U.S. Stocks Climb As Session's End Looms

NEW YORK (MarketWatch) -- U.S. stocks staged a comeback as the closing bell neared after a rally in short-term Treasury bills highlighted concerns about the effectiveness of the Federal Reserve's move to boast liquidity by cutting its discount rate.

"It's not your father's bull market anymore," said Elliot Spar, option/market strategist at Stifel Nicolaus & Co.

After a morning of choppy action, the Dow Jones Industrial Average was solidly lower by mid-day, then reversed course into positive territory in the final hour of trade.

The Dow was more recently up 61.3 points at 13,140.4.6, with 18 of its 30 components ahead, led by Alcoa Inc. , which was up 2.7%.

Decliners included J.P. Morgan Chase , which fell 2%, and Hewlett-Packard Co. , which was off 1%.

Another Dow component, American Express Co. , fell 0.5% with declines in the financial sector illustrating hesitancy on the part of buyers since the embattled group led Friday's Fed-fueled relief rally.

Merrill Lynch & Co. Inc. was off 1.5%, while Deutsche Bank declined 2.1% after the Financial Times reported it has tapped the discount window opened by the Fed in a show of support for central bank's move.

The S&P 500 was up 1.68 points to 1,447.62, and the Nasdaq Composite edged 5.42 points higher to 2,510.45.

Volume at the New York Stock Exchange hit 1.3 billion shares, with advancing stocks outpacing decliners 9 to 7.

At the Nasdaq, nearly 1.5 billion shares exchanged hands, with advancing stocks edging ahead of decliners 15 to 14.

"Liquidity is not yet flowing to those areas of the credit markets that need liquidity most, such as toward the mortgage market and the commercial paper markets," said Tony Crescenzi, fixed-income analyst at Miller Tabak. "Yields have plunged sufficiently enough today to indicate that the psychotic atmosphere that has gripped the financial markets recently remains in place."

Yields on Treasury bills declined sharply as money market funds unloaded asset-backed commercial paper in exchange for the shortest-maturity government debt, with three-month yields down the most since the 1987 market crash.

"Heavy buying, particularly in the very shortest dated Treasury bills at rates below 2% reflected craven fear," said analysts at Action Economics LLC. "Investors were reportedly getting out of even supposedly 'safe' money markets, and taking cover in T-bills, especially after several 'enhanced" money market funds were hurt by their exposure to the now shaky commercial paper market."

The latest reminder of the trouble sparking the credit crunch now roiling the markets came from Thornburg Mortgage Inc. , which said it sold a "substantial" part of its triple-A-rated mortgage securities portfolio.

Thornburg, a residential-mortgage lender focused on jumbo adjustable-rate loans, will report a third-quarter capital loss of about $930 million as a result of the mortgage-securities sales, the company said in a statement. Thornburg's stock fell 9.8%.

"When we get fresh evidence of what is going wrong, the markets tend not to be able to hold onto any gains," said Art Hogan, chief market strategist at Jefferies & Co.

Others impacted by the global credit crunch include FCStone Group Inc. , which on Monday said it anticipates a $3.5 million charge after losing 25% of its investment with Sentinel Management Group, which filed for bankruptcy on Friday.

Stunted growth?

With investors focused on developments in the credit markets, the market displayed little reaction to an indication of slow growth for the rest of the year, with U.S. leading economic indicators increasing 0.4% in July, according to the Conference Board.

"While there still may be some upside left to this 'relief' rally, we are more likely to move money to the sidelines than buy equities," said Paul Nolte, director of Investments at Hinsdale Associates.

"The boo is a long way from being closed to the debt issues in the U.S.," he wrote in a note.

The Fed moved to reassure investors Friday by cutting its discount rate, the interest in charges on its loans to banks, by a half-point to 5.75%, and said it stands ready to do more. U.S. stocks jumped in response, with the Dow industrials climbing 233 points, the Nasdaq Composite up 53 points and the S&P 500 adding 34 points.

Sharp gains were also seen in Asian and European markets.

"Markets probably have passed the point of maximum stress, at least in this episode," said Gerard Minack, a strategist for Morgan Stanley in Australia. He said the Fed was pressed to act by the near shutdown of short-term funding in the asset-backed commercial paper market.

The Fed disclosed another $3.5 billion injection into the banking system shortly after Monday's opening bell, bringing to almost $120 billion of liquidity added into the market by the Fed since last week.

Shares of Countrywide Financial fell 7.6%, after slumping 31% last week. The nation's largest mortgage lender has started laying off workers involved in originating loans as part of an effort to weather a credit crunch, The Wall Street Journal reported.

Elsewhere, J.P Morgan downgraded The McGraw-Hill Cos., the parent of credit-rating agency Standard & Poor's to neutral from overweight, citing signs the credit market would see a meaningful drop in issuance activity.

HSBC Holdings PLC said it is in talks to acquire a majority of Korea Exchange Bank from Lone Star Funds. HSBC stock fell 0.8%.

In other action, shares of CDC Corp. fell 3.4% after the provider of software, Internet and mobile communications services said it would register with the Securities and Exchange Commission an initial public offering of as much as $225 million of Class A common shares.

The Nasdaq saw its own shares rise 0.4% after it put its entire stake in the London Stock Exchange on the block, saying the market isn't correctly valuing its holdings of the U.K. bourse it had previously tried to buy.

Lowe's Cos.'s climbed 6.4% up after the home improvement retailer reported second-quarter net income increased 9% from a year earlier to $1.02 billion, or 67 cents a share.

Shares of Dell Inc. advanced 1.2% after WR Hambrecht initiated coverage of the personal-computer maker with a buy rating and $34 a share price target.

Other markets

Crude oil and gasoline futures dipped on weather reports indicating Hurricane Dean would not hit oil production installations in the Gulf of Mexico. Crude oil for September delivery fell 86 cents to close at $71.12 a barrel. Natural gas for September delivery finished the session with a loss of 13.8%, or 97 cents, at $6.04 per million British thermal units on the New York Mercantile Exchange.

U.S. Treasurys traded higher as investors stayed cautious about whether the stock market has weathered the worst of the financial storm caused by credit-market troubles. The 10-year note was up 5/32 at 100 26/32, its yield down to 4.647%.

The dollar was slightly up against the yen and slightly down against the euro as investors took a wait-and-see attitude to the credit-market crunch. The greenback was up 0.1% against the Japanese currency at 114.42 yen. The euro was up fractionally at $1.3476, while the British pound was ahead 0.2% at $1.9842.

Gold futures fell, with the contract for December delivery ending 30 cents down to close at $666.50 an ounce.

By Kate Gibson