Stocks tumbled Friday, after an initial jump, following news that J.P. Morgan Chase and the New York Federal Reserve are jumping in to help Bear Stearns.
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." CNBC has learned that Bear is actively being shopped around, and not just to J.P. Morgan Chase.
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 sector's biggest decliners amid growing concerns as the bank is also involved with mortgage-backed securities. Interactive Brokers reported that Lehman's credit-default swaps widened by 65 basis points this morning right after the Bear Stearns news.
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. Interactive Brokers said this will help UBS, the European bank hardest hit by subprime, avert a legal battle with shareholders demanding an independent investigation.
Citigroup and J.P. Morgan were the Dow's top two 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 after the closing bell on Monday, Goldman Sachs and Lehman 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'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.
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.
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."
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 as it's already received two-thirds of that.
Kodak shares also rose 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.
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.
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 forecast was 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
TUESDAY: Fed meeting; Earnings from Goldman, Lehman
WEDNESDAY: Earnings from Morgan Stanley
THURSDAY: Visa IPO
FRIDAY: Financial markets closed for Good Friday holiday
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