Stocks tumbled Friday, after an initial jump, as news that J.P. Morgan Chase and the New York Federal Reserve are jumping in to help Bear Stearns sunk in.
It was a wild ride even before the opening bell rang. Futures had been pointing lower, then bounded higher after a CPI report, which has been described as "bizarre" and even "absurd," showed no inflation last month. Futures rocketed still higher right after the Bear Stearns loan news emerged. When the market opened, stocks followed through with a jump, then fell sharply as investors digested the Bear Stearns news.
Bear Stearns shares plunged in heavy trading, with volume about five times the daily average, amid concern that J.P. Morgan and the New York Fed had to come to its rescue. The agreement will provide Bear Stearns with short-term funding to help restore confidencein the firm. Bear Stearns said the loan, which will come from the New York Fed via J.P. Morgan, will be for an initial period of up to 28 days, helping to boost the firm's liquidity. Bear Stearns also said it's in talks with J.P. Morgan about "permanent financing or other alternatives."
Rumors had been swirling this week about liquidity problems at Bear Stearns. The company attempted to play down the rumors for most of the week, going so far as to say that the firm had no liquidity problems, but in the press release Friday, Bear Stearns CEO Alan Schwartz said, "our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations."
Bear Stearns "got money, we should be relieved. Where did they get it? The Federal Reserve, lender of last resort," Art Cashin, director of floor operations at UBS Financial Services, told CNBC. "That, I think, prompted some of the sellers to say, 'Wait a minute. This isn't over yet.' "
"I don't think any name, no matter how lofty or industrious, can be beyond consideration at this point," Stephen Pope, chief global market strategist at Cantor Fitzgerald, said. "It's just staggering."
Financial stocks took a beating amid those very concerns -- that there are more shoes to drop. The S&P 500 financial index was down nearly 3 percent.
Lehman Brothers was among the hardest hit in the sector. Citigroup and J.P. Morgan were the Dow's top two decliners. Bank of America , Merrill Lynch and UBS also declined.
Earnings reports are due out next week from the brokerage firms, which should keep things interesting. On the schedule are Goldman Sachs and Lehman on Tuesday, Morgan Stanley on Wednesday and Bear Stearns on Thursday.
The consumer-price index came in unchangedfor February, the Labor Department reported. Excluding volatile food and energy costs, core CPI was also unchanged. Economists had expected the gauges to tick higher by 0.3 percent and 0.2 percent, respectively.
The detail of the CPI report that's raising the most eyebrows is the 0.5 percent drop in the energy component, even as the front-month crude-oil contract rallies to a new high just about every day.
"Initial look at it is kind of bizarre," Robert Macintosh, chief economist at Eaton Vance Management in Boston, told Reuters. "I don't know why you don't see inflation here. It must be a faulty measurement system -- it makes no sense whatsoever."
"This is the most absurd number I have ever seen," Tom Sowanick, chief investment officer at Clearbrook Financial in Princeton, N.J., told Reuters, calling out the energy drop in particular. "These numbers aren't believable. In the real world, nobody would believe today's figures.
"Now we can all go on imagining there's no inflation and the Fed can continue pretending that the rate cuts aren't going to come at a cost. So the party goes on," Michael Darda, chief economist at MKM Partners LLC in Greenwich, Conn., told Reuters.
The CPI report "opens plenty of scope for the Fed to stand and deliver on Tuesday," when it next meets on interest rates, Pope said. He now sees the Fed cutting rates by a whole percentage point, up from his prior view of three-quarters of a percentage point. "The dragon on the block that needs to be slayed is recession. Its twin brother, inflation, can wait for another day."
The University of Michigan said its consumer-confidence index was at 70.5 in a mid-March reading, compared with 70.8 at the end of February. Economists had been expected the gauge to drop to 69.5.
The market has been so riled up by the CPI and Bear Stearns news that comments by the head of the National Bureau of Economic Research seemed to go unnoticed.
NBER President Martin Feldstein said the U.S. has entered a recession that could be "substantially more severe"than recent ones.
And, before news of its own troubles broke, Bear Stearns said that S&P 500 financial companies will probably write down another $35 billion to $75 billion in the first quarter.
On Thursday, stocks finished higher after Standard & Poor's offered some relief on the write-down front, saying that the end of subprime mortgage write-downs is in sight.
"This has got to be the most skittish and suicidal bunch of shorts that I have ever seen in 45 years," Cashin said. "Many of these people are just out of Pampers ... they haven't traded a bear market and watched bear-market turns."
In early-morning trading the dollar was mixed, slipping against the yen but up slightly against the euro and the pound.
Oil prices retreated from $110 a barrel, while gold futures were higher, approaching $1,000 an ounce.
On the retail front, Target is in discussions with J.P. Morgan to take a 50 percent stake in the discount retailer's credit card business, the Wall Street Journal reported.
Coming Up Next Week:
MONDAY: David Paterson to take over as NY governor
TUESDAY: Fed meeting; Earnings from Goldman, Lehman
WEDNESDAY: Earnings from Morgan Stanley
THURSDAY: Earnings from Bear Stearns, Visa IPO
FRIDAY: Financial markets closed for Good Friday holiday
Send comments to cindy.perman@nbcuni.com.