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Stocks Take Another Step Back

Sarina Penn

Stocks in New York had an erratic session before ending lower Friday, as optimism surrounding the probability of more rate cuts had to contend with another sign the U.S. economy is in danger of sliding into, or already in, a recession.

The Dow Jones Industrial Average dropped more than 100 earlier, rebounded to go positive, then proceeded to slide by more than 200 points. At the close, the index had fallen 146.70 points, or 1.2%, to 11,893.69. The S&P 500 was down 10.97 points, or 0.8%, at 1293.37, and the Nasdaq was off 8.01 points, or 0.4%, at 2212.49.

Breadth was poor. Roughly 4.48 billion shares changed hands on the New York Stock Exchange, and some 2.38 billion traded on the Nasdaq. Decliners outpaced advancers 3 to 2.

All three major averages were down substantially for the week thanks especially to the last couple of brutal sessions. Since Monday, the Dow slid 3%, the S&P lost 2.8%, and the Nasdaq gave back 2.6%.

One of the key stories of the day was the government's employment report, which came in far below what was expected and added to the building evidence that the U.S. economy is in the midst of a significant slowdown.

The Labor Department said 63,000 jobs were lost in February, making it the worst month in five years. A Bloomberg survey had the consensus estimate for an addition of 23,000 workers. At the same time, the initial report that 17,000 jobs were given up in January was revised down by 5,000 to show a loss of 22,000. On top of that, December's gain of 82,000 was cut in half. The unemployment rate last month did tick down to 4.8%.

"These poor jobs data are the strongest evidence yet that the economic expansion has ended," Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission, said in an emailed statement. "The economy has slipped into a recession of uncertain depth and duration."

Hank Smith, chief investment officer with Haverford Investments, believes that even if a recession has already begun, "it should be brief and shallow," only nominally worse than a period of slowing or stagnated growth.

Still, the employment numbers ultimately seemed to overshadow attendant hopes of more rate cuts by the Federal Reserve, as well as news that the central bank is taking new steps to improve liquidity in the market. First, the central bank will increase the size of its term auction facility to $100 billion, from $60 billion, over the course of the next two auctions.

Second, it will undertake a series of repurchase transactions that are expected to total $100 billion. The transactions will be conducted as 28-day term repurchase agreements in which primary dealers can put up as collateral for loans any of the securities that are eligible in conventional open market operations.

The Fed plans to continue holding the auctions for at least the next six months unless they become unnecessary. Also, it said it's "in close consultation" with foreign central banks concerning the credit situation. However, with the moves, the chance of an intermeeting rate cut that some traders were hoping for might have been taken off the table.

Phillip Roth, chief technical market strategist with Miller Tabek, said there was "nothing definitive" in the central bank's actions, adding, "this only says the Fed will do what it can to add liquidity into the system."

Smith is more optimistic. Regarding whether monetary stimulus will help turn the economy around, he said, "I think that question is always asked at the darkest period. And our simple response is, 'of course it will work, because it's worked in the past.'"

Fed funds futures are pricing in a 100% chance that the Federal Reserve will ease by 75 basis points when it meets March 18, and the odds stand at 28% for a full percentage point cut. Already, the Fed has lowered its fed funds target rate by 225 basis points since last summer to 3% in an effort to prevent a recession.

Financials, the key for the performance of the overall market for months, briefly helped to pull the market to the upside before subsiding. The NYSE Financial Sector Index slipped 0.1%. The Amex Securities Broker/Dealer Index and the KBW Bank Index each pared back from bigger morning gains to finish higher by 0.2% and 0.6%, respectively.

Several individual names in the sector likewise saw choppy action. Bear Stearns (BSC), Lehman Brothers (LEH), Morgan Stanley (MS), Wells Fargo (WFC) and Wachovia (WB), all strongly ahead earlier, each crossed into negative territory before mostly ending in the green.

Treasury prices were climbing. The 10-year note was up 13/32 in price to yield 3.53%, and the 30-year bond added 5/32 in price, yielding 4.55%.

The new session also brought more bad news from Carlyle Group, whose publicly traded bond fund was hit this week with a default notice after failing to meet four margin calls. Now, the fund said it has gotten "substantial additional margin calls ... well in excess of [those] it received Wednesday" that it believes "could quickly deplete its liquidity and impair its capital." The fund also said it has received more default notices from its lenders.

Also, struggling lender Thornburg Mortgage (TMA) tumbled anew after saying it will have to restate its results for 2007 and that there is substantial doubt about its ability to continue as a going concern because of a spate of margin calls.

Shares reversed to finish 8.5% higher, however, after PIMCO chief investment officer Bill Gross said he has been picking up hundreds of millions of dollars worth of "high quality" paper from the company, at least briefly fueling hopes that the firm can meet its margin calls. The stock proceeded to plunge 25.7% in after-hours trading.

Meanwhile, the Financial Times reported that Citigroup (C) is considering an executive reshuffling in its U.S. consumer unit. Following the prior close, the financial giant laid out plans to retool its mortgage operations. Citi was down 1.2%.

Ambac (ABK) detailed its plan to raise $1.5 billion, saying it will get nearly $1.16 billion of that by selling 171.1 million shares at $6.75 each. The underwriters received a 30-day option to purchase up to an additional 25.7 million shares.

Simultaneously, Ambac priced a $250 million public offering of 5 million equity units and also sold more than 14 million shares, raising $95 million, through a private placement with two financial institutions. Shares of Ambac had a quick last-minute reversal, however, surging 28%, after spending most of the day in negative territory. Post-close action saw the stock giving back 16%.

Additionally, in a move to dig into some of the problems that led to the past year's subprime-led catastrophe, Congress heard testimony from former Citi CEO Chuck Prince, Merrill Lynch's (MER) ex-CEO Stanley O'Neal, and Countrywide Financial (CFC) chief Angelo Mozilo, who answered questions on their own substantial compensation packages as part of a larger Congressional review on failings at the three firms.

Overseas, Asian markets were battered by the U.S. decline last time out, as Tokyo's Nikkei 225 plunged 3.3% to 12,783. The Hang Seng Index in Hong Kong tumbled 3.6% at 22,501. In Europe, London's FTSE 100 and Germany's Xetra Dax each fell 1.2%.

Among commodities, crude oil had another record-breaking day as it crossed the $106 mark for the first time. It finished off 32 cents to $105.15 a barrel, but was still up $3.31 for the week. Gold futures shed $2.90 at $974.20 an ounce.