Stocks Stumble On Financial, Economic Woes

NEW YORK (MarketWatch) -- U.S. stocks stumbled Thursday after a fund managed by the Carlyle Group admitted it's close to collapse, dragging down the dollar and boosting oil. Weaker-than-expected February retail sales data also fueled concerns the economy is already in recession.

"Retail sales were very disappointing, and it's one more indication that we're headed towards one quarter of negative growth," said Peter Cardillo, chief market economist at Avalon Partners."

"As for the situation with Carlyle, the market is looking for some sort of capitulation in credit markets," Cardillo said. "People want to get all the bad news out and wonder who else is going to go belly-up. Until then, it's going to be stop and go (for stocks)."

The Dow Jones Industrial Average was down 177 points at 11,932 in early morning trade, with 28 of its 30 components falling, led by a 5% drop in shares of AIG .

Counterparties of the Carlyle fund in trouble include Dow components, Citigroup , JP Morgan Chase , and Banc of America ,

Also hitting financial stocks, Treasury Secretary Henry Paulson urged banks to reconsider their dividends in order to preserve capital.

With credit markets in turmoil, Paulson called for several steps to strengthen federal oversight of the mortgage and credit markets -- the first federal regulatory response aimed at the roots of the financial-market turmoil that has roiled Wall Street for the last seven months.

The S&P 500 index was down 17 points at 1,291, while the Nasdaq Composite fell 26 points to 2,217.

International stock markets stumbled overnight as Carlyle Capital , a bond fund affiliated with the Washington private-equity house, said it expects lenders to take possession of "substantially all" of its remaining assets after it was unable to meet surging margin calls on its portfolio of residential mortgage-backed securities.

Other Carlyle counterparties include Bear Stearns , which fell 13%, BNP Paribas , Credit Suisse , Deutsche Bank and UBS .

Adding to the turmoil, hedge fund firm Drake Management told clients that it may shut its largest fund.

In the foreign exchange market, the dollar fell sharply against the Japanese yen, trading below 100 yen for the first time since 1995.

The weak dollar first boosted crude oil prices to another record high of $110.70 a barrel. Similarly, gold briefly topped $1,000 an ounce.

Bonds rose, sending yields on 10-year Treasury bonds down to 3.41%.

Retail sales fall

Consumer spending weakened again in February as U.S. retail sales fell 0.6%, the Commerce Department reported Thursday. Most kinds of retail stores reported lower seasonally adjusted sales in February even before the impact of inflation was counted. The figures were weaker than Wall Street economists had expected, having forecast no change in retail sales.

First-time claims for state unemployment benefits for the week ending March 8 came in at 353,000, the same as the revised number for the week ending March 1, the Labor Department reported Thursday.

Among stocks in focus Thursday, Microsoft and General Electric are holding analyst meetings, and Tyco International is hold its annual shareholder meeting.

Electronic Arts is taking its battle for Take-Two Interactive directly to shareholders, commencing a tender offer at $26 per share.

Virgin Mobile USA shares dropped nearly 40% after it forecast 2008 earnings well below analyst estimates.

Time Warner said it's buying social-networking site Bebo for $850 million in cash.

By Nick Godt