Stocks Slump on Subprime Worries

Major indexes each tumbled more than 1% Friday. One pro wondered whether the hoopla over the Blackstone IPO signaled a market top

Major stock indexes finished an erratic week sharply lower, as higher energy prices and worries over the health of hedge funds and mortgage derivative markets dampened investor sentiment. A huge, successful IPO from big buyout firm Blackstone (BX) wasn't enough to inject optimism into equity markets. Treasury prices rose, but the yield on the benchmark 10-year note remains well above 5.00%, ahead of next week's Federal Reserve policy meeting.

On Friday, the Dow Jones industrial average slumped 185.58 points, or 1.37%, to 13,360.26. The broader S&P 500 index fell 19.63 points, or 1.29%, to 1,502.56.

The tech-heavy Nasdaq Composite index was lower by 28 points, or 1.07%, to 2,588.96.

Rebalancing of the S&P 500 and Russell indexes may have added to market volatility, according to Standard & Poor's MarketScope.

What was behind the market's malaise? Market players remain worried about Bear Stearns' (BSC) subprime mortgage fund fiasco worsening.

According to an Associated Press report, Bear Stearns confirmed it will bail out one of its troubled hedge funds with $3.2 billion in secured loans, but the Wall Street firm sought to convince the broader market its troubles are "relatively contained". Bear said it stepped in to save the Bear Stearns High-Grade Structured Credit Fund because market uncertainty made it "difficult" to unwind the fund's assets -- mostly securities backed by risky mortgage loans.

Some traders were disturbed China's stock market plunged 3.29% overnight amid speculation the country's central bank would raise rates to cool off its red-hot economy and stock market.

Roger Volz, chief technical strategist for Swiss American Securities, says the market may be suffering from a case of summertime jitters arising from factors such as interest rate pressures, crude oil's rise, a cloudy future earnings outlook, and additional subprime fallout. In addition, Volz says that traders are fretting that the highly touted Blackstone IPO may prove to be "a topping signal" for the market.

There were no significant economic reports on Friday's calendar. On next week's economic docket, traders will be awaiting the outcome of the Federal Reserve's policy meeting. The markets will be keen to see how the post-meeting statement characterizes economic conditions. With the economy picking up, inflation still elevated, but housing still in the dumps, Wall Street is looking for some clues on which way, if anywhere, interest rates may be headed.

"We continue to expect that the [Fed's] next move will be downward, but not until 2008. The current 5.25% funds rate is above our estimate of the neutral rate, and we believe that the Fed will eventually have to cut back to neutral," wrote S&P chief economist David Wyss in a weekly note.

In energy markets Friday, July WTI crude oil futures rose 49 cents to $69.14 as the Nigerian workers' general strike finished its third day

amid little hope for a quick end to the walkout.

Among stocks on the move in Friday's session, Blackstone's partnership units were trading 18% above their offering price on their first day of NYSE trading. The manager of the world's second-largest buyout fund raised $4.13 billion in the largest U.S. initial public offering since 2002.

Jabil Circuit (JBL) was higher after the company said third quarter profit of 23 cents a share, better than the 20 cents expected.

Macy's (M) shares moved higher amid newswire reports that the retailer received a buyout offer of $52 per share from a team of three private-equity shops: KKR, GS Capital Partners, and Providence.

Pacific Ethanol (PEIX), VeraSun (VSE), and Aventine (AVR) were among stocks of ethanol producing companies seen higher after the U.S. Senate passed an energy bill that would raise fuel efficiency standards.

CORUS Bankshares (CORS) was higher after the company said it will pay a one-time dividend of $1 a share to shareholders of record as of July 18.

Celsion Corp. (CLN) was higher, while Boston Scientific (BSX) was lower after Boston Scientific bought Celsion's technology for enlarged prostates for $60 million.

Hexcel (HXL) was up a bit after the company sold its U.S. Electronics, Ballistics & General Industrial unit to JPS Industries for $62.5 million.

Hologic (HOLX) was lower after agreeing to acquire closely held BioLucent Inc. and its MammoPad breast-cushion business for $70 million in cash and stock.

European indexes finished lower Friday. In London, the FTSE 100 index was off 0.43% to 6,567.4. In Paris, the CAC 40 index was down 0.11% to 6,023.25. The DAX index in Frankfurt was lower by 0.19% to 7,949.63.

China-led volatility was again evident in Asian stock markets Friday. The Shanghai stock index fell 3.29% to 4091.45 on speculation the government will raise interest rates to tame a stock-market boom and cool the economy. AFP reported fears of a liquidity crunch sparked by companies' new listing plans and after the government announced Tuesday that it would slash tax incentives for thousands of exports ranging from toys to cement.

Japan's Nikkei 225 index fell 0.28% to 18,188.63. In Hong Kong, the Hang Seng index gained 0.21% to 21,999.91.

Treasury Market

Treasuries recovered smartly from opening losses Friday to close higher, supported in part by a flight to safety amid stock market weakness.

The 10-year Treasury note rose modestly in price to 95-05/32 for a yield of 5.23%. The 30-year bond rallied to 92-17/32 for a yield of 5.25%.