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Stocks End Mixed After Bear Scare

Sarina Penn

Stocks in the U.S. endured a chaotic session and ended mixed Monday, as the major averages rebounded from the early panic that ripped through the market following the swift downfall of Bear Stearns (BSC Quote).

The Dow Jones Industrial Average, down nearly 200 points in the morning, rallied to go positive. At the close, it was up 21.16 points, or 0.2%, at 11,972.25, aided by a 10.3% jump in JPMorgan Chase (JPM Quote), which agreed to buy Bear Stearns at a fire-sale price.

The broader averages closed with losses, but they had been deeper in the red. The S&P 500 was down 11.54 points, or 0.9%, at 1276.60, and the Nasdaq was off 35.48 points, or 1.6%, at 2177.01.

"It could have been a lot worse," said Peter Cardillo, chief market economist with Avalon Partners. "I think the fear factor is obviously quite high and will continue until we really get a handle on the credit markets, but the [Federal Reserve] is certainly throwing a lot of ammunition and a lot of lifesavers out there, and I think that's helping to spur some of the volatility."

Breadth was poor. Some 5.78 billion shares changed hands on the New York Stock Exchange, with decliners outpacing advancers by a 7-to-2 margin. The Nasdaq saw volume reach 2.38 billion shares as losers trounced winners 4 to 1.

When the market opened, New York stocks slumped amid worries that other firms could meet the same fate as Bear Stearns, one of Wall Street's most prominent institutions. Concern about Bear's viability peaked last week, and customer defections forced the 85-year-old firm to seek Fed-backed funding from JPMorgan on Friday.

Then, over the weekend, JPMorgan reached a deal to buy Bear for $2 a share -- a thin sliver of what the investment bank was worth last week, let alone a year ago, when it was trading around $150. In total, the buyout is worth $236.2 million. That compares with Bear's $4.08 billion market capitalization last week after losing nearly half of its value in a single session. Bear closed down 84% at $4.81.

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"Is it any surprise that someone imploded in one of the biggest credit crises in U.S. history?" asked Richard Yamarone, chief economist with Argus Research. "I think people would be naïve to think we could escape this without it happening to somebody."

Still, Bear's collapse was shockingly rapid, and the Fed followed it by cutting its discount window lending rate by a quarter-point to 3.25%. Simultaneously, the Fed said it will, for at least six months, let securities dealers borrow at the discount window in a manner similar to commercial banks. The central bank hasn't done this on a regular basis since the Great Depression.

These actions show that the Fed is "willing to do whatever it takes to get the liquidity crunch behind us," said Arun Raha, vice president and senior economist with Swiss Re.

Jason Pride, director of research at Haverford Investments, said it seems like the Fed "is doing everything it can" to prevent another failure among financials.

"We think it's a good thing that they're getting their arms around the entire system, instead of just the commercial banks," he said.

The Fed's policymaking arm, the Federal Open Market Committee, will meet Tuesday, and futures are pricing in a 100% chance that it will cut the fed funds target rate by a full point, nearly doubling from Friday's odds. The FOMC has already slashed the rate by 225 basis points since September in an effort to soften the market's fall as the credit crunch has intensified.

For his part, Yamarone predicts the gathering will only result in a half-point cut. "I just don't think the Fed can afford to cut its fed funds rate by 100 basis points with inflationary pressures mounting and the dollar in a freefall," he said. "Because at that point, it becomes a potential collapse."

Richard Bove, an analyst with Punk Ziegel, said on CNBC that the market is "getting to the crescendo of this financial crisis." He believes we will find out in the next four or five days whether the moves being taken by the Fed will hold the financial system in place, and expects that they will do so.

Raha agreed. "Based on the way the Fed has acted, and the liquidity with which it has responded, I do believe that the situation is likely to get better, and not worse."

Meanwhile, shares of Bear Stearns rival Lehman Brothers (LEH Quote) had an erratic session in the red, at one point sliding 48% to a 52-week low of $20.25, amid questions regarding its liquidity. Lehman itself called its cash position "very strong," according to reports. The stock ended down 19.1% at $31.75.

