After the sell-off, investors face a scary week

By Charley Blaine and Elizabeth Strott

A panicky day of selling ended Friday with investment bank Bear Stearns (BSC, news, msgs) likely to be sold and investors watching how the Federal Reserve and the federal government cope with continued stress in the financial markets.

The Dow Jones industrials finished the day down nearly 195 points, or 1.6%, to 11,951. The Standard & Poor's 500 Index was down 27 points, or 2.1%, to 1,288, and the Nasdaq Composite Index dropped 51 points, or 2.3%, to 2,212.49.

The market tumbled on news reports that Bear Stearns had obtained financing from JPMorgan Chase and the Federal Reserve Bank of New York. The report raised fears that problems in the credit markets were far worse than thought. Bear's shares plunged, and major rating agencies cut their ratings on the stock.

In addition, shares of Lehman Bros. (LEH, news, msgs) fell 14.6% to $39.26; investors feared the investment house may also experience Bear Stearns' problems. (Lehman later said it had arranged $2 billion in financing to strengthen its capital position.)

The Fed's Federal Open Market Committee will meet Tuesday and will probably cut its key short-term rates -- the federal funds rate and the discount rate -- by perhaps as much as 1 percentage point. The betting on Friday was for the Fed to cut the federal funds rate -- the rate banks charge each other for overnight loans -- to 2.25% from 3% now.

The idea of the rate cuts, coupled with the Fed's moves in recent weeks to inject billions of dollars of liquidity into the credit markets, is to stabilize the credit markets. If that works, the theory goes, longer-term rates should start to move lower. In spite of cutting the federal funds rate five times since September, mortgage rates have been moving higher and raising fears that a stabilization of the housing market might not come until late this year at the earliest.

Because of the big housing slump, many analysts say the U.S. economy is now in a recession that seems to be getting more serious. Even President Bush told the Economic Club of New York that the economy was "going through a tough time."

In fact, Harvard economist Martin Feldstein, who heads the National Bureau of Economic Research, told an investor conference in Florida on Friday that the slowdown could become the worst since World War II. The NBER dates business cycles.

Nonetheless, thanks to Tuesday's big rally that saw the Dow jump 417 points, the blue-chip index finished the week with a 0.5% gain. The S&P 500 was off 0.4%. The Nasdaq was unchanged. For the year, the Dow is down 9.9%. The S&P 500 is off 12.3%, and the Nasdaq is down 16.6%.

The market plunge came on a day when gold hit a new closing high of $999.50 an ounce in New York, up $5.70 from Thursday. Crude oil in New York finished down slightly at $110.21 a barrel, and the dollar fell again against major currencies, in part as global investors bailed out of the U.S. financial markets.

Will markets fall under January lows?

The markets came close on Friday to falling under their lows on Jan. 23 but ultimately bounced higher. The S&P 500's low on the day was 1,274.86, 4 points above the Jan. 23 low of 1,270.05.

Investors will spend the weekend wondering how markets around the world will open on Monday, although history suggests that Monday may be relatively quiet because of the Fed meeting on Tuesday.

But the new week will be fraught with risk. Major investment banks will report first-quarter results, starting with Bear Stearns on Monday, Goldman Sachs (GS, news, msgs) on Tuesday and Morgan Stanley (MS, news, msgs) and Lehman Bros. on Wednesday.

If the markets can stay above the January lows next week, one expert said Friday, a huge rally could be in the offing.

Barton Biggs of Traxis Partners told Bloomberg Television that the pessimism of the markets is overblown and is setting the market for a rally of perhaps 1,000 points on the Dow.

"It's crazy, and it's overdone, and this is the time to buy stocks around the world," Biggs said.

The markets for the week

	Close for week	Wk. ago close	% chg.	YTD. chg.
Dow Jones industrials	11,951.09	11,893.69	0.48%	-9.90%
S&P 500	1,288.14	1,293.37	-0.40%	-12.27%
Nasdaq Composite	2,212.49	2,212.49	0.00%	-16.58%
Russell 2000	662.90	660.11	0.42%	-13.46%
Crude oil per barrel	$97.91	$105.15	4.81%	14.83%
10-yr. Treasury yield	3.42%	3.54%	-3.39%	-15.22%
Gold per troy ounce	$999.50	$972.20	2.81%	19.27%

All eyes on Bear Stearns

The Fed, the Treasury Department and the Securities and Exchange Commission were all monitoring the Bear Stearns situation closely on Friday.

