“One of the most followed rules of investing is to cut losses quickly and to let your winners run.  Another even more important rule is to not exacerbate your problems by throwing good money after bad in an attempt to bail yourself out of a losing position.  But what if you had no choice? 

What if you were holding a largely, if not completely, illiquid investment in a market that had already imploded–despite the fact that the market was unwilling or unable to reflect mark-to-market pricing reflecting the enormity of that implosion?  And what if, like a cluster of nuclear weapons daisy chained together, that investment was levered five, ten, twenty, even thirty times your original capital?  

Are They Trying to “Buy” Time? 

When Bear Sterns recently threw good money after bad, I had to wonder if they were breaking a very basic investment rule out of lack of discipline or simply executing a strategic decision based purely on necessity.  My guess is that it’s the later and I think they understand all too well the ticking time bomb they, as well as others, are sitting on.  I also think the BAM stock model will prove correct in its prediction that a decline over the coming months will send the market spinning into a black hole with investor psychology switching from optimistic to pessimistic in the blink of an eye.  Bear’s decision to do what they did only reinforces the model’s idea of a severe plunge because when they finally admit that the subprime market is not going to recover quickly enough to stave off additional margin calls, they’ll be forced to capitulate which will create a domino effect of capitulation from others trapped in similar positions.”  

NOTE: This guessed turned out to be correct as Bear was proven to be bluffing and the subprime problems subsequently crushed many other firms. 

Full report coming soon