U.S. Stocks Mixed As Market Reflects On Fed, Thornburg

NEW YORK (MarketWatch) -- U.S. stocks struggled to hold gains Monday as investors weighed relief over indications the Federal Reserve might lower interest rates further against another report of trouble in the subprime mortgage market.

"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.

In choppy action, the Dow Jones Industrial Average was ahead 5 points at 13,084, with 16 of its 30 components trading higher, led by Alcoa Inc. , which was up 2.9%.

Hewlett-Packard Co. fronted the Dow's declines, with its stock lapsing 1.6%.

Another Dow component, American Express Co. , fell 0.3% with declines in the financial sector illustrating hesitancy on the part of buyers since the embattled group led Friday's Fed-fueled relief rally.

Fellow Dow component J.P. Morgan Chase fell 1.5% and Merrill Lynch & Co. Inc. was off 1.5%.

The S&P 500 fell 1.7 points to 1,444.26, and the Nasdaq Composite rose 4.24 points to 2,509.04.

Volume at the New York Stock Exchange hit 553 million shares, with advancing stocks topping decliners 19 to 13.

At the Nasdaq, 630 million shares exchanged hands, and decliners were slightly ahead of advancers.

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 11.2%.

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 book 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.

Shares of Countrywide Financial fell 7.3%, 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.

In other early action, shares of CDC Corp. fell 0.8% 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.

Lowe's Cos.'s climbed 7.6% up fter 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 1.9% 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 93 cents, or 1.3%, to $71.05 a barrel, while gasoline futures declined 4.5% to $1.9470 a gallon.

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 made strong gains against Japan's yen, with the U.S. currency up 0.5% against the Japanese currency at 114.91 yen. The euro traded tightly at $1.3485, while the British pound was at $1.9869.

Gold futures gained, with the contract for December delivery was up 60 cents to $667.50 an ounce.

By Kate Gibson