In a July 8 feature, Boone Pickens told CNBC he’s sticking with $150 oil for 2008. But where did Lehman Bros. see oil?

Also on Tuesday, JP Morgan (JPM - Annual Report) said U.S. crude futures may hit $150 later this month, while Lehman Brothers (LEH) raised its oil price forecast to an average $127 a barrel for 2008 from its previous assumption of $105.

Regular readers know I follow the spread between Baa-rated bonds and Treasuries to get a feel for how much they are willing to accept risk.

Last week, as the market rallied on the initial news of the JP Morgan (JPM - Annual Report) and Fed-led rescue of Bear Stearns (BSC) I said “The big questions are whether, how much, and how quickly the spreads will begin to narrow again. That will be the real signal from bondholders that the worst is behind us from the current crisis.”

Instead, credit spreads continued to widen. They averaged 343 basis points last week, up from 340 in the prior week.

It remains a double-edged sword. As long as the spread continues to widen, risky assets will perform poorly. However, the abnormally high risk premia we are currently seeing indicate that longer-term investors will be paid more handsomely for accepting such risks than they have been paid on average in the past.

By all accounts, JPMorgan (JPM - Annual Report) has all the leverage to complete its proposed acquisition of Bear Stearns (BSC) for $2.00 per share. Actually, since it is a stock deal and JPMorgan shares have risen since the announcement, the acquisition price is now $2.40 per share.

Still, for a deal likely to be made at $2.40 per share, why would anyone be willing to pay $5.00 per share for the stock today? One answer that keeps getting bandied about is that bondholders are buying the stock in order to vote for the deal, as it is worth losing some money on the stock to preserve the value of the bonds.

That argument makes some sense, but I believe it doesn’t tell the whole story. It is possible for the bondholders to not only preserve the value of their bonds, but to lose very little on the stock in the process.

While the stock has been getting all the news, options on Bear Stearns have seen enormous trading volume. I think the bondholders are buying the stock, but hedging their bets by creating synthetic short positions.

A synthetic short consists of writing a call option and buying a put. Here’s how I think a bondholder can be playing this:

Buy 100 shares for $5
Write an October $5 call option for 2.10 (bid price as I write this)

Buy an October $5 put for $2.45 (ask price as I write this)

Net cost for this transaction is $5.00 + 2.45 - 2.10 = $5.35. At expiration, it will be worth $5.00 no matter where the stock is trading. So, for $0.35 per share, or $35 for every $500 of exposure, the bondholders can buy the right to vote on the deal.

Given that the bonds were trading at $700 per $1,000 face value on Friday, and are worth $1,000 when backed by JPMorgan, it is pretty simple math. For every $1,000 of bond exposure, you can pay $70 to vote in favor of a deal that is worth $300 to you.

What’s more, since there was so much more debt than equity, only a small fraction of the bondholders need to make this bet to gain an overwhelming majority of the equity votes.  Or, each bondholder could insure a smaller portion of their value.

Taking that into consideration, paying $5.00 for the stock starts to make sense.

Provided, that is, you already own the bonds.

How quickly value can evaporate these days. Bear Stearns (BSC) closed on Friday at $30, down from $57 the night before. I spent the weekend working up an article on why investors should still avoid it despite an apparently low price relative to book value. Before I could publish it (not that it would have done any good), JPMorgan says it will buy Bear Stearns.

JPMorgan Chase & Co (JPM - Annual Report) said on Sunday it would buy stricken rival Bear Stearns for just $2 a share in an all-stock deal valuing the fifth largest investment bank at about $236 million.

How could a stock go from $57 to $2 in two trading days, all the while having a book value above $80? I can’t say, exactly. But here’s what I was planning to say on the assumption that the stock would still be $30:

Many value investors look for stocks trading at prices below the company’s book value per share. Such stocks are often undervalued.

After Bear Stearns’ shellacking on Friday, the stock closed at $30. Yet on the conference call, Bear Stearns CEO said its book value “fundamentally” is still in the mid-$80 range. Does that mean value investors should step in?

I don’t think so. Taking a look at the 10K the company filed in January, I found it quite easy to make most of that $11.8 billion book value disappear.

To start with, there is $950 million recorded as “goodwill & intangible assets.” Subtracting this out leaves a tangible book value of $10.8 billion, or $82 per share.

Next, Bear’s balance sheet includes, in “other assets,” $5.2 billion in “financial instruments that are valued using models or other valuation methodologies.” Most of the total is “comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable.”

