Deal rocks shares of financial firms
It could have been a lot worse.
Shares of many financial companies were pummeled Monday, but the stock market overall finished well above its lows a day after the collapse of Bear Stearns Cos. and the adoption of new measures by the Federal Reserve to combat the credit crunch.
A sudden sell-off in commodities and a continuing rush into Treasury bills, however, showed that markets remained on edge.
Today will bring another test of investors’ resolve: Fed policymakers meet and are expected to lower their benchmark short-term interest rate for the sixth time since August. Some analysts worried about the potential for disappointment in nervous markets if the Fed cuts its rate by less than a full point, to 2%.
On Monday the Dow Jones industrial average recovered from a 195-point drop just after the opening bell to end with a gain of 21.16 points, or 0.2%, to 11,972.25. Most broader indexes lost 1% to 2%.
Sellers swarmed at the outset of trading, reacting to the surprise news Sunday that JPMorgan Chase & Co. would buy ailing investment bank and brokerage Bear Stearns for a mere $2 a share.
Although the takeover was aimed at avoiding a potentially wrenching liquidation of the firm, the rock-bottom purchase price raised fresh doubts about the worth of other financial companies.
“There’s a great deal of fear -- some of it justified -- when you have a company whose stock a week ago traded around $70 and people decide it’s worth $2,” said Stanley Nabi, chief strategist at Silvercrest Asset Management in New York. “People are now saying, ‘I’m holding this stock or that stock. How much is it really worth?’ ”
Bear Stearns, a key player in the mortgage-backed-securities market, faced what in effect was a run on the bank late last week as some investors refused financial dealings with the company, fearing it might become insolvent because of mortgage-related losses.
On Monday investors fled shares of other banks and brokerages that they worried could be vulnerable if credit continues to tighten.
Shares of National City, the biggest bank in Ohio, dived $5.63, or 43%, to $7.52. Thrift Washington Mutual slid $1.35 to $9.24.
Brokerage Lehman Bros., a major dealer in bonds, sank as low as $20.25, then closed at $31.75, off $7.51, or 19%, for the day.
MF Global, a large trader in futures and options, slumped $11.30, or 65%, to $6.05. In a statement, the firm said it had “sufficient funding to conduct our business.”
The credit crunch also caught up with the high-flying commodities market.
In futures trading, oil, wheat, platinum, coffee and other commodities suffered sharp pullbacks that analysts said reflected sales by speculators who were raising cash to repay loans they had used to make their bets.
“Calls for cash are starting to take a toll on the last area of speculative enjoyment -- commodities,” said Philip Gotthelf, head of Equidex Brokerage Group in Closter, N.J.
Near-term crude oil futures slid $4.53 to $105.68 a barrel in New York. Wheat futures in Chicago tumbled 60 cents to $11.31 a bushel.
The Reuters/Jefferies CRB index of 19 commodities dropped 4.6%, cutting its year-to-date gain to 10.7%.
Prices of raw materials also may have been clipped by concerns that the U.S. economy could be headed for a severe recession that could slash demand, some experts said.
Worries about the economy may have helped gold buck the pullback in other commodities: Near-term futures closed above $1,000 for the first time, rising $3.20 to $1,001.40 an ounce.
The dollar’s weakness underpinned demand for gold. The greenback closed at 98.04 yen in New York, a 12-year low and down from 99.21 on Friday. The euro jumped to a record $1.573 from $1.567 on Friday.
The dollar’s woes were another sign of global investors’ unease at the state of the U.S. financial system as the housing market crisis worsens.
“Everyone’s looking for the next shoe to drop,” said Brian Edmonds, head of interest rates at brokerage Cantor Fitzgerald in New York.
Investors’ jitters were evident in another rush of money into Treasury securities. The three-month T-bill yield slid to 1.1% from 1.16% on Friday. The 10-year T-note yield fell to 3.31% from 3.44%.
The Fed on Sunday announced another in a series of steps to help ease credit, saying it would begin lending directly to strapped securities firms, rather than solely to commercial banks.
The Fed’s move, and the rescue of Bear Stearns by JPMorgan Chase with the Fed’s help, were intended to bolster confidence in the financial system.
But foreign stock markets were hammered Monday before U.S. trading began. Japan’s Nikkei 225 index fell 3.7%. In Europe most market indexes lost 3% to 4%.
On Wall Street, selling was heavy at the opening bell. A rally followed, then another sell-off, then another rally.
At the close the Standard & Poor’s 500 was down 11.54 points, or 0.9%, to 1,276.60.
The Nasdaq composite index dropped 35.48 points, or 1.6%, to 2,177.01.
Losers outnumbered winners by nearly 5 to 1 on the New York Stock Exchange as share volume reached its highest level since late January -- which had marked a short-term bottom in the market, leading to a brief recovery.
The market’s ability to bounce off its lows Monday gave some analysts hope that the selling was peaking for the moment.
“I was getting up in the middle of the night and looking at [stock market] headlines on my BlackBerry, hoping that the world was holding it together,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “Now I feel much more sanguine about the shape of our financial system.”
The big question looming today is how much the Fed will cut its benchmark rate, now 3%. Some analysts on Monday were betting on a 1-percentage-point reduction.
If policymakers cut less than a point, they could risk a backlash from investors, some experts warned.
Given markets’ delicate state, a drop of just half a percentage point “probably would be hard to get away with,” said Tony Crescenzi, bond strategist at Miller Tabak & Co.
Among Monday’s market highlights:
* JPMorgan Chase jumped $3.77 to $40.31 as investors cheered its deal to buy Bear Stearns. The latter plummeted $25.19 to $4.81.
JPMorgan Chase is one of the 30 Dow stocks, so its sharp advance helped the index.
* Elsewhere in the financial sector, Merrill Lynch fell $2.33 to $41.18 and Goldman Sachs dropped $5.84 to $151.02. Goldman and Lehman Bros. will report quarterly earnings today.
* Energy stocks were lower with oil prices. BP slid $2.20 to $62.03, Hess lost $3.37 to $95.67 and Chevron gave up $1.15 to $84.19.
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walter.hamilton@latimes.com
