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| Currency | US Dollar |
|---|---|
| British Pound to US Dollar | 1.661900 |
| Euro to US Dollar | 1.485000 |
| Japanese Yen to US Dollar | 0.011100 |
| Canadian Dollar to US Dollar | 0.930600 |
On a day that began with very little hope after the panicky sale of investment bank Bear Stearns (BSC, news, msgs) to JPMorgan Chase (JPM, news, msgs), the stock market ended today on something of a high note.
The Dow Jones industrials finished with a gain of about 21 points, 0.2%, to 11,972. And big losses in the Standard & Poor's 500 Index and the Nasdaq Composite Index were trimmed substantially.
The S&P 500 closed down 12 points, or 0.9%, to 1,277. The Nasdaq was off 35 points, or 1.6%, to 2,177.
The Dow had fallen 194 points after the open. The S&P 500 had been down as many as 31 points; the Nasdaq had been down as much as 57 points.
The rebound seemed to represent some investor confidence that the Federal Reserve and the Treasury Department were beginning to get a handle on the problems that big banks and Wall Street investment houses face.
The Fed's interest-rate-making body will meet Tuesday and is expected to cut its key short-term rate to perhaps as low as 2%.
But financial stocks were generally lower; the eight-worst S&P 500 performers today were financial stocks, starting with Bear Stearns, which fell 84% to $4.81.
At the same time, investors began to buy stocks that can benefit from a lower dollar, such as Johnson & Johnson (JNJ, news, msgs), up 2.2% to $64.04 and General Electric (GE, news, msgs), up 1.5% to $34.33.
Late in the day, there was buying in such key tech stocks as Hewlett-Packard (HPQ, news, msgs), Microsoft (MSFT, news, msgs) and Apple (AAPL, news, msgs) Hewlett-Packard closed up 1.1% to $46.42. Apple, which had been down as much as 3.2% in the early afternoon, recovered to a small gain at $126.73. Microsoft added 1.2% to $28.30. (Microsoft is the publisher of MSN Money.)
Internet stocks, however, had a crummy day. Google (GOOG, news, msgs) was down 4.1% to $419.87.
Some were suggesting that the rebound off the day's lows was a positive development, but there was still lots of skepticism that a bottom had been achieved.
Bulls can legitimately make the bottoming argument because the S&P 500 managed to close above 1,270 -- its low on Jan. 23 -- for the fourth day in the past five trading sessions. But the S&P did drop to as low as 1,257, and traders will watch that level going forward.
Markets around the world dropped more dramatically today: Japan's Nikkei 225 Index ($JP:100000018) closed down 3.7%, and Hong Kong's Hang Seng Index ($HSIX) slumped 5.2%. The FTSE-100 Index ($GB:UKX) in Britain was off 3.9%; the German Dax Index ($DE:DAX) fell 4.2%.
Investors fled to safety wherever they could find it. At the same time the dollar was lower, U.S. Treasury yields were lower; the yield on the 10-year Treasury note fell to 3.3% from 3.4% on Friday. Gold, meanwhile, jumped $3.10 an ounce in New York to $1,002.60, its first-ever close above $1,000. Gold is up 19% this quarter alone. Gold moved up as the U.S. dollar moved lower against the euro and the yen. In addition, the U.S. dollar index, which measures the currency against a basket of currencies, fell under 72 at 71.955.
Complicating the market today was selling in energy and metals stocks after oil and prices for metals other than gold broke this morning.
Crude fell 4.1% to $105.68 a barrel in New York; natural gas was off 7.8% to $9.10 per million British thermal units. Copper fell 3.7% to $3.685 a pound in New York.
ExxonMobil (XOM, news, msgs) was off 12 cents to $85.79. Freeport-McMoRan Copper & Gold (FCX, news, msgs) fell 6.9% to $94.61.
| Mon. | Fri. | Chg. | Month chg. | YTD chg. | |
|---|---|---|---|---|---|
| Crude oil (NYMEX) (per barrel) | $105.68 | $110.21 | -$4.53 | 3.77% | 10.11% |
| Heating oil (per gallon) | $3.0684 | $3.1465 | -$0.0781 | 8.05% | 15.81% |
| Natural gas (per million BTU) | $9.1000 | $9.8680 | -$0.7680 | -3.00% | 21.61% |
| Unleaded gasoline (per gallon) | $2.5045 | $2.6894 | -$0.1849 | -0.31% | 0.55% |
Bear Stearns dominates the talk
The Bear Stearns deal, however, was the big story of the day. The investment bank's shares had plunged Friday on reports that it was unable to meet its current obligations. The Fed stepped in with emergency aid to stave off a complete failure and worked over the weekend with the company and JPMorgan to cut a deal Sunday night.JPMorgan will buy Bear Stearns for $2 a share, less than 7% of the stock's $30 closing price on Friday and off 98.8% from its peak in January 2007.