Given that the credit issues have really just started to flow through the system, I’d want to be conservative about the value of these instruments. For the sake of argument, I’m assuming they are really only worth half their book value. Admittedly, I’m just making a guess. But then again, so is Bear Stearns.

If I take $2.6 billion off the value of these instruments, the tangible book value is reduced to $8.2 billion, or $60.22 per share.

Bear also reported $33.5 billion in “assets of variable interest entities and mortgage loan special purpose entities.” These were the loans it was unable to move off of its balance sheet. Of this amount, Bear says its maximum loss is nearly $3 billion. For conservatism, I’ll assume that maximum loss gets realized. That cuts the tangible book value to $38.

Finally, As of November 30, 2007, the Company had notional/contract amounts of approximately $13.40 trillion of derivative financial instruments, of which $1.85 trillion and $1.25 trillion, respectively, were listed futures and option contracts. These amounts are not fully reflected on the balance sheet.

It’s likely that many of these derivative instruments offset each other, reducing the total exposure Bear faces. But without being able to see the underlying contracts, investors are unable to make that judgment. Since the tangible book value is less than a tenth of one percent of the notional value of these contracts, it isn’t hard to imagine the contracts changing in value sufficiently to wipe out the remaining tangible book value.

While there may be a buyout of Bear Stearns, it would be made by sophisticated investors with full access to the company’s financial information. These investors are in a position to determine a value for Bear Stearns.

I, on the other hand, am not. And if I can’t make a reasonable estimate of the company’s value, I’m going to stay away.

Disclosures: William Trent has no positions in the companies mentioned

The following is a reprint of my December 20, 2007 RealMoney column

I have long complained that Plantronics’ (PLT) increasing exposure to consumers was nothing but trouble. If lower margins and higher advertising costs weren’t enough, the fact that the consumer part of the business was dragging down overall growth was the icing on the cake.

The company was cleaning up its act earlier this year, and the shares rallied as a result. But an earnings miss in October and a downgrade by JPMorgan (JPM - Annual Report) have robbed stockholders of the entire year’s worth of gains.

Once again, the main culprit is the consumer business - specifically the Audio Entertainment Group (AEG), which was formed through the company’s ill-advised purchase of Altec Lansing. Through the six months ended September 30, that segment’s sales were just $43 million - down from $63 million in the same period last year.

In addition to the AEG, the company continues to struggle with more intense competition in the mobile headset business. One reason for the JPMorgan downgrade was that channel checks indicate the company is losing share of Bluetooth headsets to Motorola (MOT - Annual Report) and Nokia (NOK).

Finally, inventories continue to be far too high for my comfort. They have more than doubled over the past couple of years compared to a cumulative sales increase of just 42%. It isn’t the situation one wants to have in a slowing economy, especially in the face of competitive pressure.

The Good News

There are still a few reasons for optimism, though. For one thing, the drop in AEG revenues means it now accounts for less than 12% of the total business. Even if things continue to deteriorate, the incremental impact will be less likely to weigh on the total company.

Furthermore, the company took action to try and prevent such deterioration. Last month they announced a plan to close and/or consolidate a number of facilities as part of a strategic initiative to lower costs. They are also trying to design fresher products that consumers may actually want to buy, but those aren’t expected until next Christmas.

One good thing that could come of the restructuring in the short term would be a disruption in manufacturing. Though this doesn’t sound good at first blush, it would give the company a chance to work down those inventories.

Not a Bad Value

Shares are trading at less than 17x the consensus estimate for the fiscal year ending in March, and just 14x the estimate for March 2009. Unfortunately, given the recent news it is likely both sets of estimates will come down over the next few weeks.

The 9.9% consensus analyst estimate for 5-year growth is less than the company’s sustainable growth rate based on ROE. This means if growth is less than expected the company should be able to compensate by raising the dividend or buying back shares.   On a price to book basis, I think the current multiple of 2.2x could increase. Combined with the growth potential, a valuation expansion could lead to double-digit gains for the stock.

Over the last 12 months Plantronics generated $79 million in free cash flow. If anything, I think this could improve if the company gets a grip on its inventory levels and production capacity. The current FCF/EV yield is fairly attractive at 6.3%, which provides a decent margin of safety while waiting for the growth to materialize.

Although I like the valuation and believe there is cause for optimism, the stock has whipsawed lately due to numerous analyst upgrades and downgrades. Investors willing to take a chance on it would want to pick their price carefully.

Writing puts may also be an effective strategy here. As I write this, the February 25’s are trading at $1.10, offering a potential 4.5% 1-month return on the money risked and an effective purchase price of $23.90 in the event of further market declines.