Unless you’re living in Stone Age, you must have heard about one of the greatest mega-sale of the century – the $2 a share sale of The Bear Stearns Companies, Inc. (NYSE: BSC, stock) to JPMorgan Chase & Co. (NYSE: JPM, stock). Bear Stearns was facing collapse because of the U.S. mortgage crisis and the offer from JPMorgan, with the backing of the Federal Reserve Bank of New York, valued Bear Stearns at only $250 million – a whopping 97.5 percent discount.

At $2 a share it’s as good as throwing your shares into the toilet. It’s little wonder that Bear shareholders are fuming at the outrages bid price. Who can blame them when suddenly their stocks investment shrunk by 97.5 percent in value? If you’re one of the investors or traders who have been following “Mad” Jim Cramer’s recommendations, you might want to strangle him for suggested (on 11 Mar 2008 on Mad Money) that “Bear Stearns is fine … Bear Stearns is not in trouble … Don’t move your money from Bear … Don’t be silly …” just before the collapse. Poor Cramer!!!

But before you actually reach for the gun and pull the trigger, you got to accept the fact that investments, regardless of instruments, carry certain degree of risk. To put the blame solely on Crazy-Jim is rather childish as sometimes you should follow your instinct and discipline. If your trade is already profitable (or the other way), there’s no harm to take it off the table. So it’s silly for Jim Cramer’s fans to follow blindly without doing one’s own homework.

In a twist to pacify angry Bear Stearns’ shareholders, JPMorgan today announced a sweetened offer, 400 percent or four times higher than the initial offer bid of $2 to $10 a share. However the Fed, which must approve any new deal, was balking at the new offer price on Sunday night. In the original deal, the Fed guaranteed to absorb $30 billion of Bear’s toxic assets while directed JPMorgan to pay no more than $2 a share for Bear to paint a picture as if it was not a bail-out plan. With this latest higher bid price, Fed is worry that critics would complain that tax-payers money are used to bail out Bear Stearns.

Interestingly Bear Stearn employees own more than a third of Bear’s stock and many longtime employees were reportedly could loose all the savings considering the stock was trading at $67 two weeks ago and as high as $170 a year ago. Anyway this is another classic example of why you should adopt a mixture strategy of long-term as well as short-term and middle-term investment instead of solely long-term. Most importantly do not forget the rule to lock in profit (if there’s any) or take some money off the table if you wish to put your trade to run.

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• Jim is still the Mad Cramer, make no mistake about it

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March 24th, 2008 by financetwitter

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