Stocks tumble on Bear scare
Wall Street tanks - but manages to close off its lows - as investors worry about Bear Stearns' liquidity, record oil, gas and gold prices and the weak dollar.
NEW YORK (CNNMoney.com) -- Stocks tumbled Friday after news that Bear Stearns needs emergency funding due to a liquidity crisis intensified fears that the credit crunch is spreading.
Bond prices surged, lowering corresponding yields as investors sought the comparative safety of government debt.
The Dow Jones industrial average (INDU) lost more than 300 points at one point in the afternoon, before recovering to close down almost 195 points, or 1.6%.
The Dow managed to end the week with modest gains, thanks to a 417-point rally on Tuesday, its best day in 5-1/2 years, that followed after the Federal Reserve said it would lend up to $200 billion to banks in an effort to loosen up tight credit markets.
The broader Standard & Poor's 500 (SPX) index lost 2.1% Friday, ending the week with modest losses. The Nasdaq composite (COMP) lost 2.3% and ended the week unchanged.
Equities rose in the first few minutes of trade as a mild consumer inflation report offset new record highs for oil, gas and gold. But stocks soon tumbled as the Bear Stearns news was absorbed.
The news is making people think that "perhaps the long arm of the credit crisis stretches everywhere," said Kim Caughey, senior equity analyst at Fort Pitt Capital Partners. "People are scared. No one wants to see even the smallest of the big five brokerage houses fail."
The week ahead brings earnings from a number of banks, including Bear Stearns on Monday and Goldman Sachs on Tuesday. The results are expected to be poor. (Full story)
Reports on producer prices, the housing market and manufacturing are all due as well. The week's biggest event is the Federal Reserve meeting Tuesday.
Bear Stearns battered. Bear Stearns (BSC, Fortune 500) said JPMorgan Chase (JPM, Fortune 500) and the New York Federal Reserve Bank will provide it with emergency funding for a period of up to 28 days while it looks for longer-term options, including the possibility of selling itself.
CEO Alan Schwartz said the bank's cash situation had significantly deteriorated over the last 24 hours, after market rumors that it was facing a liquidity crisis caused customers and lenders to withdraw business or cancel lines of credit.
This followed a denial from the bank just a few days ago that it was suffering a major liquidity crisis. Bear shares ended the session with about 47% lower.
"The admission that Bear Stearns needs cash and needs the Fed's help and JPMorgan's help basically confirms the worst fears from over the last week," said Ben Halliburton, chief investment officer at Tradition Capital Management.
Investors may have also been spooked that no details were released about the size of the funding, Halliburton said.
In the afternoon, S&P cut its credit and debt ratings on Bear Stearns, according to news reports, saying that the liquidity help was a short-term solution to a longer-term problem. S&P also put the bank's long- and short-term ratings on Credit Watch with negative implications.
In terms of how the news impacts the broader market, "it confirms that the potential for a structural meltdown is still there," he said. "There is still a real possibility that a major financial institution will be closed down as a result of this crisis or sold at a price that wouldn't have been possible a year ago."
Following the announcement, the Fed issued a statement saying that it had voted to support the Bear Stearns agreement and that it would continue to keep a close watch on market developments and provide liquidity when necessary.
Fed policy makers meeting Tuesday are expected to cut the fed funds rate, a key overnight bank lending rate, by at least a half-percentage point, if not three-fourths of a percentage point, according to futures trading. (Full story).
Fed Chairman Ben Bernanke spoke in the afternoon, discussing the central bank's plan to help mitigate the subprime lending meltdown. (Full story).
President Bush spoke late Friday morning, saying that the economy was facing challenges, but that the underlying strength would help it get through this difficult period. (Full story).
Company news. A variety of financial stocks tumbled on the news out of Bear Stearns, including Lehman Brothers (LEH, Fortune 500), Citigroup (C, Fortune 500) and Merrill Lynch (MER, Fortune 500).
Stock declines were broad-based, with 29 out of 30 Dow components sliding, led by Chevron (CVX, Fortune 500), 3M (MMM, Fortune 500), JP Morgan (JPM, Fortune 500) and American Express (AXP, Fortune 500).
The Dow's one gainer was Boeing (BA, Fortune 500). The aerospace maker climbed 2% after Morgan Stanley upgraded it to "overweight" from "equal-weight," saying that most of the bad news has been reflected in the stock price, but not much of the good news.
Market breadth was negative. On the New York Stock Exchange, losers beat winners five to one on volume of 1.86 billion shares. On the Nasdaq, decliners topped advancers three to one on volume of 2.55 billion shares.
Inflation holds steady. The Consumer Price Index (CPI) held steady in February, surprising economists who were expecting a rise of 0.3% in the month. So-called "core" CPI, which strips out volatile food and energy prices, also maintained January levels.
Economists thought core CPI would rise 0.2%, according to a Briefing.com survey.
The report was a welcome development ahead of next week's Fed policy meeting, amid worries that inflationary pressures will limit the central bank's ability to keep lowering borrowing costs to shore up the weak economy.
However, the report's implications could be short-lived, with commodity prices continuing to surge on the falling dollar and worldwide demand.
The University of Michigan's consumer sentiment index dipped in March to 70.5 from an earlier reading of 70.8, better than expectations that it would dip to 69.5.
Other markets. U.S. light crude oil for April delivery fell 12 cents to settle at $110.21 a barrel on the New York Mercantile Exchange after hitting a record $111 during the previous trading session.
COMEX gold for April delivery added $6.50 to settle at $999.50 an ounce after hitting an all-time record of $1,007.30 earlier in the session.
Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.44% from 3.52% late Wednesday. Bond prices and yields move in opposite directions.
In currency trading, the dollar fell to a fresh all-time low versus the euro and again touched a more than 12-year low against the yen. 
