Wall Street tumbles

This came in response to concerns about the severity of credit troubles.

stock exchange 88 224 (photo credit: Bloomberg)
stock exchange 88 224
(photo credit: Bloomberg)
SHARES WALL STREET Stocks tumbled Friday after a plan to alleviate a liquidity crisis at Bear Stearns Cos. touched off concerns about the severity of credit troubles. Each of the major indexes lost more than 1.5 percent on the day, with the Dow Jones industrial average falling nearly 200 points. Bear Stearns lost half of its value within 30 minutes of the market open. The plan by the New York Federal Reserve and JP Morgan Chase & Co. offers Bear Stearns relief from a sudden liquidity crunch that analysts surmised could have felled the bond house. But the company's position on the precipice of financial disaster left many investors shaken and spoiled some hopes that troubles in the moribund credit market are on the mend. JPMorgan Chase is providing secured funding to Bear for 28 days, backstopped by the Federal Reserve Bank of New York. Stocks showed moderate increases in the early going after a US Labor Department report showed the Consumer Price Index remained flat for February. Wall Street has been expecting inflation would show an increase. But the gains quickly disappeared after investors learned about the severity of troubles at Bear Stearns. "This is another chapter in a book rather than a one-act play," said Phil Orlando, chief equity market strategist at Federated Investors. He said the market is worried that further trouble in the credit markets will emerge and that the ramifications of the credit strains and a slowing economy could result in recession. "Investors thought they are probably more than norm than the exception and maybe this is the tip of the iceberg," he said, referring to Bear Stearns. "Our sense is that this is sort of an amoeba here and this is sort of a broadly spreading situation." The Dow fell 194.65, or 1.60%, to 11,951.09. The Dow had been down as much as 313 points. Broader stock indicators also declined but pulled off their lows. The Standard & Poor's 500 index fell 27.34, or 2.08%, to 1,288.14, and the Nasdaq composite index fell 51.12, or 2.26%, to 2,212.49. For the week, the major indexes were mixed, with the Dow showing a modest gain, the Standard & Poor's 500 index slipping and the Nasdaq composite index finishing exactly where it began. The Russell 2000 index of smaller companies fell 16.81, or 2.47%, to 662.90. Bond prices jumped as stocks retreated. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.42% from 3.53% late Thursday. Elisa Parisi, economic analyst at RGE Monitor.com, contends the bond market has recently shown more concern about the economy. "The stock market is increasingly catching up with signals from the bond market. Somehow the stock market could delude itself into thinking that they have nothing to do with the mortgage fallout," she said. Comments from the Fed might have helped corral some of investors' nervousness Friday. The central bank said it voted unanimously to sign off on the arrangement between JPMorgan and Bear Stearns and that it is ready to provide further resources to stave off further credit troubles. Fed Chairman Ben Bernanke also said Friday he would do what was possible to aid struggling homeowners. Still, investors remained nervous. The Chicago Board Options Exchange's volatility index, known as the VIX, and often referred to as the "fear index," jumped 18.7%. Declining issues outnumbered advancers by about 5 to 1 on the New York Stock Exchange, where volume came to 1.86 billion shares compared with 1.84 billion shares traded Thursday. "The Bear Stearns news reversed the early positive sentiment from the inflation data," said Peter Cardillo, chief market economist at Avalon Partners. "There had been nervousness about Bear Stearns for some time and now the market's concerns about the company have been proven true." Friday's stock market pullback comes a day after an anxious stock market rebounded from an early plunge following a Standard & Poor's prediction that financial companies are nearing the end of the massive asset write-downs that have pummeled the stock and credit markets for months. The S&P projection had given investors some hope that the seemingly unrelenting losses from the mortgage and credit crisis could have been bottoming out. Bear Stearns' woes rekindled investors' nervousness about the troubles in the financial sector. The company's shares skidded $27, or 47%, to $30, while JP Morgan fell $1.57, or 4.1%, to $36.54. Other financial names declined as well. Lehman Brothers Holdings Inc. fell $6.73, or 15%, to $39.26 and Merrill Lynch & Co. slid $2.75, or 5.9%, to $43.51. The market's fall Friday caps a big week for the markets. On Monday, stocks continued a sell-off from last week, falling more than 1% as oil again moved into record territory. Then, on Tuesday, stocks surged after the Fed said it would put up $200 billion to loosen tight credit markets. The Dow surged nearly 417 points, its biggest one-day percentage gain in five years. Stocks posted more modest losses and gains Wednesday and Thursday as investors speculated over how much help the Fed's plan would ultimately provide. On top of Friday's concerns, Wall Street remains anxious for Tuesday's Fed meeting at which the central bank is still expected to lower interest rates. While Wall Street would welcome cheaper access to cash to help consumers and businesses, the freer flow of money could would likely fan inflation concerns and could further weaken the dollar. EUROPE Stocks ended another volatile session in the red Friday after US