Bear Stearns, which had been one of the biggest promoters of securities backed by subprime mortgages, saw its stock price fall 47% to $30, the worst performance of any S&P 500 stock. The stock was down 57% on the week and down 82% from its January 2007 peak.

The investment bank had been forced to seek emergency assistance from JPMorgan Chase (JPM, news, msgs) and the New York Federal Reserve Bank after it nearly ran out of cash. Rating agencies Standard & Poor's, Moody's and Fitch Investors all cut their ratings on the stock.

JPMorgan and the New York Fed stepped in with a 28-day financing package because of fears that a Bear Stearns collapse would have devastating effects on the U.S. and global financial markets. The participants in the deal did not disclose the size of financing package. Because Bear Stearns is not a commercial bank, it couldn't borrow money from the Fed directly. Instead, JPMorgan borrowed the money from the Fed and lent it to Bear Stearns, securing the financing with Bear Stearns assets. JPMorgan Chase fell 4% to $36.54 on the day.

At the end of the day, the company said it has asked investment bank Lazard Frères to help it sort out its options for the future, a polite way of saying it had put itself up for sale. The betting, said Bloomberg News, was that Bear Stearns would be sold entirely or at least in part to JPMorgan Chase.

Financial stocks generally were battered by the Bear Stearns crisis, and the five worst performers in the index were financial stocks. After Bear Stearns, Lehman Bros. was the second-worst S&P 500 performer, falling 14.6% to $39.26.

Third worst was Washington Mutual (WM, news, msgs), down 12.7% to $10.59, after Moody's downgraded the stock to a notch above junk, citing the "rapid deterioration" of the U.S. housing market and $4 billion-plus in new capital that the company will need to raise to cover bad mortgages in 2008.

Citigroup (C, news, msgs) was the worst performer of the 30 Dow stocks, falling 6.1% to $19.78.

Boeing (BA, news, msgs) was the only Dow stock to show a gain, up 2.8% to $76.23. Only 29 S&P 500 stocks were higher, along with just 10 stocks in the Nasdaq-100 Index ($NDX.X).

Energy prices -- New York close

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$110.21	$110.33	-$0.12	8.22%	14.83%
Heating oil (per gallon)	$3.1465	$3.1248	$0.0217	10.80%	18.76%
Natural gas (per million BTU)	$9.8680	$10.2300	-$0.3620	5.19%	31.87%
Unleaded gasoline (per gallon)	$2.6894	$2.6828	$0.0066	7.05%	7.97%

Consumer confidence falls

Adding to market jitters Friday was a dismal report on consumer confidence.

The Reuters/University of Michigan survey on consumer confidence fell to a reading of 70.5 in March -- down slightly from a reading of 70.8 in February and the lowest reading since February 1992.

• Video: Survey shows US in a recession

"Consumer conditions have deteriorated dramatically since the end of last year," Lena Komileva, head of research at Tullett Prebon in London, told Bloomberg News.

"A recessionary labor market, tighter lending, negative housing equity and a higher cost of living are bearing down on the consumer."

CPI surprise in February

By midmorning on Friday, it was easy to forget that stocks looked set to open higher Friday after a report showed inflation might not be such a big worry.

The Consumer Price Index was unchanged in February, the Labor Department reported Friday; analysts had expected the CPI to rise 0.3%.

• Video: Inside the CPI report

Core prices were also unchanged last month, the report showed. Excluding food and energy prices, analysts had expected the core CPI to rise 0.2%.

The CPI rose 0.4% in January; the core rate had risen 0.3%.

The CPI report "allows the Fed to continue easing rates aggressively with a clear conscience," said Mark Zandi, chief economist at Moody's Economy.com, to Bloomberg News. "Inflation is a concern, but it's completely trumped by concerns about the contracting economy and fragile financial markets."

Oil and gold retreat after records

Profit taking pushed crude oil down slightly on Friday from Thursday's record close.

Meanwhile gold topped $1,000 an ounce, reaching $1,000.20 before falling back again. Gold had topped $1,000 an ounce in intraday trading Thursday.

"Supply and demand is not really the driver of gold prices," said UBS metal strategist Robin Bhar, to CNNMoney.com. "This is about global financial stresses."

"Gold is a non-interest-yielding commodity, so lower interest makes gold a more attractive commodity," stated Bhar.

The falling dollar and the weak U.S. economy have made the commodities a safe haven for investors. The Federal Reserve has lowered interest rates from 5.25% to 3% over the past six months, with more rate cuts expected.

