Friday, March 14, 2008

U.S. Stocks Fall, Led by Banks; Bear Stearns Drops Most Ever

By Eric Martin

March 14 (Bloomberg) -- U.S. stocks plunged for the third day this week after Bear Stearns Cos. required a bailout from the Federal Reserve and JPMorgan Chase & Co. to avoid collapse.

Bear Stearns, the second-largest underwriter of U.S. mortgage bonds, tumbled the most ever after the brokerage said it ran short of cash, spurring concern other banks lack funding. The announcement overshadowed economic reports showing inflation remained stable while consumer confidence beat forecasts. Lehman Brothers Holdings Inc., Citigroup Inc. and Bank of America Corp. also led declines as all 10 industry groups in the Standard & Poor's 500 Index fell.

The S&P 500 retreated 27.34, or 2.1 percent, to 1,288.14 and slid 0.4 percent in the week. The Dow Jones Industrial Average lost 194.65, or 1.6 percent, to 11,951.09. The Nasdaq Composite Index decreased 51.12, or 2.3 percent, to 2,212.49. Nine stocks fell for every one that rose on the New York Stock Exchange.

``What's worrisome here is the accumulation of revelations that are clearly shaking investor confidence,'' said Nick Sargen, who helps oversee more than $30 billion as chief investment officer at Fort Washington Investment Advisors in Cincinnati. ``This feeling of `What's the next shoe to drop?' has the market on edge. You put your finger in the dike and another leak springs.''

Stocks and the dollar have tumbled this year as widening credit-market losses reduced confidence in financial assets, sending gold, oil and wheat to records this month. The S&P 500 had been poised for its best week since the end of January before today after the Federal Reserve pumped $200 billion into the financial system to shore up banks and S&P predicted an end to subprime mortgage writedowns. The Dow added 0.5 percent in the week and the Nasdaq Composite was unchanged.

Bear Stearns

The S&P 500 is more than 17 percent below its Oct. 9 record and within 3 percentage points of a so-called bear market.

Bear Stearns, which triggered the collapse of the subprime- mortgage market last year when two of its hedge funds collapsed, dropped $27, or 47 percent, to $30. Options traders increased bets that the firm's survival is in doubt.

The retreat in Bear Stearns shrunk the company's market value to $4.1 billion, less than one-fifth the size of rival Lehman Brothers.

Lehman Brothers, the largest underwriter of U.S. mortgage bonds, tumbled $6.73, or 15 percent, to $39.26 after it obtained a $2 billion credit line from 40 banks. Implied volatility, a measure of how much investors are paying to insure against further stock-price losses, for Lehman options more than doubled.

'Pretty Big Problems'

Citigroup Inc., JPMorgan and Bank of America Corp., the three largest U.S. banks, each dropped at least 3 percent. Washington Mutual Inc., the largest savings and loan, lost $1.54 to $10.59.

The New York Fed agreed to provide Bear Stearns financing through JPMorgan for up to 28 days. After denying for three days that access to capital was at risk, Bear Stearns said today its cash position had ``significantly deteriorated'' amid what it called ``market chatter'' that it was facing a cash shortage.

``The fact that the issue is so serious that the New York Fed directly has to intervene demonstrates that there are pretty big problems here with pretty big uncertainties,'' said John Kattar, who oversees about $2 billion as chief investment officer at Eastern Investment Advisors in Boston.

Financial Slump

National City Corp., Ohio's largest bank, tumbled $1.86 to $13.15 after Moody's Investors Service downgraded its credit ratings because of likely mortgage-related losses. Moody's said the housing market downturn may cause further losses in National City's holdings of home loans and commercial real-estate debt. Another downgrade is possible, Moody's said.

The S&P 500 Financials Index lost 4.1 percent as all 92 members fell. The gauge has dropped 32 percent in the past year. Ambac Financial Group Inc., the world's second-largest bond insurer, led declines in the group with a 93 percent drop on concern the company will not have enough capital to pay claims.

The world's biggest banks and securities firms have posted $195 billion in asset writedowns and credit losses since the beginning of 2007 as the subprime mortgage market collapsed.

``Throughout this whole process, it's been broader, deeper and worse than we were told it was going to be,'' said Steve Lehman, who manages $2 billion at Federated Investors Inc. in Pittsburgh. ``It's a mess on unprecedented scale, at least that I know of.''

Clear Channel, Nvidia

Clear Channel Communications Inc. dropped 43 cents, or 1.2 percent, to $34.56 after slumping as much as 16 percent. The rescue of Bear Stearns heightened investor concerns that Thomas H. Lee Partners LP and Bain Capital LLC will fail to raise funds to complete the $19.5 billion acquisition of the largest U.S. radio broadcaster.

Nvidia Corp., the world's second-largest maker of computer- graphics chips, dropped $1.38 to $18.32, its lowest price since September 2006. JPMorgan cut the company's 2009 and 2010 profit estimates, saying it is facing a weaker market for graphics chips for desktop computers.

Semiconductor companies slid 3 percent as a group. Micron Technology Inc., the largest U.S. maker of memory chips, lost 35 cents to $6.14. Intel Corp., the world's biggest semiconductor company, decreased 62 cents to $20.66.

General Motors Corp. tumbled 5.4 percent to $19.22, the lowest since April 2006. The world's biggest automaker is recalling 208,000 Buick Regal and Pontiac Grand Prix sedans because of oil leaks that may lead to engine fires, Carolyn Markey, a spokeswoman for Detroit-based GM, said.

VIX Surge

The benchmark for U.S. stock option prices climbed to the highest in five years. The Chicago Board Options Exchange Volatility Index, or VIX, rose 14 percent to 31.16, the biggest advance in two months. Higher readings in the VIX, derived from prices paid for S&P 500 options, indicate traders expect larger share-price swings in the next 30 days.

Boeing Co. posted the only gain in the Dow average, adding $2.05 to $76.23 after Morgan Stanley upgraded the world's second-largest commercial-aircraft maker to ``overweight'' from ``equal-weight.''

Stocks had been poised to open the day higher after the Labor Department said consumer prices were unchanged in February, giving the Fed more leeway to cut rates.

The steady reading in the cost of living index followed a 0.4 percent gain in January, the Labor Department said. Economists surveyed by Bloomberg had forecast an advance of 0.3 percent. So-called core prices, which exclude food and energy, were also unchanged, the first time they didn't increase since November 2006.

Fed Bets

Traders now price in a 60 percent chance the Fed will cut its benchmark rate by a full percentage point to 2 percent by the central bank's March 18 meeting, an outcome they had ruled out yesterday, according to Fed fund futures. The rest of the bets are for a 0.75 percentage point cut from the current 3 percent.

The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 70.5 from 70.8 in February. The measure is the lowest reading since February 1992 and compares with an average 85.6 in 2007. Economists had forecast the confidence measure would fall to 69.3, according to a Bloomberg News survey.

The Russell 2000 Index, a benchmark for companies with a median market value 22 times smaller than the S&P 500, declined 2.5 percent. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, fell 2.1 percent to 12,992.93. Based on its retreat, the value of stocks decreased by $342 billion.

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