investment bank Bear Stearns said it turned to the Federal Reserve and J.P. Morgan Chase for liquidity, fanning concerns for its European peers. After registering decent gains in the wake of benign US inflation data, the pan-European Dow Jones Stoxx 600 took a quick turn for the worst. It finished down 1% to 304.15. "There was an upward bias after the CPI, then you had the Bear news," said Philippe Gijsels, senior equity strategist at Fortis in Brussels. "It was one step further to realize a company this size is in trouble, and that's weighing on the market. It's once again making it clear that markets are very nervous and that investors should be cautious." Banks heavily exposed to capital markets, including Barclays and UBS, led the decline. Barclays share lost 3.9% and UBS shares dropped 7.4%. The Swiss bank separately said it will soon publish the outcome of a probe into its subprime holdings. Shares of Britain's HBOS, a mortgage lender whose recent performance has disappointed, dropped 6.1%. "We'll probably see more asset sales, meaning pricing will come under more pressure and first-quarter results will show another round of asset write-downs in the financial sector," said Andrew Lynch, European fund manager at Schroder Investment Management, on the worries for banks. "It shows that there's a lot more stress out there in the financial market. The whole banking sector lives off confidence and if that goes then the situation rapidly becomes dire. We'll probably see more of this kind of behavior," he added. The German DAX 30 index fell 0.8% to 6,451.90, the UK's FTSE 100 index closed down 1.1% to 5,631.70 and the French CAC-40 index fell 0.8% to 4,592.15. The losses came despite encouraging inflation data out of the US, where inflation at both the headline and core level were unmoved. Less encouraging was data out of the euro zone, where inflation accelerated to a record high. Even after the Bear Stearns news, mining and metals issues did well. Lehman Brothers raised earnings estimates throughout the sector, citing upgrades to thermal and coking coal, platinum group metals and aluminum due to supply constraints and continued strong demand. Lehman upgraded Lonmin to equal-weight from underweight, based on higher prices forecast for platinum, and said its top picks in the sector continue to be BHP Billiton and Rio Tinto. Shares of BHP Billiton set the pace, rising 3.7%, while Rio Tinto shares climbed 2.2% and Lonmin shares gained 1%. Also in metals, Merrill Lynch added Xstrata and ArcelorMittal, the world's biggest steelmaker, to its most-preferred list in the basic resources sector. "We are positive on ArcelorMittal given our belief that the steel industry will fully pass through to steel prices the impact of higher raw-material costs," the broker said. ArcelorMittal's shares rose 1.8%, while Xstrata rose 0.4%. Meanwhile, shares of Sweden's SSAB jumped 4.8% after it said it's selling off its North American tubular businesses for $4.02b. Shares of Swatch Group dropped 5.5%. The Swiss watch and jewelry maker said 2007 net profit of 1.01b. Swiss francs fell slightly below analyst forecast for a profit of 1.03b. francs. "Investors may be disappointed by earnings only in line with expectations," said Aurelie Husson Dumoutier, an analyst at Societe Generale. Friday's deal speculation centered on TUI, shares of which rose 6.7% in Frankfurt. Die Welt newspaper reported that CEO Michael Frenzel is now willing to consider a split of the company's tourism and shipping businesses. Rounding out the action, shares of drugmaker Shire gained 5% on the back of speculation that it could be in line for a bid from Pfizer Inc., the US blue chip. Shire didn't comment on the speculation. ASIA Many markets extended declines Friday amid persistent worries about the weak dollar and a US economic slowdown. But markets in India, Singapore and Australia rebounded after a week of sharp declines across the region. Traders said the near-term outlook is unclear, with a string of economic data due out next week and many investors watching Washington for signs of more financial measures to buoy markets. And while many expect the US Federal Reserve to cut interest rates on Tuesday, they don't foresee a sustained recovery in Asian markets soon. "There are so many factors that it is tough to say, but I expect [the Japanese market] to stay near where it is now," said Teruhisa Ishikawa, manager at Mizuho Investors Securities. "There aren't many buyers in this environment." Tokyo's benchmark Nikkei 225 stock index fell 1.5%, to 12,241.60, dropping to its lowest close since August 2005. Hong Kong's Hang Seng Index extended its losses as well, dropping 0.3% to 22,237.11 after plunging nearly 5% in the previous session. Other regional benchmarks lost ground in China, Indonesia, Malaysia, the Philippines, South Korea and Taiwan. In Japan, the strong yen was the key factor, with investors selling exporter issues because of the damage a rising currency can do to the competitiveness of exports and repatriated earnings. Automakers, often seen as bellwethers when foreign exchange rates are volatile, were among the day's biggest losers. Toyota Motor Corp., which brings in about half of its revenues from the US, fell 3%. Mazda Motor Corp. slid 5%. The dollar was trading at 100.24 yen at 4:50 p.m. in Tokyo after briefly dipping below 100 earlier Friday. On Thursday, it fell below that level for the first time in 12 years. Japanese shipping companies, caught up in both foreign exchange and oil price woes, were also among the decliners. Mitsui O.S.K. Lines Ltd. dropped 4.6%. In Hong Kong, investors were worried by the further