Wall St sinks as Bear shakes faith in banking

Stocks fell on Monday after JPMorgan Chase (NYSE:JPM - News) bought Bear Stearns (NYSE:BSC - News) at a fire sale price and the Federal Reserve provided emergency cash to Wall Street as the global credit crisis worsened.

But stocks trimmed losses as shares of JPMorgan led advancers, while the Fed's move to cut its discount rate to 3.25 percent and expand lending to a wider range of big financial firms -- the first such move since the Great Depression -- helped Wall Street ease a bit off early lows.

Futures have been pricing in a 100-basis-point cut from the Fed when it meets tomorrow.

JPMorgan is buying Bear Stearns for $236 million, or $2 per share -- one-fifteenth of the price at Friday's close. Shares of Bear, which until recently had ranked as the fifth-largest U.S. investment bank, reached a high of $172.61 last year. Bear's stock plummeted 87.3 percent to $3.91 at midday on Monday.

The financial sector tumbled, as Lehman Brothers (NYSE:LEH - News) sank 23.9 to $29.86 and Citigroup dropped 7.3 percent to $18.35. The Standard & Poor's financial index (^GSPF - News) was down 3.6 percent.

JPMorgan, the top gainer in both the blue-chip Dow average and the S&P 500, climbed 8.3 percent to $39.58, preventing an uglier morning on Wall Street.

"The Fed took very aggressive action over the course of the weekend, and so that's having an impact," said Michael Darda, chief economist at MKM Partners LLC, in Greenwich, Connecticut.

"The problem is that action will have an inflationary price tag. And you can see that in all of the commodity and currency indicators."

The Dow Jones industrial average (DJI:^DJI - News) dropped 114.39 points, or 0.96 percent, to 11,836.70. The Standard & Poor's 500 Index (^SPX - News) shed 23.44 points, or 1.82 percent, to 1,264.70. The Nasdaq Composite Index (Nasdaq:^IXIC - News) tumbled 44.78 points, or 2.02 percent, to 2,167.71.

In a fresh sign of faltering confidence in the U.S. economy and financial system, the dollar sank to its weakest against the yen since 1995 and slumped against the euro.

The "fire sale" of Bear has put U.S. banks at risk as it will result in valuation adjustments that could result in a drop of stock prices by as much as 50 percent, Oppenheimer & Co analyst Meredith Whitney wrote.

Elsewhere in the financial sector, mortgage insurer PMI Group Inc (NYSE:PMI - News) reported its biggest-ever quarterly loss, mainly due to losses on its investment in bond insurer FGIC Corp. It also slashed its dividend by more than 70 percent.

Shares of PMI dropped 11.3 percent to $5.05, after hitting a lifetime low of $4.82 earlier in the session.

The New York Federal Reserve Bank reported an unexpectedly steep drop in its manufacturing survey and a rise in prices paid. It was the worst reading of business conditions in the state of New York since the index was launched in July 2001.

Internet Stocks Could Suffer If The Buck Strengthens

The weakness of the U.S. dollar in 2007 provided a nice boost to the top-line growth rates for Google (GOOG), Amazon.com (AMZN), eBay (EBAY) and, to a lesser degree, Yahoo (YHOO). So what happens if the buck starts to strengthen?

In an interesting piece this morning, Lehman’s Douglas Anmuth takes a look at what would happen to the financial results of the major Internet companies if the dollar turned around and strengthened against the other major currencies. A 10% appreciation in the greenback, Anmuth calculates, would chop revenue growth by 7% at Google, 6% at eBay and Amazon, and 3% at Yahoo.

In 2007, Anmuth notes, the dollar fell 9% against the Euro and the British pound, while holding steady against the yen. He notes that eBay, which recently has generated about 51% of revenue overseas, reported 29% growth in 2007, but would have grown just 24% on a currency-neutral basis. Amazon, likewise, grew 39%, but would have grown 34.9% in a constant currency world. Google’s growth rate would have dropped to 51%, from 56%; Yahoo would have grown 7%, not 8%.

Anmuth also notes that the Internet companies are building up substantial cash balances overseas that can’t easily be deployed for buying back stock, paying dividends or other capital allocation moves. At the end of 2007, he notes, Amazon had $1.2 billion - 37% of its cash - in foreign denominated marketable securities. And he says eBay at the end of Q3 had $3.7 billion of its $4.4 billion in cash invested overseas.

Anmuth’s conclusion: “While currency movements can clearly be unpredictable, given weakness in the U.S. dollar in 2007 there may be greater risk to the downside on a reported basis for Internet companies - specifically Google, eBay and Amazon - should the U.S. dollar stabilize or recover beyond what is embedded in current estimates.”