Most U.S. Stocks Drop on Bear Stearns Sale; Europe, Asia Plunge

By Eric Martin


March 17 (Bloomberg) -- Most U.S. stocks fell after careening between gains and losses, as investors rewarded JPMorgan Chase & Co. for its $2-a-share buyout of Bear Stearns Cos. and punished other banks on concern they are overvalued.

The Dow Jones Industrial Average recovered from a drop of 194 points to finish higher, led by JPMorgan's biggest gain in almost two months. The Standard & Poor's 500 Index dropped for a second day, sliding to within 2 percentage points of a bear market, as Lehman Brothers Holdings Inc. and Morgan Stanley tumbled.

The declines followed a selloff across Europe and Asia that pushed the Dow Jones Stoxx 600 Index to its lowest level since 2005 and the MSCI Asia Pacific Index to a third-straight drop.

``There is the chance that other banks are going to suffer serious damage here,'' Damon Barglow, who helps oversee about $1.7 billion at Eastern Investment Advisors in Boston, said in an interview with Bloomberg Radio. ``Clearly this is a crisis of historic proportions.''

The S&P 500 lost 11.54, or 0.9 percent, to 1,276.6 after falling as much as 2.4 percent. The Dow, which swung between gains and losses at least 27 times, advanced 21.16, or 0.2 percent, to 11,972.25. The Nasdaq Composite Index decreased 35.48, or 1.6 percent, to 2,177.01. Almost four stocks fell for every one that rose on the New York Stock Exchange.

Eight of 10 industry groups in the S&P 500 dropped as the benchmark for U.S. equities extended its decline from an Oct. 9 record to more than 18 percent. Energy shares lost 2.5 percent as a group after oil fell more than $4 a barrel on concern the economy has slipped into a recession.

Rate Cut

The Fed cut its discount rate on direct loans to commercial banks by 25 basis points to 3.25 percent yesterday, aiming to restore confidence in financial markets battered by more than $195 billion in asset writedowns and credit losses worldwide. Traders increased bets today that the Fed will lower its target rate for overnight loans between banks by at least 1 percentage point when policy makers meet tomorrow.

Bear Stearns plunged $25.19, or 84 percent, to $4.81 after JPMorgan agreed to buy the securities firm for $240 million, or about $2 a share. The Fed is providing financial backing to JPMorgan for the deal. JPMorgan gained $3.77, or 10 percent, to $40.31.

The New York Fed agreed on March 14 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 then that its cash position had ``significantly deteriorated.''

Lehman, the fourth-largest U.S. securities firm, dropped $7.51, or 19 percent, to $31.75. Goldman Sachs, the world's largest securities firm, dropped $5.84, or 3.7 percent, to $151.02.

`20-Year Lows'

UBS AG downgraded shares of Goldman and Lehman to ``neutral'' from ``buy,'' saying the liquidity squeeze will get worse before it gets better.

``Valuation will likely test 20-year lows rather than 10- year lows,'' analysts including Glenn Schorr and Mike Carrier wrote in a report today.

Shares of banks may fall by half, Oppenheimer & Co.'s Meredith Whitney said. The analyst, who correctly predicted Citigroup Inc. would cut its dividend, wrote in a report that financial shares will tumble as investors focus on ``tangible book value,'' resulting in lower valuations.

Goldman, Morgan Stanley and Lehman may post further write- offs when they report first-quarter results this week, the Financial Times reported. U.S. investment firms and commercial banks are expected to announce more than $9 billion in additional losses in the first half, the newspaper said, citing Deutsche Bank AG analysts.

Europe, Asia Slide

Europe's Dow Jones Stoxx 600 Index sank 4.6 percent. The MSCI Asia Pacific Index tumbled 2.7 percent. Hong Kong's Hang Seng Index lost 5.2 percent to the lowest since August. UBS, Europe's largest bank by assets, posted its biggest drop in more than nine years, slumping 14 percent in Switzerland.

