The most dramatic event in the wild and woolly month of March 2008 was the shocking, Fed-inspired bail-out of Bear Stearns by JPMorgan. If one believed the press clippings, Bear went from being a perfectly fine firm to one that needed emergency funding to stay afloat in a mere four days. The end result was an 80-year old institution that was bought by one of the best-run banks on the Street for a mere $2 a share.

After the deal was announced on the 24th, Bear Stock immediately dropped to $2, but bounced thereafter, eventually settling around $5 per share–more than double the buyout price–prompting numerous observers to ponder who could be so bullish on a firm that had fallen so much in such a short period of time. (For a further update go here.)

Obviously, some were betting on a sweeter deal from JP, and they ended up being right on the money. But for a vast majority of Bear Stearns equity buyers, other economic incentives were at play.

In fact, the real driver of Bear’s stock price was bond buyers. Having purchased debentures at 60 cents on the dollar, news of the JPMorgan deal drove bond prices near par on the 24th. The way bond buyers gamed it, if the Morgan deal somehow went bust, Bear would almost certainly go to a higher bidder. In that case, what is good for the shareholders is bad for the bondholders, as a busted deal would all but eliminate the profits the latter group were sitting on. As a result, bondholders had no choice but to buy Bear stock to diversify their risks.

Sound familiar? A well-balanced portfolio can provide significant shelter from equity market volatility. In the first quarter of 2008, for example, the worst days for stocks ended with significant gains for bonds, and vice versa. Such non-correlation enables investors to weather financial storms, which ensures their participation during good periods for financial assets.

The Monthly Index Report for March 2008

Index

Mar-08

QTD

YTD

Description
S&P 500 Index* -0.60%

-9.92%

-9.92% Large-cap stocks
DJIA*

-0.03%

-7.55%

-7.55%

Large-cap stocks
Nasdaq Comp.*

0.34%

-14.07%

-14.07%

Large-cap tech stocks
Russell 1000 Growth

-0.61%

-10.18%

-10.18%

Large-cap growth stocks
Russell 1000 Value -0.75%

-8.72%

-8.72%

Large-cap value stocks
Russell 2000 Growth

-0.58%

-12.83%

-12.83%

Small-cap growth stocks
Russell 2000 Value

-1.51%

-6.53%

-6.53%

Small-cap value stocks
EAFE

-1.00%

-8.82%

-8.82%

Europe, Australasia & Far East Index
Lehman Aggregate 0.34%

2.17%

2.17%

U.S. Government Bonds
Lehman High Yield

-0.34%

-3.02%

-3.02%

High Yield Corporate Bonds
Calyon Financial Barclay Index**

0.13%

6.49% 6.49% Managed Futures
3-mo. Treasury Bill*** 0.22% 0.99%

0.99%

All returns are estimates as of March 31, 2008. *Return numbers do not include dividends.

** Returns are estimates as of March 28, 2008.

Ben Warwick is CIO of Memphis-based Sovereign Wealth Management. He can be reached at ben@searchingforalpha.com.