Shorting Frenzy in the Stock Markets

US stocks gyrated through a rough rollercoaster ride this past week: they jumped super high and they fell super fast. After news of Bear Stearns (bsc) bailout, the Standard & Poor’s 500 Index [[^gspc]] fell 2.1% yesterday to 1,288.14. The S&P Financials Index lost 4.1%, and Bear Stearns fell $27, or a whopping 47% to $30 - its biggest one-day loss ever. It was just 14 months ago that Bear Stearns stocks rose to a record $171.51. Many investors who bought the company’s stocks are in a rush to get out, after all, the stock could fall to zero. Its trading volume of 187 million shares yesterday was 14 times the three-month daily average. Although sometimes such a spike in volume can signal exhaustion of a trend (downtrend in this case), unless a major rescue package for Bear Stearns materialises over the weekend, this sell-off is likely to continue and Jim Rogers will be laughing all the way to the bank on his short positions in Wall Street’s investment banks.

Last Tuesday’s strong upsurge in stocks as a result of the Fed’s plan to exchange Treasury notes for privately issued mortgage-backed securities quickly melted down, causing the Dow [[^dji]] to lose 1.6% this week. Surprisingly, the Dow finished up about 0.5% from where it ended last Friday. The Dow is now down nearly 10% for the year. NASDAQ [[^ixic]] is unchanged compared to a week ago.

Even with the bailout, stocks declined. Lehman Brothers (leh), the largest underwriter of mortgage-backed bonds, fell 15% to a three-year low of $39.26, and was the second-biggest loser in the Amex index. Lehman got a $2 billion, three-year credit line from 40 banks yesterday.

The near-collapsing Bear Stearns is now reportedly being shopped to other investment banks and equity firms. The Wall Street Journal reported private equity firms such as J.C. Flowers & Co. could be a potential buyer. The New York Times said Royal Bank of Scotland (rbs) is interested in buying it, citing unidentified people briefed on the talks, and the Daily Telegraph said Bear Stearns is seeking financing from sovereign wealth funds, without saying where it got the information.

Posted in Categories: Stocks.