Gold has risen nearly 40% since the Fed started its easing cycle in September.

While $1,000-an-ounce gold seems pretty pricey, gold hit $873 an ounce in 1980 -- which in Friday's terms, adjusted for inflation, would be about $2,400 an ounce.

Micro-hoo coming soon?

After weeks of silence, Microsoft (MSFT, news, msgs) and Yahoo (YHOO, news, msgs) finally met to discuss a possible merger.

The two companies met on Monday, The Wall Street Journal reported, to talk about Microsoft's $44 billion offer for Yahoo. (Microsoft is the parent of MSN Money.)

No bankers were present, so the two sides were just talking, the paper reported, and Microsoft presented its vision of what a combined company would look like.

Yahoo rejected Microsoft's $31-per-share deal on Feb. 11, but no other bidders have entered the picture.

• Video: Some buying opportunities

On Thursday, Time Warner's (TWX, news, msgs) AOL bought social-networking site Bebo for $850 million, deflating speculation that Yahoo could avoid Microsoft's carrot by teaming up in some way with AOL.

"To me, (the Bebo deal) speaks to the fact that Time Warner has its own plan, and it's a plan that doesn't involve making a bid for Yahoo," said analyst Crawford Del Prete of International Data to MarketWatch.com on Thursday.

• Top Stocks blog: Microsoft and Yahoo start to talk

Because Microsoft shares have fallen 12% since it made its Yahoo bid, the value of the Yahoo offer may be down to $42 billion. Yahoo shares had been trading at $19.18 the day before Microsoft made its offer.

Microsoft shares fell 2.3% to $27.96 Friday; Yahoo shares fell 2.9% to $26.71. Time Warner was off 3.3% to $14.03.

Carlyle Capital will survive, founder says

Carlyle Capital will get past its financial mess, co-founder David Rubenstein told Bloomberg News.

The bond fund, which is owned by private-equity firm Carlyle Group, caused a ripple of fear in the markets Thursday morning after telling investors that it had defaulted on $16.6 billion of its debts and that it expected lenders to take over its remaining assets.

"We have made a lot money with, and for, these banks and this is a hiccup in a 20-year relationship," Rubenstein told Bloomberg on Thursday. "We don't think any of them have any animus toward us, and we're not antagonistic toward them.'"

Carlyle's collapse triggered fears that the subprime mess was spilling into the prime mortgage market. Its portfolio was made up of AAA mortgages, rather than the risky subprime mortgages and collateralized debt obligations that have made most of the headlines lately.

"A year from now, hopefully people will say, 'Carlyle made a mistake,' or, 'the markets just moved against them,'" Rubenstein told Bloomberg. "We're going to try and do some things to make amends to investors."

"Someone somewhere has got to fail, and this is it,'' Andrew Wilkinson, an analyst at Interactive Brokers Group. told The New York Times. "I think there comes a point when you need to see some of this stuff get flushed out. The bad news just keeps getting deeper every day."

Short hits from the markets -- 4 p.m.

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.120%	1.300%	-0.180	-37.78%	-64.33%
5-year Treasury note yield	2.340%	2.509%	-0.169	-6.74%	-32.27%
10-year Treasury note yield	3.421%	3.534%	-0.113	-3.20%	-15.22%
30-year Treasury bond yield	4.348%	4.454%	-0.106	-1.63%	-2.49%
Currencies
U.S. Dollar Index	72.105	72.485	-0.380	-2.24%	-5.98%
British pound in dollars	$2.0194	$2.0338	-0.0144	1.48%	1.51%
Dollar in British pounds	£0.4952	£0.4917	0.0035	-1.46%	-1.49%
Euro in dollars	1.5689	1.5635	0.0054	3.36%	7.34%
Dollar in euros	€ 0.6374	€ 0.6396	-0.0022	-3.25%	-6.84%
Dollar in yen	98.99	100.30	-1.31	-4.97%	-11.50%
Canadian dollar in U.S. dollars	$1.011	$1.018	-$0.0066	-0.35%	1.83%
U.S. dollar in Canadian dollars	$0.990	$0.983	$0.0070	0.23%	-1.80%
Commodities
Gold	$999.50	$993.80	$5.70	2.81%	19.27%
Copper	$3.8280	$3.8400	-$0.01	-2.64%	25.88%
Silver	$20.6550	$20.4200	$0.23	2.47%	38.44%
Crude oil (NYMEX) (per barrel)	$110.21	$110.33	-$0.12	4.81%	14.83%