The dramatic takeover/bailout of Bear Stearns by J.P. Morgan Chase over the weekend prompts me to share a few thoughts.

Clearly, investors in Asia who heard about the deal Sunday night, and Europeans who got the word Monday morning, were shocked by the terms. Stock markets everywhere outside North America plummeted.

In the early going, it looked as if New York would follow suit. But then, a few brave hearts stepped in to bid for a select list of stocks -- mostly blue chip industrials and utilities, not financials. Among the financials, J.P. Morgan Chase (NYSE: JPM) itself was the exception, rocketing 10% on the day.

Is Wall Street correct to view the Bear Stearns buyout as a win-win for Morgan's ultra-shrewd CEO, Jamie Dimon? Probably. Even if screaming Bear shareholders force JPM to kick in a few extra bucks to seal the deal, the $2 per share price Dimon agreed with Bear's board of directors creates such a low hurdle that it's hard to imagine JPM reaping anything less than a bonanza on the Bear acquisition.

At the same time, you have to ask yourself what this kind of pricing tells us about the current health of the financial markets. When the stock of a prominent, well-established firm like Bear Stearns can drop 91% in two days, it's apparent that "liquidity problems" have morphed into something bigger -- and more dangerous.

I remain hopeful that the Federal Reserve has finally gotten its hands around the issue. Last week's announcement that the Fed will now lend directly to government-securities dealers as well as commercial banks (and will accept a wide variety of collateral for the loans) may mark a turning point.

However, I also advise you to proceed cautiously with new stock purchases, emphasizing blue chip growth names and high-grade utilities. If you feel like speculating, do it with index call options. They're expensive, but at least your risk is clearly defined. If you bought some calls at or near today's opening, you should be pleased with the result so far. Take profits if your gains mount to 50% or more.

Until next time...