After months of credit worries, the moment finally arrived when it was time for Wall Street to fling open the closet door and confront the monster -- well, in this case, the Bear.
Bear Stearns became the first big bank to fall victim to the credit crunch, announcing that it was going to receive emergency funding from the New York Federal Reserve via J.P. Morgan.
The news sent Bear Stearns shares into a freefall and the Dow Jones Industrial Average on a pit-in-the-stomach rollercoaster drop. The blue-chip index shed 1.6 percent, but amazingly, after this week of gyrations, managed to finish up about 0.5 percent from where it ended last Friday.
It's hard to see past this Bear-induced haze, but the Dow's gain came from two spectacular rallies this week: one on Tuesday, when stocks turned in their best performance in five years after the Fed announced a liquidity plan to loosen the credit crunch and the second on Thursday after Standard & Poor's said there's an end in sight to all of this write-down madness. Those two days helped offset losses the rest of the week thanks to general credit worries, oil's ascent above $111 a barrel and the big finale, the Bear Stearns bailout.
"This has got to be the most skittish and suicidal bunch of shorts that I have ever seen in 45 years," Art Cashin, director of floor operations at UBS Financial Services, told CNBC. "Many of these people are just out of Pampers ... they haven't traded a bear market and watched bear-market turns."
Friday marks the 30th triple-digit close for the Dow so far in 2008. For those of you keeping score at home, that would be 18 negative and 12 positive. The Dow is now down nearly 10 percent for the year.
The Nasdaq lost 2.3 percent in today's bloodbath but in a dazzling statistical feat, finished unchanged -- literally -- for the week at 2212.49. The tech-heavy index is down about 17 percent on the year.
The S&P 500 index dropped 2 percent today, but is off only about 0.4 percent on the week. Since the beginning of the year, the index has lost more than 12 percent.
You had to know we were in for a wild ride when futures were going crazy before the opening bell even 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 implications of the Bear Stearns bailout.
Bear Stearns shares plunged 47 percent, with volume more than 20 times the daily average as investors, though relieved for some much-needed help for Bear Stearns, worried that things had gotten so bad that the Fed, for the first time since the Depression, had to bail out a brokerage firm.
The move was Bear Stearns' biggest one-day decline ever and the volume, with 186 million shares traded, was the largest ever for any one stock on the New York Stock Exchange. The stock is now down 83 percent from its record high of $171.51, set on Jan. 12, 2007.
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." CNBC has learned that Bear is actively being shopped around, and not just to J.P. Morgan Chase.
Standard & Poor's and Fitch cut some Bear Stearns' credit ratings on Friday afternoon. Fitch downgraded its credit ratings on Bear Stearns four notches, citing the firm's "rising risk profile that has impeded its access to traditional funding sources."
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," Cashin said. "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 finished down more than 4 percent.
Lehman Brothers, one of the sector's biggest decliners, tumbled nearly 15 percent as "the most acute contagion from the liquidity disease afflicting Bear Stearns today appears to be festering [at] Lehman Brothers," Rebecca Engmann Darst, an equity-options analyst at Interactive Brokers, wrote in a research note.
American depositary shares of Swiss bank UBS also skidded after the company said it will soon release the findings of an internal probe into its exposure to the U.S. subprime-mortgage mess. And, CNBC learned late Friday that UBS recently tried to sell its PaineWebber brokerage unitin an effort to drum up cash but failed to find the right buyer.
Citigroup and J.P. Morgan were among the Dow's top decliners. Bank of America and Merrill Lynch also declined.
Earnings reports are due out next week from the brokerage firms, which should keep things interesting. On the schedule are Bear Stearns, which bumped up its report to after the closing bell Monday. (Bear's report had initially been scheduled for Thursday.) Goldman Sachs and Lehman report on Tuesday and Morgan Stanley on Wednesday.
Thornburg Mortgage shares advanced, amid all the bloodshed in financials.
'Absurd' Inflation Report
The Fed's move to intervene with Bear Stearns wasn't the only extraordinary news Friday.
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 raised 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.
The report "is kind of bizarre," Robert Macintosh, chief economist at Eaton Vance Management in Boston, told Reuters, "it makes no sense whatsoever."
Tom Sowanick, chief investment officer at Clearbrook Financial in Princeton, N.J., went one further, telling Reuters, "This is the most absurd number I have ever seen."
"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 today that comments by the head of the National Bureau of Economic Research got swept under the rug a bit.
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.
General Motors fell sharply after the biggest U.S. auto maker announced the recall of more than 200,000 Buick Regal and Pontiac Grand Prix sedans amid a defect that could cause the cars to catch fire. GM instructed owners not to park these cars in their garages until they get the car fixed.
Meanwhile, a former GM executive was indicted over an alleged kickback scheme involving bulk aluminum sales. Daniel Bealko, GM's global commodity manager for lightweight metals between 1996 and 2003, is accused of taking kickbacks totaling $5.4 million from an Illinois metals dealer from the sale of GM's bulk aluminum.
Boeing Is Dow's Only Advancer
Boeing was the lone blue chip advancing on the Dow after Morgan Stanley upgraded its rating on the stock to "overweight" from "equal-weight," saying most of the bad news for Boeing had already been priced into the stock but not the long-term positives.
Boeing's 787 aircraft could be delayed by another three to five months, analyst Heidi Wood wrote in a note to clients, but that's already factored in. Wood says it's feasible that Boeing could log orders for 600 aircraft this year -- it's already received two-thirds of that.
Kodak was one of the top gainers on the S&P 500 after Citigroup raised its rating on the stock to "hold" from "sell." The stock has been hammered in the past few years as the photography giant was criticized for falling behind the shift to digital. On Friday, Kodak announced a licensing agreement with Korean LCD-panel maker LG Display, allowing LG to use Kodak technology in its displays for cellphones, portable media players and small televisions.
Micron Technology fell 5.4 percent after Caris cut its price target on the chip maker to $6 from $6.50 and kept its below-average rating on the stock. The whole sector, which has taken a hit amid concerns about demand, declined, with the Philadelphia Stock Exchange semiconductor index dropping 3 percent.
On the retail front, Target is in discussions with J.P. Morgan for the brokerage to take a 50 percent stake in the discount retailer's credit-card business, the Wall Street Journal reported.
AnnTaylor shares skidded after the women's clothing chain reported it swung to a loss in the fourth quarter, hurt by a restructuring charge. The company's first-quarter and full-year forecasts came in below analysts' expectations.
AnnTaylor also became the latest retailer to say it woud stop reporting same-store sales on a monthly basis, citing volatility. Macy's , Sears and Home Depot are among the nearly dozen retailers that have recently discontinued issuing monthly sales reports.
Coming Up Next Week:
MONDAY: David Paterson to take over as NY governor; Earnings from Bear Stearns; NY and Chicago Fed reports; Industrial Production; NAHB housing report
TUESDAY: Fed meeting; Earnings from Goldman, Lehman; PPI; Housing starts
WEDNESDAY: Morgan Stanley earnings; Visa IPO; Crude inventories; New York Auto Show
THURSDAY: Weekly jobless claims; Philly Fed report; FedEx earnings; Bond market closes early
FRIDAY: Financial markets closed for Good Friday holiday
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