Wall Street hit by mixed messages

By Stacy-Marie Ishmael in New York

US stocks ended the week at levels virtually unchanged from the previous Friday, a fact which belies the incredible volatility experienced by investors over the last five days.

It has been an extraordinary week on Wall Street, and one characterised by mixed signals about the health of the economy and global financial markets.

The week began on a sour note, with stocks falling to 19-month lows after oil prices soared to a record and the dollar plumbed new lows.

On Tuesday, the Federal Reserve sparked a significant rally when it announced a new, expanded effort to improve financial market liquidity. Investors’ initial euphoria waned just a day later, after Carlyle Capital, a highly-leveraged mortgage bond fund, said it had defaulted on $16.6bn in debt and was facing collapse.

Standard & Poor’s provided a sentiment boost on Thursday, when it said the end was near for subprime writedowns at major financial institutions. Prior to the S&P comment, shares had fallen on data showing consumers had cut their spending sharply in February.

And early on Friday, unexpectedly benign inflation data supported a strong opening on Wall Street.

But by the end of the trading day in New York, as investors digested the implications of JP Morgan and the Federal Reserve stepping in to support Bear Stearns, stocks had turned sharply negative.

The S&P 500, which had been poised for its best week since the end of January before Friday, fell 0.4 per cent on the week to 1,288.14.

The Dow Jones industrial average rose 0.5 per cent over the period to 11,951.09, while the Nasdaq composite was unchanged at 2,212.49. T

Bear Stearns which this week repeatedly denied it faced any funding problems, plummeted after the brokerage said its liquidity position had significantly deteriorated. In response, Standard & Poor’s and Fitch slashed Bear’s credit ratings to triple-A. Shares fell 57.2 per cent this week to $30, a near 10-year low.

JPMorgan Chase, which is acting in tandem with the New York Fed to provide Bear with secured funding, fell 2.7 per cent on the week to $36.54. The bank said shareholders would not be exposed to “any material risk”.

Financial stocks bore the brunt of the fallout from the Bear rescue. Citigroupfell 5.4 per cent on the week to $19.78. Merrill Lynch fell 3.7 per cent to $43.51.

Lehman Brothers fell 15.3 per cent to $41.48. “The most acute contagion from the liquidity disease afflicting Bear Stearns today appears to be festering at Lehman Brothers,” analysts at Interactive Brokers said. “The mad rush for protection against further downside drama in its share price appears more or less unmitigated.”

Bank of America fell 2.9 per cent to $35.69, while Countrywide, which it has agreed to buy, fell 11.2 per cent to $4.50. Bank of America’s proposed acquisition of the top US mortgage lender has come under increasing scrutiny from investors and lawmakers. Chuck Schumer, the Democratic senator from New York, said Countrywide had been a “main contributor” to the mortgage crisis, and the lender is one of several facing an early-stage inquiry by the Federal Bureau of Investigation.

Ambac, the bond insurer, lost 34.5 per cent of its value this week, falling to $6.22 despite having its top-notch credit rating reaffirmed by both Moody’s and Standard & Poor’s. Rival MBIA fell 8.8 per cent to $10.94.

AIG the world’s largest insurer, fell 4 per cent to $41.18 after Morgan Stanley said it could be hit by as much as $3bn in losses related to credit default swaps. Insurance companies are facing subprime-related losses that could dwarf the record set by Hurricane Katrina, the worst natural disaster in US history, according to Bloomberg data.

The amount of asset writedowns and credit losses reported by the insurance industry has reached at least $38bn, just shy of the $41.1bn in claims from Katrina, Bloomberg data show.

WellPoint fell 29.8 per cent this week to $47.09 after the health insurer said it expected a smaller profit because of higher medical costs and economic weakness.

Rival Humana fell 30.8 per cent to $43.98 after it revised its own forecasts downward, citing higher-than-expected claims in its standalone Medicare prescription plans. Moody’s cut its ratings outlook on Humana to “negative” from “stable”.

Elsewhere in the insurance sector, Progressive fell 11.3 per cent to $15.47 after the car insurer reported weak February results.

The insurance sector fell 2.7 per cent this week.