After a weekend which saw the implosion of a venerable U.S. investment firm, its sale to another Wall Street titan at a rock-bottom price, emergency liquidity actions undetaken by the Federal Reserve on a Sunday night, and worldwide jitters about a speading credit crisis, perhaps the most remarkable thing about Monday's session is that the U.S. stock market didn't fall off a cliff.
Indeed, while exchanges in Europe suffered hefty losses, major U.S. stock market indexes closed mixed as bargain hunters purchased selected issues, primarily in the blue-chip and technology
arenas, following an earlier equity sell-off. Trading was volatile as investors digested news of JPMorgan Chase (JPM) acquiring Bear Stearns (BSC) for $2 per share, and the Federal Reserve cutting the discount rate and taking steps to expand lending to big financial firms.
On Monday, the Dow Jones industrial average finished higher by 21.16 points, or 0.18%, at 11,972.25.
But the strength in select blue chips was not shared by the broader market. The S&P 500 index fell 11.54 points, or 0.9%, to close at 1,276.60.
The tech-heavy Nasdaq composite index was the biggest loser among the major market benchmarks, declining 35.48 points, or 1.6%, to 2,177.01.
The VIX index, widely regarded as a fear index for the stock market, was 3.5% higher at 32.24.
Amid active trading, 26 stocks declined in price for every five that advanced on the New York Stock Exchange. On the Nasdaq, the ratio was 22-7 negative.
Notable stocks posting gains in Monday's session: JPMorgan, Johnson & Johnson (JNJ), American Express (AXP), Coca-Cola (KO), IBM (IBM), and Apple (AAPL).
Meanwhile, Treasury bond prices soared. Crude oil futures plunged while gold futures
edged higher. The dollar index weakened.
The market's attention now turns to the Federal Reserve's policy statement at 2:15 pm EDT Tuesday.
Traders woke up Monday to consider a vastly changed Wall Street landscape: Distressed investment bank Bear Stearns agreed to sell itself for $2 a share on Sunday to JPMorgan Chase (JPM).
The stock had closed Friday at $30.85. The deal valued the one-time Wall Street powerhouse at just $240 million -- just a fraction of its market capitalization of about $3.5 billion at the close of trading Friday -- and its $20 billion valuation in January, 2007.
Bear Stearns shares plunged 84% Monday to $4.81. JPMorgan shares gained 10% to $40.31.
"The Fed is treating Bear as if it were a large failed bank," says S&P Economics. Bear Stearns employees were reportedly bitter that the Fed opened its discount window to other firms after JPMorgan’s agreement to buy the company.
The ramifications of the deal were still being considered on Monday. The Wall Street Journal reports many bankers are steeling themselves for the global financial crisis to both last longer and grow deeper, a shift in mood that could magnify the potential for upheaval in markets and economies world-wide.
Meanwhile, the Federal Reserve, a key player in facilitating the Bear-JPMorgan deal, took some steps over the weekend to ease the stress on financial markets -- its first weekend move in nearly 30 years. The U.S. central bank cut the discount rate on Sunday to 3.25% from 3.5%, and announced that it will lend to the 20 primary dealers that buy Treasury securities directly from it -- a tool not used since the Great Depression. The Fed will also provide up to $30 billion to JPMorgan to help it finance the purchase of Bear Stearns.
The Fed is widely expected to cut its benchmark interest rate, the Fed funds rate target, by a full percentage point on Tuesday to 2.0%.
The Fed faces a dilemma, says Action Economics: whether to cut rates by 50, 75, or 100 basis points. "[T]oo much too soon opens the door [that] the FOMC runs out of ammo, while policymakers will fear disappointing the markets and exacerbating global market anxieties" with a lesser rate cut.
According to Tobias Levkovich, chief U.S. equity strategist for Citigroup, the counterparty risk issue, which developed both rapidly and meaningfully, forced the New York Fed to come in and provide stability through JP Morgan. "Yet, we suspect that investors remain fearful that other weaker securities firms could follow this path, with extreme concern over financial institutions now," he wrote in a note Monday.
"With the very strong likelihood of even more evidence of recessionary conditions and likely forthcoming declines in domestic industrial activity due to credit pressures, we expect earnings to fall year over year in coming quarters but sell-side consensus numbers remain too optimistic," he adds. Citi's economists predict the Fed will trim the fed funds rate by 100 basis points this week.
"At some point, financial assets will grow sufficiently to give the banking sector the capacity it needs to lend at a pace that supports economic expansion," says Tony Crescenzi, chief bond market strategist for Miller Tabak. "Capital is needed in order for banks to absorb losses, add assets onto balance sheets that were once off the books, and hold loans that were once sold to the marketplace. Money supply growth will eventually make this possible."
Investors were nervously eying shares of Lehman Brothers Monday. According to a Dow Jones Newswires report, DBS Group sent an email to traders reversing earlier instructions not to enter new transactions with Lehman, citing a person familiar with the matter. Lehman shares dropped 19% on the session, after having been down over 40% earlier.
Financial firms outside the investment banking sector posted negative news as well. Shares of specialty broker MF Global (MF) plunged nearly 65% amid market rumors about its solvency. MF said its clients continue to show strong support and its counterparty relationships are sound. The company said it is seeing no impact on its repo lines, and that it has no exposure to subprime mortgage-backed securities.
