U.S. Stocks Close Down Amid Subprime, Earnings Trouble

NEW YORK (MarketWatch) -- U.S. stocks finished lower Wednesday, halting a five-session run that briefly propelled the Dow Jones Industrial Average above 14,000, as woes from risky home loans re-emerged and earnings from Intel Corp., Pfizer Inc., and Yahoo Inc., disappointed investors.

"Subprime is again on the front-burner, with the combination of Bear Stearns and concerns over what other hedge-fund issues might be out there," said Art Hogan, chief market strategist at Jefferies & Co.

The market came under early pressure after reports that investments in two leveraged funds run by Bear Stearns are now nearly worthless, with Federal Reserve Chairman Ben Bernanke telling Congress the situation would likely get worse before getting better.

The Dow Jones Industrial Average shed 53 points to 13,918, as 21 of its 30 components fell. The Dow earlier dropped more than 140 points to a low of 13,823. On Tuesday, it reached a high of 14,022.

"The market was geared for a lower opening after a spate of negative earnings," said Jay Susskind, director of trading at Ryan, Beck & Co.

The S&P 500 fell 3.2 points to 1,546, while the Nasdaq Composite lost 12.8 points to 2,699.

Trading volumes showed 1.7 billion shares exchanging hands on the New York Stock Exchange and 2.2 billion on the Nasdaq. Declining issues topped gainers by 20 to 11 on the NYSE and by 9 to 5 on the Nasdaq.

Techs tank

Intel's stock weighed heavily on blue chips and on the Nasdaq, losing 4.8%. The chip giant's second-quarter earnings were in line with analysts expectations but its profit margins fell short of the company's own targets.

In addition, internet search firm Yahoo also fell 4.7% after cutting its earnings outlook for the year. And International Business Machines , a Dow component, and eBay both fell ahead of their earnings after the close.

Bears Back

The influential financial sector of the market came under early pressure after reports that investments in two of Bear Stearns hedge funds -- with heavy exposure to subprime markets -- are nearly worthless.

In addition, credit-ratings agency Moody's put the ratings of 13 tranches of eight deals from Bear Stearns on review for possible downgrade. These deals are mostly backed by Alt-A mortgage loans, which are a step higher in quality from subprime loans.

Following the reports on Bear Stearns, Punk Ziegel & Co. analyst Richard Bove downgraded the top Wall Street firms to sell from market perform, including Goldman Sachs , Lehman Brothers , Merrill Lynch and Morgan Stanley .

He also downgraded the universal banks -- Bank of America , Citigroup Inc. and JP Morgan -- to market perform from buy.

"I do not view this as a Bear Stearns problem but a systemic one," Bove said in a note. "For the past six months I have been writing that this could happen and that the systemic protections against such a development have been removed by the market place."

"This opens investors to sizable losses which, at this moment, simply cannot be calculated," he said.

Profit Pit

Among Dow components, Pfizer Inc. dropped 3.2%. The pharmaceutical firm posted a worse-than-forecast 48% decline in profits.

Altria Group Inc. , which posted a better-than-expected drop in earnings, still fell 1.4%.

And J.P. Morgan Chase , declined 2% amid broad weakness among brokerage stocks. The country's third-biggest bank posted a better-than-expected 20% rise in earnings, but also reported tripling its loan loss reserves.

Deflated Fed Talk

The market also digested congressional testimony from Bernanke, with the release of his written remarks having little immediate impact on trade. "All of that comes down to a predictable statement that he is not going to roil markets, so we may be able to look beyond Bernanke to corporate America," Hogan said.

The market showed little reaction to news tha consumer prices increased a moderate 0.2% in June, a touch higher than the 0.1% expected, with falling energy prices offsetting rising food prices.

Excluding volatile food and energy prices, the core consumer price index also increased 0.2%, in line with expectations.

Crude Rally

A rally in crude helped lift the energy sector, which climbed along with multimedia , and semiconductors . Financial and bank stocks led declines.

Crude oil futures ended above $75 a barrel for the first time in nearly 11 months after a government report showed a drop in supplies last week.

Treasury prices closed higher, sending yields lower, and pushing down the yield on the benchmark 10-year Treasury closer to 5%, on renewed worries over the subprime mortgage market. The 10-year bond closed 10/32 higher at 96 02/32, while its yield stood at 5.012%.

Gold futures gained nearly $8 an ounce to end at their highest level in six weeks, spurred by oil's rally and ongoing weakness in the U.S. dollar.

By Kate Gibson