possibility of inflation-fighting measures out of Beijing. The same fears dragged down the Shanghai Composite Index for the third straight day. It lost 0.2% to 3,962.3, its lowest level since July. Property developers listed in Hong Kong fell as investors shifted into utility stocks. Hang Lung Properties fell 3.3%, New World Development dropped 2.4% and Wharf declined 2.9%. The worst-performing blue chip was Sinopec, which plunged 4.6% on concerns about the strength in oil prices and the impact on the refiner's costs. "Sentiment is so gloomy, investors are just looking to sell into any rebound," said Y.K. Chan, a strategist at Phillip Capital Management (HK) Ltd. But in Singapore, investors snapped up beaten-down shares and the Straits Times Index rose 1.2% to 2,839.01. In Mumbai, India's Sensex rose 2.6% to 15,760.52 after sinking 4.8% Thursday. CURRENCY Another stunner from Wall Street on Friday sent the dollar to record lows against major currencies as US banker Bear Stearns Cos. acknowledged it was in dire financial straits. The euro traded for an all-time high $1.5687, while the dollar - which repeatedly hit record lows last week - fell below the Swiss franc for the first time ever. Meanwhile, the dollar hit its lowest point against the Japanese currency in 12 years. The dollar hit an all-time low of 0.9969 francs on the Zurich exchange before edging back up to 1.0004 francs, compared with 1.0143 it traded in New York late Thursday. In 1971, the US dollar was worth four francs. Ashraf Laidi, chief foreign exchange strategist for CMC Markets in New York, pointed to "speculation that the world's major central banks will mount coordinated intervention to stabilize the rout of the dollar." The dollar, which on Thursday fell below 100 Japanese yen for the first time since late 1995, again dipped as low as 98.88 yen Friday. It clawed back some ground and traded at 99.21 yen, compared with the 102.04 yen it traded Thursday. In other trading, the British pound fell to $2.0218 from $2.0292, while the dollar slipped to 1.0137 Canadian dollars from 1.0141 Canadian dollars. The dollar has been weighed down by worries about the outlook for the US economy, which in turn have fed expectations that the Federal Reserve will continue to lower interest rates. Lower interest rates can jump-start a nation's economy, but can also weigh on its currency as traders transfer funds to countries where they can earn higher returns. The European Central Bank has taken a tough anti-inflation stance and has shown no inclination to cut rates for the 15-nation euro zone. COMMODITIES Gold prices bolted above $1,000 again on Friday, hitting a new record after the liquidity crisis at Bear Stearns Cos. rattled Wall Street and fed buying of safe-haven investments. Other commodities traded mostly lower, with crude oil, copper and agriculture futures falling. Following weeks of flirting with the $1,000 mark, gold finally breached the milestone on Thursday after the dollar plunged against rival currencies. The dollar hit a record low on Friday against the euro, which bought as much as $1.5687. The greenback's fall has been a major driver of gold because investors consider the metal a safe investment in times of economic turmoil and rising inflation. Investors pushed gold higher Friday in reaction to a plan by the New York Federal Reserve and JPMorgan Chase & Co. to provide secured funding to Bear Stearns in a bid to keep the troubled investment firm from collapsing amid a global credit crisis. "The fact that gold was able to power back over $1,000 was very much due to the bad credit-related news that continues to sweep Wall Street," said James Steel, analyst with HSBC in New York. "The credit crisis keep morphing and the safe-haven buying keeps getting reinforced." Gold for April delivery gained $5.70 to settle at $999.50 on the New York Mercantile Exchange, after earlier rising as high as $1,009 - a new trading record. The metal rose above $1,001 in aftermarket trading. Gold has gained nearly 20% this year amid the tumbling dollar, record-high crude prices and nervousness about the faltering US economy. Analysts say the metal could go even higher if the Federal Reserve continues its interest rate-cutting campaign when it meets on Tuesday. Lower interest rates can boost the economy but also tend to undermine the dollar, encouraging investors to buy hard assets like gold and silver. A weak greenback also makes dollar-denominated commodities like gold cheaper for overseas buyers. Other precious metals traded mixed Friday. Silver for May delivery gained 23.5 cents to settle at $20.655 an ounce on the Nymex, while May copper fell 0.30 cent to settle at $3.820 a pound. In energy markets, crude oil prices dipped modestly, closing lower for the first time in a week as the slide on Wall Street and US economic worries led to profit-taking. Light, sweet crude for April delivery fell 12 cents to settle at $110.21 on the Nymex, after rising earlier to just below its latest trading record of $111, set Thursday. Other energy futures rose Friday. April heating oil futures rose 2.17 cents to settle at a record $3.1465 a gallon after earlier setting a new trading record of $3.222 a gallon. April gasoline futures rose 0.66 cent to settle at $2.6894 a gallon. In agriculture markets, wheat, corn and soybean futures plunged amid expectations that the US economic downturn will dampen demand. Wheat for May delivery plummeted 52.5 cents to settle at $11.915 a bushel on the Chicago Board of Trade, while May soybeans lost 50 cents to settle at $13.5275 a bushel. May corn fell 10.25 cents to settle at $5.5925 a bushel on the CBOT.