Stocks Drop as Economic Fears Worsen

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If the [liquidity] problem gets out of hand, [the Fed] would have to do an intermeeting cut but then they''d have nothing left two weeks from now."

One key reason for the liquidity crisis has been the muddled communication coming out the central bank, which has made the banks question whether their source of funding will continue to be available, Roberts said. "This problem is not going to go away [quickly]. This is more like stanching the bleeding," he said.

He said interest rates are certain to be reduced to 2.0% and may have to be cut back to 1.0% again in order to allow the credit markets to repair themselves.

Echoing the plunge in the Conference Board's index of consumer confidence for February released last week, the RBC Consumer Attitudes and Spending by Household, or CASH, Index fell to 33.1 in March from 48.5 in February, led by a sharp drop in consumers' optimism for the future. The numbers showed consumer confidence is down to the lowest levels since 2002, when the index started.

"The U.S. consumer, who has carried the economy for the past half-dozen years, is in full defensive mode, battered by falling housing values, spiking food and energy prices, tightening lending standards, the teetering stock market and hints of weakening in the labor market," T.J. Marta, economic and fixed income strategist for RBC Capital Markets, said in a statement.

Shares of Ambac Financial Group (ABK) came under new pressure Friday after the bond insurer issued $1.25 billion in equity at a price of $6.75 per share but rebounded to close 28% higher.

Oil prices hit a new high of $106.54 on Friday on expectations of another rate cut, which would further weaken the U.S. dollar, before sliding back slightly. Crude oil for April delivery on NYMEX settled 32 cents lower at $105.09 per barrel.

The dollar's decline to record lows on Thursday had been sparked by the European Central Bank's decision not to lower interest rates, putting a priority on vigilance against higher inflation. While short covering fueled a rebound ahead of the weekend, the fundamental backdrop hasn't changed for the greenback given the ongoing credit problems in the U.S., and renewed concerns over recession, Action Economics said. With Friday's gains nothing more than position squaring from an over-extended foreign exchange market, more downside pressure is expected to emerge after a day or two of consolidation next week.

Among the stocks in the news on Friday, AngioDynamics Inc. (ANGO) shares plummeted 37.5% after the company said it expects its third-quarter sales to grow 14% to $40.7 million but that earnings will still likely miss Wall Street estimates. While its oncology product line has done well, the medical devices manufacturer said the 10% sales growth of its interventional product lines was less than expected. It said its dialysis product sales continued to be hurt by considerable price competition. The company cut its fiscal 2008 sales forecast to $165 million to $167 million from a prior estimate of $170 million to $175 million.

National Semiconductor (NSM) shares rose 11.7% after the company posted earnings of 28 cents per share for the third quarter, vs. 22 cents a year ago on a 5.2% sales increase. The company expects sales to be $440 million to $460 million in the fourth quarter. Standard & Poor's upheld its hold rating.

Citigroup (C) said it plans to reduce residential mortgage assets in its U.S. mortgage business by about $45 billion over the next year, a 20% decrease from December 2007. The bank will also cut the amount of new loans to be held in its portfolio by more than 50% in the next year. Separately, CEO Vikram Pandit reportedly denied rumors that the company may put its South Korean unit up for sale. Shares ended 1.2% lower.

Dynamic Materials Corp. (BOOM) shares fell 19.1% after the company reported lower-than-expected fourth-quarter earnings of 56 cents per share, vs. 54 cents a year ago on a 55% rise in sales. Narrowed gross margins damped the results. The company sees 2008 revenue growth of up to 60%, with gross margins comparable to the 32% achieved in 2007. It also expects first-quarter operating income to be hurt by lower gross margins than in the fourth quarter and about $3 million of acquisition-related amortization expense. The impact of higher interest costs is expected to result in first-quarter earnings comparable to a year ago.

European indexes were trading lower again on Friday. In London, the FTSE 100 index slid 1.15% to 5,699.90. In Paris, the CAC 40 index dropped 1.26% to 4,618.96. Germany’s DAX index was off 1.17% at 6,513.99.

Asian indexes ended lower on Friday. Japan’s Nikkei 225 index dropped 3.27% to 12,782.80. In Hong Kong, the Hang Seng index fell 3.60% to 22,501.33.

Treasury market

Treasury prices climbed in response to growth in the payrolls shortfall in February from revised lower January levels, ignoring a surprising decline in the unemployment rate. The 10-year note rose 14/32 to 99-23/32 for a yield of 3.53% and the 30-year gained 8/32 to trade at 97-08/32 for a yield of 4.54%.

Bogoslaw is a reporter for BusinessWeek's Investing channel .