Bear Stearns Crisis Eclipses Stocks' One-Day Rally

Sunday, March 16, 2008

The Standard & Poor's 500-stock index fell last week after a cash crisis at Bear Stearns overshadowed the U.S. stock market's biggest one-day rally in five years.

Shares of Bear Stearns, the fifth-largest U.S. securities firm, fell 57 percent for the week. On Friday, the Federal Reserve Bank of New York and J.P. Morgan Chase gave it a 28-day lifeline. Financial shares, which rose the most in eight years after the Fed announced additional measures to help banks cope with mortgage losses, fell 1.9 percent.

"This whole thing is a vicious cycle that could be longer than anyone expects," said Eugene C. Sit of Sit Investment Associates in Minneapolis. "The fears are the economy will be significantly impacted and earnings will be lower than most people imagine."

The S&P 500 ended the week down 0.4 percent after a 2.1 percent drop Friday. Its 3.7 percent rally on Tuesday from an 18-month low was sparked by the Fed's expansion of its securities lending program.

The Dow Jones industrial average posted a 0.5 percent gain for the week, led by Caterpillar, which raised its sales forecast for 2010. The Russell 2000 index, a measure of companies with a median market value 95 percent less than those in the S&P 500, rose 0.4 percent.

Bear Stearns, the second-biggest underwriter of U.S. mortgage bonds and one of the most active traders, said its cash position had "significantly deteriorated." Earlier in the week, chief executive Alan D. Schwartz said the 85-year-old firm's "liquidity cushion" was sufficient.

Bear Stearns, Lehman Brothers, Goldman Sachs and Morgan Stanley are scheduled to report first-quarter results this week.

Treasury yields and the dollar fell as traders priced in higher odds that the Fed, whose next scheduled monetary policy meeting is on Tuesday, will lower its benchmark interest rate by as much as a full percentage point, to 2 percent, after five cuts since September.

The two-year note's yield closed below 1.50 percent for the first time since March 2004, and the 10-year note's yield fell to 3.44 percent, within 0.01 percentage point of the lowest since June 2003.

The Treasury will auction $24 billion worth of three-month bills and $22 billion worth of six-month bills tomorrow. They yielded 1.18 percent and 1.30 percent, respectively, in when-issued trading. The Treasury will sell one-month bills Tuesday.

-- Bloomberg News

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