Banks, Fed to take stocks on rocky ride
NEW YORK (Reuters) - The rocky ride in U.S. stocks looks set to intensify next week with the survival of one of the biggest investment banks in doubt and regulators rapidly burning through options to limit more damage to the financial system.
All eyes will again be on Bear Stearns come Monday for any further word about the condition of the fifth-largest U.S. investment bank, which on Friday had to get emergency funding as fallout from the global credit crisis took its toll.
Bear Stearns is among four major Wall Street firms reporting earnings next week.
But the Federal Reserve's policy-setting meeting on Tuesday will be the focus of the holiday-shortened week. The U.S. stock market will be closed for Good Friday on March 21.
U.S. interest-rate futures on Friday showed more than a 50 percent chance that the central bank will cut its benchmark fed funds rate target by 100 basis points -- or 1 percent -- to revive an economy that many say is already in recession.
"Most of the focus will be on the Federal Reserve next week. Will the Fed cut rates? And if so, how much? And most importantly, what will the statement that accompanies the decision say?" said Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany, New York. "Frankly, the Fed said it all in their bailout of Bear Stearns."
Market participants have questioned the effectiveness of the U.S. central bank's efforts. On Tuesday, March 11, the Fed teamed up with other central banks to get up to $200 billion in fresh funds to cash-starved markets. The market rallied sharply for its best day in five years, but most of those gains were erased by the end of the week.
Then on Friday, Bear Stearns said a cash crunch forced it to turn to the Federal Reserve and JPMorgan Chase for emergency funds. That revived investors' fears about the depth and breadth of the credit crunch. Bear's stock tumbled as much as 50 percent on Friday to a session low at $28.42, its lowest since October 1998.
The 28-day emergency line of funding for Bear Stearns came just days after Bear, which has been hard hit by its heavy exposure to the faltering U.S. mortgage market, had dismissed market rumors of a cash crunch and said it was still a healthy player in the global web of trading and finance.
That heightened concerns that there may be other banks facing liquidity issues.
MOMENT OF TRUTH FOR BANKS
More clarity about the extent of write-downs could come when four big U.S. investment banks report earnings next week.
Bear Stearns is first out of the block on Monday, which also happens to be St. Patrick's Day. Bear moved up its earnings release, which was initially scheduled for Thursday. The change in schedule may indicate that Bear plans to make a significant disclosure, said Rebecca Engmann Darst, equity options analyst at Interactive Brokers Group.
"Speculation is rising that Bear Stearns could be the subject of a takeover or 'takeunder' over the weekend -- possibly with JPMorgan Chase," she added.
Lehman Brothers LEH.N and Goldman Sachs (GS.N) will report earnings on Tuesday, followed by Morgan Stanley (MS.N) on Wednesday. Continued...
