A greater fear rises in the market
As the stock market limped Friday to the end of an especially dispiriting week, it became clear that the recent grim economic news might not be the biggest factor depressing stock prices.
Investors are now worrying that problems bubbling up in the markets for debt securities and financial derivatives could foreshadow a further deepening of the sub-prime mortgage crisis.
The concerns deal with whether bond insurers and others that have sold insurance-like derivative contracts on sub-prime securities can pay off if the bonds default.
If not, that could generate another round of losses for Wall Street firms that own such contracts, whether as a hedge against the risk of mortgage-linked bonds they hold or simply as a bet that such bonds would decline in value.
The fears were crystallized when Merrill Lynch & Co. took a $3.1-billion write-off Thursday to cover the risk that a large bond insurer might not make good on sub-prime hedges that Merrill had entered into.
Uncertainty about how bad the news will get is a standard feature of market downturns. But it is especially pronounced today, some experts say.
This helps explain why the fury in Washington to craft a $150-billion economic stimulus plan generated little enthusiasm on Wall Street.
“I don’t think it’s an economy issue at all. It’s a financial-system leverage issue,” said Robert Bissell, president of Wells Capital Management in Los Angeles. “You have the market locked up. People have no idea when it’s going to turn around, and the longer it goes, the worse it gets.”
For the week, the Dow Jones industrials lost 4%, the Nasdaq composite index fell 4.1% and the Standard & Poor’s 500 gave up 5.4%, its worst weekly showing since cratering 8% in July 2002. In the 13 trading sessions of 2008, the Dow has lost 8.8%, the S&P; is down 9.8% and the Nasdaq is off 12%.
On Friday, the Dow, which was up more than 180 points early in the session, fell 59.91 points, or 0.5%, to 12,099.30. The S&P; 500 fell 8.06 points, or 0.6%, to 1,325.19, while the Nasdaq fell 6.88 points, or 0.3%, to 2,340.02.
The question now is whether stocks can put together a so-called relief rally in the coming week.
Many investors have been expecting some sort of snap back from what they see as the market’s “oversold” condition, but the continued drumbeat of bad news has gotten in the way.
Michael Metz, chief investment strategist at Oppenheimer Holdings Inc. in New York, predicts a “very strong bounce” will start this week.
Others aren’t as sure about the timing but say the money that has been amassed in Treasury bonds and money market funds will at some point be diverted to stocks, propelling share prices higher.
“Once it becomes evident that most of the risks have been identified, then that will be a signal to all this money on the sidelines that it’s safe to come back in,” said Alan Gayle, senior investment strategist at Trusco Capital Management in Richmond, Va.
Gayle believes the majority of the market drop has already occurred, and says reasonable stock-price valuations reflecting fundamental strengths such as falling interest rates will attract investors as the year progresses.
But deep uncertainty remains about whether the problems that have stricken the sub-prime market could engulf other areas. “Investors are frightened -- and with good reason -- in that we’ve only seen the tip of the iceberg with credit problems,” Metz said.
“Sub-prime is only Act One,” he said. “The next act is auto loans and consumer credit. After that is home equity loans. After that is commercial real estate. After that come the private equity deals of the last two years at extraordinary levels of valuation and leverage.”
Among Friday’s highlights:
Declining issues outnumbered advancers by 2 to 1 on the New York Stock Exchange.
The yield on the benchmark 10-year Treasury note finished at 3.63%, unchanged from late Thursday. The dollar was mixed against major currencies, and gold rose. Oil climbed 44 cents to $90.57 a barrel.
The Russell 2,000 index of smaller stocks fell 7.39 points, or 1.1%, to 673.18, putting it down 4.5% for the week.
Advanced Micro Devices surged 73 cents, or 12%, to $7.07. The chip maker late Thursday reported a smaller-than-expected fourth-quarter loss.
Washington Mutual rose $1.09, or 8.8%, to $13.55 on speculation that the savings and loan would be acquired.
Fannie Mae fell $2.85, or 8.1%, to $32.15 after Morgan Stanley downgraded the mortgage finance giant, citing the risk of higher credit losses.
Schlumberger slid $2.99, or 3.6%, to $79.52. The oil field services giant posted its smallest profit gain in 17 quarters.
General Electric climbed $1.10, or 3.3%, to $34.31. Operating profit rose on higher sales overseas of jet engines, power turbines and locomotives.
IBM rose $2.30, or 2.3%, to $103.40 after giving its second upbeat report in a week, signaling that overseas sales will help overcome the U.S. slowdown.
Overseas, key stock indexes rose 0.6% in Japan and 0.4% in Hong Kong. Shares fell 1.3% in Germany and 1.3% in France, and edged down in Britain.
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