reality. Wall Street was saved by the Fed’s quick reaction to Bear Stearns but this crisis is of the banking sector’s making and it is high time that the banks faced up to their responsibilities, put their heads together and found a way out of it.

“Magic wands, like those waved by Bernanke are all very well but are not a lasting solution. This applies to both sides of the pond, as the UK banking sector results reveal a distinctly ostrich-like attitude to the depth of the hole it’s peering down. I sold out of banks last year and shorted Northern Rock, as my banking sector data analysis strongly suggested a foul wind was coming.

“Yes banks look cheap by historic standards, but until they decide to get real I would suggest that there could be more falls to come.”

Concerns were also raised over the imminent results from two other investment banks – Lehman Brothers and Goldman Sachs. Both reported sharp falls for the first three months of this year but the figures were up on forecasts.

The news came on the same day as the Fed announced its 0.75 per cent base rate cut which prompted a rise of over 400 points rise in the Dow Jones index, its biggest one-day gain in five years.

Hargreaves Lansdown head of research Mark Dampier says: “This kind of volatility is going to continue for some time with banks. I would agree that the banks have to come together and find some sort of solution.

“Some would point to this as an opportunity to fill your boots but you would have to be brave to do so. The market represents good value but it is not dirt cheap.”

PSigma income manager Bill Mott believes the market reaction to Bear Stearns is one of “irrational panic”.

He notes that rational investment becomes pointless in this climate, as the prices of different assets are pointing to different economic outcomes.

He says bond prices indicate global recession, commodity prices indicate global growth and inflation, emer-ging market equities show growth and developed world equities predict recession.

He says: “Central banks need to continue to provide liquidity, cut interest rates and be seen as a lender of last resort. As we have seen with Northern Rock in the UK and Bear Stearns in the US, delays can quickly undermine confidence and allow unnecessary trauma.

“At present, the UK equity market is offering sensational value on a medium-term view. It is only if the economy is mismanaged by the Bank of England that we could suffer a prolonged period of equity market weakness.

“In the UK, there are minimal domestically- generated inflationary pressures. House prices are falling, wage rates are subdued, consumer spending is weak, there is a clamp-down on public sector wages and unemployment is likely to rise.

“The only inflationary pressures are being delivered by energy, food and commodity prices. These are being driven by emerging market demand which will surely subside soon, given the inflation rates seen in places like China. The Bank of England should cut interest rates aggressively.”

Paul Niven, F&C Investments head of asset allocation, feels there is room for optimism as the falls already seen show that investors are over 75 per cent into what he deems “normal” recession markets, with risk indicators revealing that investors are now in the panic stage.

He believes valuations could be compelling with metrics at similar levels to that seen at the start of the last bull market.

Niven says: “In addition to equity markets pricing in a lot of bad news, the credit markets are now discounting default rates normally associated with recessions, and the fact that two-year US treasury yields are so low indicates recession is already expected and priced in.

“Markets will be volatile but the repricing we have already seen leads us towards expecting a moderate rebound in equity markets over coming months.

“From this perspective, we would caution against panic and capitulation as such sentiment is already evident from the majority of market participants.

“Instead, take a degree of comfort in that a variety of asset classes are already discounting a bearish outcome, with certain markets, such as equities, arguably already entering into the panic territory usually associated with a rebound in prices.

“One needs to exercise caution with risky asset weightings due to the cyclical slowdown we expect but several factors are leading us towards a cautiously optimistic position.”

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