Friday, August 03, 2007

Correlation is Not Causation

by Ken Houghton

It has been slightly over three months since I left The Old Firm. The investors have not reacted favorably:

However, as we never tire of noting, Correlation is Not Causation, as a glance at the Comparatives shows:

They have made progress in one area, as noted by the FT (h/t Felix Salmon):

Bear was this week selected as the lead sponsor for US intercollegiate squash....

“Bear Stearns is a champion of the professional squash community,” said the president of the College Squash Association. Which is nice now it’s not so much a champion of the professional investing community.

OUCH! Then again, the core businesses have always been Clearing and trading, which aren't exactly highly-visibile or -loved in the "professional investing community."

Mr. Salmon is undoubtedly correct when he says, "Bear Stearns might just be sold, then, although the obstacles to a sale remain formidable. Just don't expect it to be sold cheap." No one ever expected that to happen. But given his (legitimate) suspicion of Countrywide's Book Value, expecting the price to be anywhere near his initial guesstimate of 2.0x Book* (even if the buyer is Barclay's, as Salmon suggests, instead of either B of A or long-time dance partner HSBC) requires a long wait.

Any further delays, if they result in a sale, will remind the market more of PwC's ultimate rejection of $11B from HP** and ending up with ca. $4B from IBM after the market transformed than Sam Zell's deciding to let Blackstone think they know more about REITs than he does.

*The stock was then trading around 1.8x Book. It is ca. 1.2x now.

**The initial bid was ca. $18B; the offer was subsequently adjusted due to some liabilities. In fairness, there was significant hesitation on HP's side as well, primarily, I am told, for extraeconomic reasons.

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