The downturn came after Moody's affirmed its A1 rating on Lehman's senior long-term debt, but lowered its outlook to stable from positive. At the same time, UBS downgraded Lehman to neutral from buy.

Nevertheless, Pride believes that Lehman will likely be saved from following Bear's path, thanks to the Fed's decision to allow investment banks to borrow at the discount window.

"And if it had been there before, it may have saved Bear, as well," he added.

The Amex Securities Broker-Dealer Index plunged more than 10% under the weight of Bear and Lehman, and the NYSE Financial Index gave back 2.1%.

Among individual names, Morgan Stanley (MS Quote) was down 8%, and Goldman Sachs (GS Quote) lost 3.7%. Merrill Lynch (MER Quote) slumped 5.4%, and Citigroup (C Quote) fell 5.9%.

Elsewhere in the space, ETFs-and-options broker MF Global (MF Quote) sank as much as 79% to $3.64 -- by far the stock's lowest point since its July 2007 initial public offering -- on rumors of customers pulling out funds and of ties to billionaire investor Joe Lewis, who was speculated to have lost big in the Bear Stearns collapse.

The blood-letting tapered off after the company declared that it has no exposure to subprime mortgages, and is "very well capitalized with $1.4 billion in a committed, undrawn credit facility." The firm also said Lewis is not one of its clients. Still, shares finished down 65.1% at $6.05.

In a speech Monday morning, President Bush acknowledged that times are "challenging," but said "our financial institutions are strong." He voiced support for the Fed's actions and said that the central bank will "continue to act decisively in a way that brings order to the financial markets."

The Bear-sparked tumult pushed to the backburner a disappointing industrial production report, which revealed a decline of 0.5% in February following three straight months of growth. The consensus called for a contraction of just 0.1%. Capacity utilization, however, registered at 80.9%, down from last month, and well below the point at which inflationary concerns would crop up. Estimates were for 81.3%.

Separately, the New York Federal Reserve said its Empire State Index, another manufacturing measure, indicated a severe contraction in March with a negative 22.2 reading. That nearly doubles from the prior month, whereas economists were looking for an improvement to minus 7.4. The index's break-even point is at zero.

Elsewhere on the economic docket, net foreign purchases came in at $62 billion for January, up from $56.2 billion in the prior month and $2 billion more than expected.

The dollar slid to another record low against the euro, bottoming at $1.5903 earlier. Against the yen, the greenback hit 95.76, the worst point in more than a dozen years.

Among commodities, crude oil reached a record high of $111.80 a barrel before pulling back to a penny gain at $105.69. Gold futures touched an all-time best of $1,033.90 an ounce earlier before retreating to $1,002.60, up $3.10 from the prior settlement.

Treasury prices were surging. The 10-year note was up 30/32 in price to yield 3.33%, and the 30-year bond gained 1-5/32 in price, yielding 4.29%.

Back in corporate news, lumber company Weyerhaeuser (WY Quote) rose 1.8% after saying it will sell its containerboard packaging and recycling business to International Paper (IP Quote) for $6 billion in cash. IP shares gave back 8.7%.

Also, CME Group (CME Quote) has finally struck a deal to buy out fellow commodities exchange Nymex (NMX Quote), agreeing to pay $9.48 billion in cash and stock. CME shed 7.6%, and Nymex surrendered 11.6%.

Yet another deal will see H&R Block (HRB Quote) sell the mortgage loan servicing business of its Option One Mortgage unit to billionaire investor Wilbur Ross. Shares of Block tacked on 5.1% at $18.36.

Overseas, Asian markets took a tumble overnight. The Nikkei 225 in Tokyo lost 3.7% to 11,788, and Hong Kong's Hang Seng Index plummeted 5.2% to 21,085. In Europe, the FTSE 100 in London, Germany's Xetra Dax and the Paris Cac all dropped 3.5% or more.