U.S. Stocks Trim Declines
NEW YORK (MarketWatch) -- U.S. stocks fell Thursday, as traders weighed the likelihood of a Federal Reserve interest-rate cut against enthusiasm for Bank of America's move to rescue distressed mortgage lender Countrywide Financial Corp.
The decline is "a pure case of a little profit-taking," said Peter Cardillo, chief market economist at Avalon Partners. "Second, the market is maybe rethinking that the Fed may not elect to cut interest rates.
The Dow Jones Industrial Average declined 33 points at 13,203, with 18 of its 30 stocks in negative territory.
Home Depot fronted the Dow's declines, with its stock down 2%. A $10.3 billion deal to sell Home Depot's wholesale supply division may fall apart, the Financial Times reported Thursday.
Bank of America Corp.'s $2 billion investment in Countrywide was welcomed by the market, but enthusiasm about the move appeared to wane in noon trading as broader credit concerns dominated.
Countrywide CEO Angelo Mozilo told CNBC Thursday the housing slump will lead to a "recession" and that there is still a tremendous liquidity problem.
The S&P 500 index was off 5 points to 1,459, while the technology-laden Nasdaq Composite declined 14 points to 2,538.
"We're seeing some profit-taking in response to market gains that we've seen since the end of last week," said Mike Malone, trading analyst at Cowen & Co.
"Both the news flow and sentiment has improved since the Fed's announcement on Friday, but despite that, we're not out of the woods yet," Malone said.
More than 1 billion shares exchanged hands at the New York Stock Exchange, with advancing stocks ahead of decliners 9 to 7. At the Nasdaq, 1.3 billion shares were traded, with declining stocks outpacing advancers 9 to 5.
Fed's next move
"We've had a few Fed speakers out there who've said that the Fed's job is to ensure that inflation doesn't get out of hand," Cardillo said.
In addition, "the CBO [Congressional Budget Office] came out and said that in spite of the recent situation, the economy remained sound," Cardillo said. "That may be giving investors a reason to rethink."
CBO said Thursday that recent woes were unlikely to significantly hamper the economy over the long run.
"Although the economic outlook has been clouded by recent troubles in the housing market and turbulence in financial markets, the most likely scenario is for the economy to return to solid growth by early 2008," the CBO report said.
U.S. stocks climbed Wednesday, lifting the Dow 145 points after Bank of America, Citigroup Inc. , JPMorgan Chase & Co. , Deutsche Bank AG, and Wachovia borrowed money from the Federal Reserve. Tapping the central bank for funds from the Fed would usually be viewed in a negative light, but the move came as a way of bolstering the financial system after the Fed cut its discount rate last week.
While the stock market is showing signs of stabilization, investors are also focused on whether the central bank would cut its policy rate either before or at the next Federal Open Market Committee meeting on Sept. 18. Some think the Fed will have to cut the benchmark lending rate between banks, which now stands at 5.25%, by at least a quarter point, by or at the FOMC gathering.
"We're going to be looking for enough negative economic data to push the Fed over the edge to lower rates come Sept. 18," said Art Hogan, chief market strategist at Jefferies & Co. "That's a tough game to play, if you get too much of what you wish for."
Countrywide help
In announcing its investment late Wednesday, Bank of America called Countrywide undervalued due to the current market "turmoil." Hammered during the broadening crisis in the home loan business, Countrywide's stock was up more than 3.4%.
"There's a belief in the credit markets that things have eased a bit," Hogan said. "At least in the near-term a relative state of tanquility has settled into the markets as we wait for the next shoe to drop."
Bank of America's move is seen both as a means of helping Countrywide weather problems in the global credit markets, as well as preventing further losses at the mortgage lender from hurting the underlying economy.
Analysts at Bear Stearns didn't see the move leading to a full takeover.
"Bank of America executives have said repeatedly that they do not want to try to manage mortgage servicing rights assets exceeding $20 billion, as Countrywide must, given its business model," the broker said.
"We view this as an investment by Bank of America, on terms that could generate a significant profit for the bank, in a customer facing a liquidity squeeze which could have negative short-term implications for the U.S. financial system."
Deutsche Bank said the real estate finance sector would likely rally on the news, suggesting investors buy Redwood Trust .
More earnings came from the retail sector, with New York & Co. cutting its forecast, and Stein Mart reporting a 78% profit fall. After the close Gap reports quarterly results.
Lehman Brothers said Wednesday that it's shutting its subprime-mortgage unit BNC Mortgage LLC and firing 1,200 people, becoming the latest company to stop offering home loans to less-creditworthy borrowers.
Data
Ahead of Thursday's opening, the Labor Department's tally of jobless claims came in as expected, with the number of those filing for initial unemployment benefits for the week ending Aug. 18 falling by 2,000 to 322,000.
Other markets
Treasurys gained Thursday, as credit concerns replayed in the markets, with the benchmark 10-year note up 6/32 at 100 31/32, its yield lapsing to 4.627%.
On the currency markets, the dollar rose against the yen, but fell against the euro and British pound, as investors increased their appetite for risk overnight by resuming so-called carry trades.
On the New York Mercantile Exchange, gold futures closed slightly lower, reflecting weakness in the broader U.S. stock market after a failed attempt at reaching the $675-a-ounce level, as the dollar declined against major currencies and oil prices struggled to end their losing streak.
Crude-oil prices headed higher, poised to break a three-session losing streak on the back of strength in gasoline, which saw a steep decline in weekly U.S. supplies.
By Kate Gibson