MARKET SNAPSHOT: Stocks Look To Strengthen Gains After Bear Stearns Drama
Friday March 21st, 2008 / 22h18
By Nick Godt Stocks will enter the final week of the first quarter with investors hoping to build on nascent gains scored after the near-collapse and subsequent bailout of investment firm Bear Stearns. Supportive actions by the Federal Reserve, a stronger dollar, and a plunge in commodities prices all seemed to mark a key turn in the credit crisis gripping markets. "The Bear Stearns story was kind of like the turn-around everybody was waiting for," said Paul Nolte, director of investments at Hinsdale Associates. "In any crisis, things keep getting from bad to worse until something breaks. In this crisis, something did break and that was Bear Stearns." After a week rocked by even wilder swings than those witnessed since the start of the year, stocks recovered to post their first weekly gains in four weeks, even if the week was shortened by the Good Friday holiday. The Dow Jones Industrial Average (DJI) rallied 3.5%, the broad S&P 500 index (SPX) rose 3.3%, and the tech-heavy Nasdaq Composite (RIXF) gained 2.1%. "There are lots of signs that we were very oversold," said Barry Ritholtz, CEO and director of equity research at Fusion IQ. "In a normal cycle, those periods become great buying opportunities." In times of crises, "the same metrics don't apply," Ritholtz said. But "it's highly likely that we'll have a bounce over the next few weeks, until first-quarter earnings start coming out in April. That will test whether earnings are holding up as well as analysts are hoping." Bear shocker Global markets first went into a tail-spin after as news emerged that Bear Stearns (BSC) was near collapse. On Monday, the Fed backed a deal for JP Morgan Chase (JPM) to buy Bear Stearns for $236 million, or a mere $2 a share. The 85-year-old investment firm, whose mounting losses linked to bad home loans marked the onset of the credit crisis last summer, saw its shares collapse 84% on Monday. Yet, the market managed to surmount the trauma on Monday, throwing on some fireworks on Tuesday, after the Fed delivered a 75-basis-point cut in its key interest rate. The Dow rallied 420 points, or 3.5%, its best one-day gain since July of 2002. Along with the Bear Stearns bail-out and a set of extraordinary measures to boost liquidity in convulsing credit markets, the Fed's move on rates -- aimed at boosting the ailing U.S. economy down the road -- seemed to provoke another positive development for stocks. Dollar firms, commodities plunge In cutting the Fed funds rate to 2.25%, the central bank refrained from giving the market everything it wanted. After the Bear Stearns drama, markets were expecting the Fed to cut rates by a full point to 2%. The Fed showing restraint in cutting rates, while also expressing renewed concerns about inflation risks, providing some limit on how many dollars the central bank was ready to flood the system with. With the dollar back bouncing from record lows and holding firm throughout the week, most dollar-denominated commodities, from crude oil to gold and wheat saw some of their biggest drops in years, after rallying since last August, when the credit crisis began exploding into the open. "Commodities have had a great run, but the action by the Fed seems to be helping the dollar hold firm. That means we may be seeing the end of the dollar devaluation run in commodities," said Marc Pado, market strategist at Cantor Fitzgerald. After hitting a record high of $1,034 an ounce Monday, gold's subsequent sharp drop led it to post a 8.3% decline for the shortened week. Crude oil briefly slid below $100 a barrel on Friday, after hitting a record high of $112.75 last Friday, and finished the week at $101.84. A stronger dollar and sliding commodities were also seen as a sign that some degree of confidence was returning in markets. Commodities had been used as -- not only a hedge against inflation -- but a safe haven from the turmoil in credit markets. "Some of this sell-off in commodities ... can also be attributed to the perceptions that fears are lifting somewhat in the financial markets," said Jon Nadler, a Montreal-based senior analyst at Kitco. In the wake of the near-collapse of Bear Stearns, rivals Goldman Sachs (GS), Lehman Brothers (GS) and Morgan Stanley (MS) all posted better-than-expected quarterly results. Similarly, Friday's news that commercial-finance firm CIT Group (CIT) would need to tap its $7.3 billion credit line to repay debt sent its shares plunging over 20% but didn't prevent the stock market from rallying Friday. Bounce for stocks? While few are willing to call an end to the credit crisis and the downward slump of the U.S. economy, action in the markets over the past week is leading some analysts to believe some sort of short-term bottom might have been found for stocks. "We have upgraded our view of the equity market to positive /neutral as a result of the Federal Reserve's recent dramatic measures and the subsequent tremendously positive investor response," said Ken Tower, market strategist at Covered Bridge Tactical. "The economic outlook may be as murky as ever and risk in the financial system remains high, but it's quite possible that the lion's share of falling expectations will soon be behind us," he said. Should the market's attention return to economic news, next week will bring a number of key reports: data on February durable goods orders on Wednesday, the final reading of fourth quarter growth on Thursday, and on Friday, February personal income data, which will provide a snapshot of the health of consumers. Monday will bring existing home sales for February, and the Chicago manufacturing survey for March. Tuesday will bring consumer confidence numbers for March. Besides durable goods, Wednesday will see the release of new home sales numbers for February. Besides the GDP, important data released on Thursday includes the weekly jobless claims numbers. On Friday, another consumer sentiment survey, this time by the University of Michigan will be released. "Whether the market has found a bottom or not, I'm not convinced yet, but people seem to have accepted that a recession is upon [us]," said Hinsdale's Nolte. "The here and now is obviously not terrific and won't be for a while, but people in the market are looking forward to 4 or 5 months out, and that maybe things might start improving then."
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