Stock Charts (Year)
Bear Stearns
JPMorgan Chase
Lehman Bros.
Indeed, in an interview with CNBC, British investor Joseph Lewis, who may lose $900 million to $1.1 billion from the collapse, called the JPMorgan bid "derisory, and I don't believe shareholders will approve it."
JPMorgan shares were up 10.3% to $40.31. The stock was the best performer among the 30 Dow stocks. Twenty Dow stocks finished in the black today.
Other financial stocks, however, were weaker. Citigroup (C, news, msgs) was the weakest Dow stock, down 5.9% to $18.62, its lowest price since October 1998.
The Standard & Poor's Banking Index ($BIX.X) was down 1.4% to 228. The Amex Securities/Broker Dealer Index ($XBD.X) was down 10% to 141.
Along with Bear Stearns, Lehman Bros. (LEH, news, msgs) was off 19% to $31.75; it had been down as much as 48%. Goldman Sachs (GS, news, msgs) was down 3.7% to $151.02.
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An 'incredibly difficult time'
The deal values Bear Stearns at a mere $236 million; Bear Stearns' market capitalization was $3.54 billion at the end of trading on Friday and more than $20 billion in January 2007.Bear's shares collapsed Friday after the investment bank sought emergency assistance from JPMorgan and the New York Federal Reserve Bank after it nearly ran out of cash.
"The past week has been an incredibly difficult time for Bear Stearns. This transaction represents the best outcome for all of our constituencies based upon the current circumstances," CEO Alan Schwartz said in a prepared statement. "I am incredibly proud of our employees and believe they will continue to add tremendous value to the new enterprise."
- Wall Street Journal: Banks brace for deepening financial crisis
Maybe, but there were reports today that half of Bear Stearns' 14,000 employees will lose their jobs in the firm's collapse.
But the deal still won applause. This will "be perceived as a positive for the markets," E. William Stone, chief investment strategist at PNC Wealth Management, told Bloomberg News. "It puts a floor under all the financials. The longer-term thesis is that the Fed won't let good companies fail based on lack of liquidity and a crisis of confidence."
Bear won't announce its first-quarter earnings today after all. Last week, Bear had said it would report earnings after today's close.
Other players that had been reportedly interested in bidding for Bear Stearns included private-equity firms Kohlberg Kravis Roberts and J.C. Flowers. Had the deal with JPMorgan not come through, Bear probably would have had to file for bankruptcy protection.
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The status of a planned $1 billion investment in Bear Stearns by China's Citic Securities was up in the air.
The investment, which was announced in October but had not closed, would have given Citic about a 6% stake in Bear Stearns.
Bloomberg News reported that Citic canceled the investment, but spokesman Raymond Tang denied that report. "We are very unclear because we have lots of new things to study at the moment," Tang told Reuters.
Fed cuts discount rate
To try to stem the bleeding on Wall Street, the Federal Reserve on Sunday lowered the discount rate to 3.25% from 3.5% -- a move "to bolster market liquidity and promote orderly market functioning," a news release from the central bank said.The discount rate is the rate charged to banks and other depository institutions for borrowing short-term funds directly from their regional Federal Reserve Bank.
The Fed also said it approved the financing arrangement between JPMorgan and Bear Stearns and will fund up to $30 billion of Bear's "less liquid assets."
The central bank's Federal Open Market Committee meets Tuesday, and analysts now expect the Fed to lower the federal funds rate -- the rate banks charge each other -- by a full percentage point, to 2%. Analysts also expect the Fed to cut the discount rate again.
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The Fed also announced a new lending facility, where it will accept "a broad range of investment-grade debt securities" as collateral for primary dealers, including those that are not necessarily considered banks or depositary institutions.
"This is the first time since the Great Depression that the Fed has extended financing to nonbanks," Merrill Lynch North American economist David Rosenberg wrote in a note to clients today. "As with all the other liquidity measures, this facility does not deal with or remove the underlying credit issues that plague the financial markets. Ultimately, the Fed is hoping that the liquidity injections transcend beyond just the primary dealers' balance sheets into the broader market place."
"Today's moves by the Federal Reserve are the desperate acts of failing men," Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission, wrote in a note to clients late Sunday. "The threat of contagion and wholesale breakdown is on a scale of 1929."
Is Bear really only worth $2 per share?
The big question weighing on many people's minds today was how Bear Stearns, which was founded in 1923 and has managed to live through many market messes, could be bought for a measly $2 per share. Last week, Bear CEO Schwartz said that the company had a book value in the $80-a-share range, and the company was expected to report earnings of $1 per share this afternoon.The Bear Stearns building in Manhattan alone is worth about $1.2 billion, some analysts estimate.
