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Bear's Woes Wallop Wall Street

Sarina Penn

Stocks in New York tumbled Friday as traders fretted that a funding crisis at Bear Stearns (BSC - Cramer's Take - Stockpickr) could mean more trouble is yet to come for the financial sector.

The Dow Jones Industrial Average slumped 194.65 points, or 1.6%, to 11,951.09, and the S&P 500 dropped 27.34 points, or 2.1%, to 1288.14. The Nasdaq Composite sank 51.12 points, or 2.3%, to 2212.49.

The declines ensured the erasure of all of the gains from a massive rally Tuesday , when the Federal Reserve's plan to inject $200 billion worth of liquidity into the market sent the Dow up more than 400 points. For the week, the Dow lost 2.6%, and the S&P sank 0.4%, though the Nasdaq managed to roughly break even.

The story of the day Friday was Bear Stearns (BSC - Cramer's Take - Stockpickr), whose shares lost nearly half their value after Alan Schwartz, president and chief executive of the brokerage, said Bear's "liquidity position in the last 24 hours had significantly deteriorated."

That prompted the company to get emergency funding from JPMorgan Chase (JPM - Cramer's Take - Stockpickr) that will be backed by the New York Federal Reserve bank. The move comes just days after Schwartz said Bear had ample liquidity.

Bear Stearns' stock plummeted 47.4% to $30, as more than 186 million shares changed hands.

"Everyone's hoping for a solution to the credit problem, and this is evidence that we're not near the end of it," said Charles Rotblut, senior market analyst with Zacks Investment Research. It's also troubling, he said, that Schwartz made such a quick reversal from his confident position of earlier this week, and that the situation closely follows recent margin calls at a Carlyle Capital fund and at Thornburg Mortgage (TMA - Cramer's Take - Stockpickr).

"The last thing the Fed wants is uncertainty, and Bear just us gave a huge dose of uncertainty," Rotblut said.

Shortly after the Bear news came out, the Fed announced that it is "monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system." The central bank said its board had unanimously approved Bear's financing by JPMorgan.

"I think this is just another in a series of earthquakes and tremors going through the stock market, and it's shaken investor confidence in the structure of the global banking system," said Fred Dickson, senior vice president and market strategist with D. A. Davidson. "It makes investors wonder, 'who's next?'"

The NYSE Financial Sector Index plummeted 3.6%, and the KBW Bank Index slid 4.2%.

The Amex Securities Broker-Dealer Index took a 8.6% freefall as it was weighed down heavily both by Bear and fellow investment bank Lehman Brothers (LEH - Cramer's Take - Stockpickr), which closed down 14.6%. According to reports, Lehman's 5-year credit-default swaps, or the cost of insuring its debt for five years, have widened by some 65 basis points to 4.65% of principle.

Elsewhere in the sector, Citigroup (C - Cramer's Take - Stockpickr), Goldman Sachs (GS - Cramer's Take - Stockpickr), Morgan Stanley (MS - Cramer's Take - Stockpickr) and Washington Mutual (WM - Cramer's Take - Stockpickr) fell between 5% and 13%.

Lehman, Goldman, Morgan and Bear are all due to report earnings next week.

"It seems we're in the eye of the storm," said Dickson. "The question is, how long will this process continue? The Bear news probably won't be the only shock this quarter."

Breadth for the session was poor. About 5.26 billion shares changed hands on the New York Stock Exchange and some 2.55 billion traded on the Nasdaq, as decliners outran advancers by a 4 to 1 margin.

Amid the angst, Treasury prices were leaping as investors sought a safe haven. The 10-year note was up 23/32 in price to yield 3.44%, and the 30-year bond gained 1-11/32 in price, yielding 4.36%.

As for commodities, crude oil hit an all-time high, as it has done every trading session this week, this time at $112.75 a barrel. But it also closed lower for the first time since Monday, by 12 cents at $110.21.

"I think over the immediate term it's hard to see the fundamentals weakening enough to penetrate the financial community's obsession with oil," said Richard Mueller, director of the oil practice at Energy Security Analysis. "Crude prices have really disentangled themselves from the fundamentals in the past few weeks."

Puncturing the bubble in the short term, he believes, could only happen through "extremely unlikely" events, such as the U.S. government deciding to release oil from the strategic petroleum reserve, or the cooling down of tensions in Nigeria. In the latter case, he noted, that would free up 500,000 to 600,000 barrels of good-quality crude a day.

Gold, which reached $1,000 an ounce for the first time on Thursday, careened back above that psychological benchmark to a high of $1,009 before easing to $999.50, up $5.70 from the last close.

The Bear situation overshadowed a report from the Labor Department that the February consumer price index was unchanged from the prior month, on an overall and core basis. Year over year, the core number, which strips out food and energy, rose 2.3%, while the headline number added 4%.

The core CPI figure, a key measure of U.S. inflation, is the first since November 2006 to show a halt in ballooning month-to-month prices. Year over year, it showed the slowest growth in four months.

Inflationary concerns are particularly important for investors at this point as they anxiously await the next Federal Reserve meeting on March 18. The Federal Open Market Committee, the Fed's policymaking arm, is expected to cut the fed funds target rate by as much as 75 basis points.

Since last summer, the Fed has lowered rates by 225 basis points in an attempt to reinvigorate the economy. Just days before the central bank gathering, a new Wall Street Journal poll is showing that more than 70% of 51 economists surveyed believe the economy is already in a recession. The respondents, on average, predicted that the unemployment rate will rise to 5.5% by December from the current 4.8%.

Elsewhere on the economic docket, the University of Michigan's preliminary March consumer sentiment index registered a reading of 70.5, a full point better than expected, though slightly worse than February's 70.8 reading.

Back on the corporate side, The Wall Street Journal reported that Microsoft (MSFT - Cramer's Take - Stockpickr) and Yahoo! (YHOO - Cramer's Take - Stockpickr) management met on Monday to discuss Microsoft's takeout bid for the first time since the Internet portal operator rejected it in January.

Also, Dow component General Motors (GM - Cramer's Take - Stockpickr) said it's recalling roughly 208,000 Buick Regal and Pontiac Grand Prix vehicles harboring a defect that can lead to oil leaks and, subsequently, fires. Shares of GM lost 5.4%.

Among analyst actions, Credit Suisse upgraded Exxon Mobil (XOM - Cramer's Take - Stockpickr) to outperform from neutral and raised its price target on the stock to $102 from $100, but the stock was still down 1.3% at $85.91.

Other notable moves included Morgan Stanley upgrading Boeing (BA - Cramer's Take - Stockpickr) to overweight from equal weight, after which shares tacked on 2.8%. Harley-Davidson (HOG - Cramer's Take - Stockpickr) was not as fortunate, however, losing 3.8% after the motorcycle maker was removed from a top picks list at Citigroup.

That came as the U.S. dollar edged to another record low against the euro at $1.5686. And, after falling past the 100-yen mark yesterday for the first time in a dozen years, the greenback continued hovering around that level today, fetching 99.08 yen.

Overseas markets were sinking. Tokyo's Nikkei 225 lost 1.5% overnight, and the Hang Seng Index in Hong Kong ticked down 0.3%. In Europe, London's FTSE 100 lost 1.1% and Germany's Xetra Dax surrendered 0.8%, erasing earlier gains following the drop in the U.S.