``This is definitely not the kind of thing you want to wake up to on a Monday morning,'' Peter Sorrentino, who helps manage $15 billion at Huntington Asset Advisors in Cincinnati, said in an interview with Bloomberg Television. ``The financials hopefully will be able to put in a bottom here in the near future. Without that, the rest of the market's really held hostage by this.''

Financials Drop

Morgan Stanley retreated $3.17, or 8 percent, to $36.38. Merrill Lynch & Co., the third-largest securities firm, dropped $2.33, or 5.4 percent, to $41.18. Citigroup, the biggest U.S. bank, declined $1.16, or 5.9 percent, to $18.62.

National City Corp., Ohio's biggest bank, fell the most in 24 years, while Washington Mutual Inc., the largest U.S. savings and loan, tumbled to its lowest since 1995 on waning prospects for takeovers.

Analysts including Richard Bove of Punk Ziegel & Co. have said share declines spurred by losses on home loans have made Washington Mutual and National City takeover targets. The price for Bear Stearns cast doubt on the value of other companies tied to mortgage lending.

National City lost $5.63, or 53 percent, to $7.52. Washington Mutual retreated $1.35 to $9.24.

Financial shares in the S&P 500 lost 1.5 percent as a group to the lowest level in almost five years.

Freeport-McMoRan Copper & Gold Inc., the world's second- largest producer of copper, dropped $7 to $94.61 as copper plunged the most in almost eight weeks on renewed concern that a U.S. recession will curb global demand for metals.

Energy companies dropped after crude fell $4.53, or 4.1 percent, to $105.68 a barrel. Exxon Mobil Corp., the largest U.S. oil company, fell 12 cents to $85.79 and Chevron Corp., the second-largest, dropped $1.15 to $84.19.

Bonds Rally

Treasuries rose and the three-month bill rate plunged to the lowest since the late 1950s. Gains in two-year securities drove yields to the lowest level in almost five years.

Futures contracts on the Chicago Board of Trade show traders are betting the central bank will slash its target interest rate by at least 1 percentage point tomorrow from 3 percent. Traders are pricing in 16 percent odds of a 1.25 percentage point cut in the rate to 1.75 percent, a result they had ruled out last week.

Ambac Financial Group Inc., the world's second-largest bond insurer, tumbled 81 cents, or 13 percent, to $5.41. FGIC Corp., the fourth-largest bond insurer, reported a fourth-quarter net loss of $1.89 billion amid a decline in the value of securities backed by subprime mortgages that the company guaranteed. MBIA Inc., the biggest, decreased 14 cents, or 1.3 percent, to $10.80.

Economy Watch

Industrial production in the U.S. dropped in February for the first time in four months, the Federal Reserve said. Production at manufacturers, mines and utilities fell 0.5 percent, according to the Fed, more than the 0.1 percent decrease estimated by economists in a Bloomberg survey.

Merck & Co. added 88 cents to $41.85. The company's scientists used a new method to find a group of genes that act together in networks of people to spur obesity, researchers reported in the journal Nature. Johnson & Johnson rose $1.39 to $64.04.

The announcement of more than $18 billion in takeovers, the most since Microsoft Corp. offered $44.6 billion for Yahoo! Inc. on Feb. 1, failed to halt the market's skid.

CME Group Inc., the world's largest futures market, agreed to acquire Nymex Holdings Inc. for $9.4 billion to add benchmark oil and natural gas futures to the contracts it offers. CME dropped $36.85, or 7.6 percent, to $449.20. Nymex Holdings Inc., operator of the world's largest energy market, tumbled $11.04 to $84.30.

Weyerhaeuser Co. added $1.09 to $63.06. International Paper Co., the world's largest forest-products maker, agreed to buy packaging, recycling and containerboard units from Weyerhaeuser for $6 billion to expand in North America. International Paper dropped $2.79, or 8.7 percent, to $29.47.