Stocks Unable to Sustain Rally

Skepticism about the Fed's $200 billion liquidity plan, and another record closing high for oil, dragged the market lower Wednesday

Major U.S. stock indexes closed lower Wednesday as trading turned more cautious after the market's huge rally in the previous session. Market observers tied Wednesday’s retreat to profit taking and mixed opinions about the Federal Reserve's recent steps to help ease the credit crisis. Also causing uneasiness among investors: crude oil prices, which fanned inflation fears by heading deeper inside record territory.

Bonds rallied as the Fed is now seen cutting rates 50 basis points next Tuesday instead of 75 basis points, as the central bank uses various tools to combat current liquidity problems. The dollar was lower, while gold prices rose.

On Wednesday, the Dow Jones industrial average finished lower by 46.57 points, or 0.38%, at 12,110.24. The broader S&P 500 index fell 11.88 points, or 0.90%, to close at 1,308.77. The tech-heavy Nasdaq composite index shed 11.89 points, or 0.53%, to end the session at 2,243.87.

Action in the broader market was negative, with 12 stocks advancing in price for every 20 that fell on the New York Stock Exchange. Nasdaq breadth was 17-13 negative.

Investors celebrated on Tuesday the news that the Fed, along with other central banks, will offer 28-day loans to banks and allow mortgage-backed debt to be used as collateral. It's a move aimed at easing the credit crunch, and investors will be watching to see if it continues to soothe debt markets. Major stock indexes advanced 3.5% to 4% Tuesday.

"Despite the move by the Fed to temporarily accept mortgage-backed securities as collateral, this is not a bail-out," said Ben Eldred of Daiwa Securities in London. "Rather, it is the latest attempt by the various central banks to provide institutions with sufficient breathing space to make the necessary adjustment to their balance sheets in a more orderly fashion."

Action Economics says foreign exchange markets don't seem convinced the Fed's liquidity measures will help to stabilize the economy. Further, Representative Barney Frank gave ratings companies a month to fix standards that they apply to local government debt, as his House committee opened a hearing today on how the firms evaluate municipal bonds.

Meanwhile, Bear Stearns (BSC) chief executive Alan Schwartz, in a televised interview on CNBC, dismissed recurring speculation that the investment bank faces a cash crunch, saying it has hefty cash reserves that have remained little changed this year. Schwartz also said he is comfortable with the range of analysts' earnings estimates for the fiscal first quarter ended Feb. 29. Results for the quarter are due next week. "We don't see any pressure on our liquidity, let alone a liquidity crisis," he said.

Investors on Thursday will be examining reports on January business inventories, February retail sales, and weekly initial jobless claims.

NYMEX April WTI crude futures rose $1.20 to a record $109.95 per barrel Wednesday as the dollar fell to record lows against the euro and sterling as the U.S. economy showed signs of being in recession. Traders ignored an Energy Dept. report that showed a larger than expected rise in inventories.

Traders, nervous about banking, mortgage and credit problems, are buying commodities as a hedge against disaster, according to S&P MarketScope.

Comex April gold futures rose $4.50 to $980.50 per ounce.

Among stocks in the news Wednesday, Caterpillar (CAT) stuck with its 2008 estimate for earnings growth of 5% to 15%, and revenue growth of 5% to 10%. The industrial firm says it will invest $2.3 billion in capital expenditures this year.

Managed health care stocks, which took a pounding Tuesday after WellPoint (WLP) slashed its 2008 profit forecast), were under pressure again Wednesday, after .Humana (HUM) cut its first quarter earnings guidance nearly in half, from a range of 80 to 85 cents to a range of 44 to 46 cents.

AMR Corp. (AMR), the parent of American Airlines, was reportedly downgraded by JPMorgan analysts along with other airlines Alaska Air Group (ALK), Continental Airlines (CAL), Delta Air Lines (DAL), US Airways (LCC) and UAL Corp. (UAUA).

Take-Two Interactive Software (TTWO) reported a loss of 52 cents per share, vs. a 30-cent loss a year ago, as revenues at the video game maker fell 13%. The firm raised its fiscal 2008 guidance to $1.25 billion to $1.4 billion in revenue and $1.35 to $1.55 per share in earnings.

J. Crew Group (JCG) posted earnings of 39 cents per share, vs. 71 cents a year ago. Same-store sales rose 4%.

European indexes were higher on Wednesday. In London, the FTSE 100 index was up 1.29% to 5,763.80. In Paris, the CAC 40 index added 1.23% to 4,684.44. Germany’s DAX index rose 1.06% to 6,593.44.

Asian indexes gained ground overnight. Japan’s Nikkei 225 index climbed 1.6% to 12,861.13. In Hong Kong, the Hang Seng index rose 1.86% to 23,422.76.

Treasury market

Treasuries rallied sharply just a day after a big sell-off that was spurred by the Federal Reserve's plans to boost liquidity. The 10-year note jumped 33/32 to 100-08/32 for a yield of 3.47%. The 30-year bond surged 55/32 to 99-17/32 for a yield of 4.40%. The quick reversal reflects skepticism that the Fed's actions will suffice to stabilize credit markets.