Bear's prime brokerage business is worth $3 billion, and its asset-management business is worth $1.3 billion, Sanford Bernstein analyst Brad Hintz wrote in a note to clients this morning.
Analysts expressed shock at Bear's rapid slide.
"One reaction is shock that a company that reaffirmed its book value at around $84 on Wednesday can be worth $2 per share four days later on Sunday," Deutsche Bank analyst Mike Mayo said.
Another agreed: "For Bear's stock price to go to effectively zero, contrary to market expectations, even at the close on Friday, tells us that something is systemically very wrong and we're at a very dangerous moment," David Goldman, a portfolio strategist at Asteri Capital, told Bloomberg News.
Without the sale, Bear probably wouldn't have been open for business today, Goldman said.
| Mon. | Fri. | Chg. | Month chg. | YTD chg. | |
|---|---|---|---|---|---|
| Treasurys | |||||
| 13-week Treasury bill | 0.990% | 1.120% | -0.130 | -45.00% | -68.47% |
| 5-year Treasury note yield | 2.202% | 2.340% | -0.138 | -12.24% | -36.27% |
| 10-year Treasury note yield | 3.314% | 3.421% | -0.107 | -6.23% | -17.87% |
| 30-year Treasury bond yield | 4.282% | 4.348% | -0.066 | -3.12% | -3.97% |
| Currencies | |||||
| U.S. Dollar Index | 71.955 | 72.105 | -0.150 | -2.44% | -6.18% |
| British pound in dollars | $1.9996 | $2.0178 | -0.0182 | 0.48% | 0.52% |
| Dollar in British pounds | £0.5001 | £0.4956 | 0.0045 | -0.48% | -0.52% |
| Euro in dollars | 1.5741 | 1.5726 | 0.0015 | 3.70% | 7.70% |
| Dollar in euros | € 0.6353 | € 0.6359 | -0.0006 | -3.57% | -7.15% |
| Dollar in yen | ¥97.52 | ¥98.50 | -0.98 | -6.38% | -12.81% |
| Canadian dollar in U.S. dollars | $1.003 | $1.013 | -$0.0099 | -1.14% | 1.02% |
| U.S. dollar in Canadian dollars | $0.998 | $0.987 | $0.0105 | 1.05% | -1.00% |
| Commodities | |||||
| Gold | $1,002.60 | $999.50 | $3.10 | 0.31% | 19.64% |
| Copper | $3.6850 | $3.8280 | -$0.14 | -3.74% | 21.18% |
| Silver | $20.3000 | $20.6550 | -$0.36 | -1.72% | 36.06% |
| Crude oil (NYMEX) (per barrel) | $105.68 | $110.21 | -$4.53 | -4.11% | 10.11% |
Impact for Bear's Wall Street peers
"Bear Stearns is not the only big financial house in trouble," Morici wrote in his note. "The potential for contagion is real and menacing. The real questions are: Which of the big banks will be next to fail? How many more banks will fail? Will the whole system turn to panic if Citigroup unwinds?"One financial company that is feeling the heat is Lehman Bros.
On Friday, Lehman said it had arranged $2 billion in financing to help boost its capital position after worries emerged that Bear's problems would slam the company. Ratings company Moody's affirmed its rating on Lehman this morning but lowered its outlook to "stable," noting Lehman's "current exposure to commercial and residential real estate."
"Importantly, for all securities firms, the events of the past week highlight the sharp increase in confidence sensitivity associated with a key component of the securities industry's funding model -- repurchase or collateralized funding -- irrespective of the quality of the underlying collateral," Moody's Senior Vice President Blaine Frantz said in the ratings note.
Sandler O'Neill analyst Jeffery Harte told CNBC this morning that he doesn't think Lehman or any of Bear's peers will go under like Bear did, although he said that "liquidity crisis is definitely a risk that the brokers face."
Digesting the news
Observers were mixed in their assessments of the deal and its repercussions.There is good news and bad news this morning, Harte said: "The good news is the Fed is essentially stepping in and saying 'we're not going to let a large brokerage fail.' The bad news, without that, it appears that Bear Stearns would have failed last week. A major brokerage failing is not good news for the markets. Near term, the bad news has got to outweigh the good news."
Forbes magazine Publisher Steve Forbes told CNBC today that said he didn't think Bear had to go out of business. Bear was forced to write off mortgage securities -- a key portion of the company's overall business -- without enough actual performance data on and other problems. Regulators should suspend rules that require immediate write-downs until there's enough data to come up with rules that make more sense.
"When you're guessing, in a panic environment," he added, "disaster takes over."
But Morici had a much different view. "(JPMorgan CEO Jamie) Dimon is gambling, not investing. When the other shoe falls, shareholders will know who to blame," Morici wrote. "The hidden liabilities and potential for lawsuits at Bear Stearns are huge."
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