Stock Gains Fade

The Dow gave up a triple-digit gain to finish nearly flat amid debate about Goldman Sachs' hedge-fund bailout

Stocks reversed to the downside in the final minutes of trading Monday, offering a whiff if not a full blast of the volatility seen over the past few weeks. The market's earlier sigh of relief at strong July retail sales data and a $3 billion cash infusion by Goldman Sachs (GS) into one of its troubled hedge funds dissipated as concerns about lingering damage from a credit squeeze resurfaced.

The Dow Jones industrial average surrendered nearly a gain of nearly 100 points to finish 3.01 points, or 0.02%, lower at 13,236.53 on Monday. The broader S&P 500 lost 0.72 points, or 0.05%, to end at 1,452.92. The tech-heavy Nasdaq composite index was off 2.65 points, or 0.10%, to 2,542.24.

Goldman Sachs injected $2 billion of its own money, plus another $1 billion raised from outside investors into a credit-exposed hedge fund, saying it viewed the fund's 30% loss in asset value last week as a statistical anomaly that offered an attractive buying opportunity. The news initially sparked some optimism among investors. But Goldman shares reversed early gains and ended the session lower amid debate on the Street about whether the move reflected a vote of confidence in its computer models or an attempt at damage-control against further losses.

Pessimists say it's inevitable the bank will be forced to write down the value of those assets and take a charge in the future, and conclude that the fallout from the subprime mess isn't over. One analyst on CNBC Business News said the watchword for the rest of this week will be "redemptions," and another said he saw Goldman's action as an effort to ensure there was enough liquidity in the fund to cover redemptions and avoid the embarrassment that Bear Stearns (BSC) underwent when it halted investor withdrawals from one of its hedge funds last week.

And, after providing $38 billion to the U.S. banking system on Friday, the Federal Reserve's injection of an additional $2 billion on Monday, rather than being disappointing, was taken as a sign that there is enough liquidity to avoid a credit crunch, analysts said.

In the wake of widespread intervention by central banks to stave off a full-blown credit crunch, the markets are trying to stabilize, which should establish a trading range for the major indices over the next couple of weeks, said Peter Cardillo, chief market economist at Avalon Partners in New York. The winding down of earnings season will also lead to fewer gyrations, allowing the market to return to a more rational look at economic data coming out, he predicted.

He said he sees the bias toward selling as exaggerated as he expects the Fed's moves to provide sufficient liquidity to the banking system will help avoid a full-blown credit crunch.

U.S. retail sales were up 0.3% in July, and rose 0.4% excluding vehicle sales. On a year-over-year basis, sales are up 3.1%. The data are a little stronger than expected, according to Action Economics.

Bear Stearns economist John Ryding wrote Monday the data show the U.S. consumer is "on a solid trajectory." That makes a rate cut from the Federal Reserve less likely.

Data on Tuesday and Wednesday, including the producer and consumer price indexes, could clarify the inflation picture. Preliminary consumer sentiment data from the University of Michigan is due on Friday. Throughout the week, markets will closely watch the Fed for more moves to ease the credit crisis.

A report from Reuters Estimates projected an 8.6% rise in second-quarter earnings for companies in the Standard & Poor's 500 index, up from a 7.8% forecast last week and 6% when the second quarter started on April 1. The biggest year-over-year gains were expected in the healthcare and technology sectors, up 14% and 13%, respectively, according to the weekly compilation of forecasts from Wall Street strategists and industry analysts.