17 March 2008

Monday morning delights

Stocks down, but off lows

NEW YORK (CNNMoney.com) -- Stocks cut losses Monday morning, with the Dow briefly turning higher, as shares of JP Morgan Chase rallied on bets that its bargain basement purchase of Bear Stearns was a good move for the company.

Bond prices surged, lowering corresponding yields, as investors sought the comparative safety of government debt. The dollar plunged to a 12-1/2 year low versus the yen and hit another all-time low versus the euro.

The Dow Jones industrial average (INDU) was down about 0.2% 90 minutes into the session. The broader Standard & Poor's 500 (SPX) index tumbled 0.8%, and the Nasdaq composite (COMP) shed 1.2%.

Stocks tumbled at the open after the sale of Bear Stearns and emergency moves by the Federal Reserve exacerbated fears about the fallout in financial markets.

But the declines were not as aggressive as analysts had been expecting, and select financial shares managed to bounce back as the morning continued.

Bear Stearns. Stocks tumbled Friday on news that Bear Stearns needed emergency funding to avoid a collapse, and fears about the financial sector deepened over the weekend.

On Sunday, JP Morgan Chase agreed to buy Bear for just $2 a share, or $236 million. That's less than 4% of Bear Stearns' value at the close of trading on Thursday. On Friday, Bear shares plunged 47% to close at $30 a share. One year ago, the stock was worth nearly $160. (Full story).

Bear Stearns shares tumbled 84% to less than $5 a share on Monday. But JPMorgan Chase, a Dow component, rallied 10.2%.

Federal regulators accelerated the deal-approval process and the Federal Reserve provided $30 billion in funding, the latest in the central bank's series of drastic steps to protect the financial markets amid the housing and credit crises.

Also on Sunday, the Fed cut the discount rate, a short-term bank lending rate, to 3.25% from 3.5%, as a means of making more cash available to strapped banks. The move occurred just two days ahead of the Fed's regularly scheduled policy meeting.

The central bank could cut the fed funds rate, a consumer lending rate, by as much as a full percentage point at that meeting, traders estimate. The fed funds rate currently stands at 3%.

The Fed also announced Sunday it had created another lending facility that allows big Wall Street firms access to short-term funding.

A variety of financial stocks initially tumbled as investors wondered which company would be next to face a fate similar to that of Bear Stearns, with current speculation turning to Lehman Brothers.

However, by mid-morning, select financials had turned higher, helping the broader market trim losses.

In global trade, Asian markets plunged and European markets fell in afternoon trading.

Other markets. U.S. light crude oil for April delivery fell $3.31 to $106.90 a barrel on the New York Mercantile Exchange after touching an all-time high near $112 in electronic trading.

COMEX gold for April delivery added $13 to $1,012.50 an ounce after hitting an all-time high of $1,017.50 an ounce earlier.

TSX slumps as market gloom deepens
Last Updated: Monday, March 17, 2008 | 12:30 PM ET
CBC News

The Toronto Stock Exchange was deep in negative territory Monday, with jittery investors worried about the depth of the problems in the global financial system.

The S&P/TSX composite index tumbled 300 points to 12,953 at noon ET. That amounted to a slight recovery from its worst level of the morning, when the benchmark index was down was much as 385 points.

Every sector except the gold and health-care group was lower, led by a 2.8 per cent drop in the financials group.

All six of the big banks hit new year-to-date lows. CIBC dropped $2.71 to $57.19; TD fell $1.86 to $59.43; BMO slid $1.10 to $39.07.

Energy stocks fell as oil prices retreated from an overnight record high above $111 US a barrel. Crude futures were trading at $107.15 US, down $3.06 US.

The gold sub-index gained 0.7 per cent. The April gold futures contract was up $17 to $1,016.50 US an ounce, off its overnight high of $1,033.90 US an ounce — a record high.

Bear Stearns collapse spooks markets
On the NYSE, shares of Bear Stearns plunged 85 per cent to $3.81 US as its collapse reached its full magnitude. A week ago, the stock had been trading at $70 US a share.

On Sunday, rival investment bank JP Morgan bought Bear Stearns for $2 US a share in stock after Bear Stearns faced a huge liquidity crisis that required an emergency bailout. Bear Stearns had been a major player in the imploding world of subprime mortgages.

Shares of another investment bank, Lehman Bros., slid 23 per cent as rumours swirled that it might be the next to face a liquidity crisis.

In a statement, Lehman said its cash position was "strong."

The Dow Jones industrial average was down 115 points to 11,836. Shares of JP Morgan — a component of the Dow — jumped nine per cent, helping to keep the Dow from sliding further.

There's widespread speculation the U.S. Federal Reserve will drop its key overnight lending rate by as much as a full percentage point on Tuesday.

U.S. President George W. Bush moved to reassure panicked financial markets Monday.

"We've taken strong, decisive action," Bush said after a White House meeting with U.S. Treasury Secretary Henry Paulson.

In a rare Sunday move, the Fed cut its emergency lending rate to financial institutions by a quarter of a percentage point to 3.25 per cent and expanded the list of financial institutions that can access money at that rate.

"These steps will provide financial institutions with greater assurance of access to funds," Federal Reserve chairman Ben Bernanke told reporters in a conference call late Sunday.

Central banks around the world — including the Bank of Canada — have pledged to inject more than $200 billion US into the global financial system to ease the credit crunch.

While the impact of the credit crunch has been much more muted in Canada, financial stocks in this country have tumbled by 20 to 40 per cent from their highs last year as many banks reported writedowns from credit problems.

It's amazing how the entire financial sector is deluding themselves into believing everything is manageable. Another bailout? Where is all this Fed money coming from? An essential firesale on Bear Stearns? An emergency fed rate change on the weekend? A predicted 100 base-point drop in the lending rate tomorrow?

Sure, there are fundamentals that are still solid, but it looks like the equity markets are going to continue taking one beating after another for some time to come yet. The Fed will keep throwing money at the problems, but this is only temporary and devastating to the American dollar at the same time. I would surmise that at this point, inflation is a minor irritant in the whole scope of things. In fact, if everything priced in USDs gets inflated, it will appear to look like it's worth more on paper...something especially poignant to those home owners in the U.S. who are losing more value on their investments by the day.

"We've taken strong, decisive action."

Yeah, George, the Fed certainly took decisive action. In fact, this is the only action they could take, so no doubt it's decisive. If JP Morgan hadn't scooped up Bear Stearns over the weekend and the assets were going to auction (has JPM shot themselves in the foot with this buy? The only thing making the putrid carcass of Bear Stearns palatable was a $30B flavor package from the Fed), can you imagine what would've unfolded this week? Meltdown, that's what. The Fed's still frantically bucketing water out of the leaky liferaft. Here's hoping it's big enough to stay ahead of the increasing leaks in the walls.

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