Radian Group (RDN) said in a Form 10-K filing, which had been delayed pending completion of the company's fair value process relating to insured collateralized debt obligations in its financial guaranty business, that it had widened its fourth quarter loss to $721 million, or $9.03 per share, from its Feb. 15 report of a loss of $618 million, or $7.74 per share. Radian shares were down nearly 13% Monday.
PMI Group (PMI) posted a $12.51 fourth-quarter loss per share, vs. $1.19 EPS one year earlier, as the company's equity in losses from FGIC and a net loss in its U.S. mortgage insurance operations offset flat revenues. The company cut its quarterly dividend 77%, from 5.2 cents per share to 1.25 cents. PMI shares fell 10%.
A gloomy run of economic data didn't help matters Monday. U.S. industrial production fell 0.5% in February, well below the -0.1% expected and after a 0.1% increase in January. Capacity utilization fell to 80.9% from 81.5% in January. Manufacturing production fell 0.2% in February from a flat reading the month before, while utilities fell 3.7% to erase the 2.2% increase previously.
The U.S. Empire State manufacturing index plunged to -22.23 in March after falling more than 20 points in February, to -11.72. This was much worst than the increase to -6.0 that markets had expected.
There was one economic bright spot Monday: The U.S. deficit on current account, the broadest measure of international trade, narrowed to $172.9 billion in the fourth quarter from $177.4 billion in the third. The consensus was for a widening to $182.7 billion. The deficit on goods widened to $208.1 billion from $200.5 billion, because of higher oil prices.
However, this was offset by a widening of the services surplus to $30.2 billion from $28.0 billion and of the surplus on income to $33.0 billion from $21.3 billion.
The news was better than expected, but is old from the standpoint of the market, and is unlikely to reverse Monday's plunge in the dollar, says S&P Economics.
John Ryding, chief U.S. economist for Bear Stearns, wrote in a note Monday that “with the velocity of events picking up markedly since the middle of last week, we expect the Fed to cut the funds rate by 100-basis-points tomorrow (a call we adopted on Friday) in addition to the funding facility that was announced for primary dealers.”
With the Fed meeting and financial markets in flux, it is not certain investors will respond much to Tuesday’s data on the consumer price index and housing starts for February.
The dollar index, which plunged to a record low 70.698 earlier Monday, was off 0.33 to 71.28 Monday amid speculation the Fed, European Central Bank, and the Bank of England might take some joint action to stabilize a market jolted by U.S. and global securities and banking problems.
April April crude oil futures, which surged to an $111.80 high overnight, plunged $4.67 to $105.68 as the financial crisis is likely to push economy further in the hole and reduce demand for commodities, according to S&P MarketScope.
April gold futures rose $2.50 to $1002.50 per ounce, well down from a high of $1017.50 earlier in Monday's session.
Outside the financial sector, Illinois Tool Works (ITW) lowered its first quarter EPS guidance due to two special charges with an estimated after-tax effect of 22 cents per share; the company now forecasts first quarter EPS from continuing operations of 50 to 56 cents. Excluding these two special charges, ITW's operating results for the first quarter are expected to be at the high end of its previous forecast of 72 to 78 cents.
Amid the market tumult, some good old-fashioned M&A managed to work its way into Monday's news flow. CME Group (CME) agreed to acquire NYMEX Holdings (NMX). Under terms of the deal, NYMEX shareholders will receive total consideration equal to 0.1323 shares of CME Class A common stock and $36.00 in cash for each share of NYMEX stock outstanding, or an aggregate of about 12.5M shares of CME Class A common stock and cash of $3.4 billion.
Meanwhile, Weyerhaeuser (WY) announced the sale of its containerboard packaging and recycling business to International Paper (IP) for $6 billion in cash, subject to post closing adjustments. Taking a tax benefit into account, the net purchase price for IP is about $4.6 billion. Weyerhaeuser expects to use a substantial portion of the after-tax proceeds from the sale to pay down debt.
H&R Block (HRB) signed an agreement to sell the mortgage loan servicing business of its Option One Mortgage Corp. unit to an entity sponsored by WL Ross & Co. LLC, a private equity firm. Based on Jan. 31 values, the formula purchase price would generate proceeds of about $1.1 billion.
European indexes were pummeled Monday amid fresh fears about the health of the global financial system. In London, the FTSE 100 index fell 3.86% to 5,414.4. In Paris, the CAC 40 index declined 3.51% to 4,431.04. Germany's DAX index shed 4.18% to 6,182.30.
Asian markets fell as fears from the U.S. financial crisis rippled across the globe. Japan's Nikkei 225 index fell 1.54% to 12,241.60. In Hong Kong, the Hang Seng index declined 0.29% to 22,237.11.
Treasuries rallied sharply on back of the Fed's surprise 25 basis-point reduction in the discount rate to 3.25% and JP Morgan's agreement to acquire Bear Stearns for a paltry $2 a share. The 10-year note jumped 40/32 to 101-17/32 for a yield of 3.31%. The 30-year bond surged 46/32 to 101-15/32 for a yield of 4.29%.