stocks rally back on hopes write downs nearly

Stocks rally back on hopes write-downs nearly over

Markets stumbled earlier as fund said it's close to collapse; dollar hits lows

By Nick Godt, MarketWatch
Last Update: 4:31 PM ET 3/13/08

NEW YORK (MarketWatch) -- U.S. stocks rallied back from steep losses Thursday, with the Dow industrials recovering from a 235-point drop, after Standard & Poor's suggested banks might be finished with the bulk of write-downs linked to bad home loans.

The report helped the market recover from losses sparked by the potential collapse of a fund owned by Carlyle Group and another weak report on retail sales, which fueled concerns over recession.

"We started today with really bad news," said Paul Mendelsohn, chief investment strategist, at Windham Financial Services. "Then S&P came out with their report about being near an end to the subprime crisis. Who knows? We were deeply oversold and ready for a bounce, the S&P report was a trigger."

Crude prices fell back below $110 a barrel after earlier hitting a record above $111, taking some pressure off stocks.


Off more than 200 points earlier the session, the Dow Jones Industrial Average ($INDU) rallied back to end 35 points higher at 12,145, with 16 of its 30 components gaining ground. Among the stocks still in the red, American International Group Inc. (AIG) lost 2.7%, Citigroup Inc. (C) fell 0.7% and JPMorgan Chase & Co. (JPM) lost 1.3%.

"We're still in a bear market, but there are bear-market rallies," added Mendelsohn. "We're also getting closer to the end of the quarter and if somebody wants their portfolios to look good before then, this is the time to do it. We're likely to have another [cut in interest rates by the Federal Reserve] next week."

The S&P 500 Index ($SPX) gained 6 points to end at 1,315, and the Nasdaq Composite Index (COMP) rose 19 points to 2,263.

Standard & Poor's said that write-downs from the subprime financial crisis can reach $285 billion, up from a previous estimate of $265 billion, but that the end of write-downs are in sight for large financial firms.

The market had stumbled earlier, with the Dow losing more than 200 points, after a fund managed by the Carlyle Group reported that it was close to collapse, dragging down the dollar and boosting oil.

Counterparties of the Carlyle fund in trouble include Dow components Citigroup, J.P. Morgan and Bank of America Corp. (BAC)

Also hitting financial stocks earlier, Treasury Secretary Henry Paulson urged banks to reconsider their dividends to preserve capital.

With credit markets in turmoil, Paulson called for several steps to strengthen federal oversight of the mortgage and credit markets -- the first federal regulatory response aimed at the roots of the financial-market turmoil that has roiled Wall Street for the past seven months. See full story.

"Paulson didn't say anything new," said Art Hogan, chief market strategist at Jefferies. "We expect bold and decisive plans like we got from the Fed on Tuesday."

On the New York Stock Exchange, trading volumes showed 1.8 billion shares changing hands, with gainers topping decliners by a ratio of 18 to 13. On the Nasdaq, 1.1 billion shares traded, with gainers topping decliners by 17 to 11.

Collapse at Carlyle?

International stock markets stumbled overnight as Carlyle Capital (CARYF) , a bond fund affiliated with the prestigious private-equity firm, said that it expects lenders to take possession of "substantially all" of its remaining assets after it was unable to meet surging margin calls on its portfolio of securities backed by residential mortgages. See related story.


Other Carlyle counterparties include Bear Stearns Cos. (BSC) , which fell 10%, BNP Paribas, Credit Suisse Group (CS) , Deutsche Bank AG (DB) and UBS AG (UBS) .

In the foreign-exchange market, the dollar fell sharply against the Japanese yen, trading below 100 yen for the first time since 1995. See full story.

The weak dollar first boosted crude prices to another record high above $111 a barrel. Read more.

Similarly, gold briefly topped $1,000 an ounce. See Metals Stocks.

But bonds reversed an earlier safe-haven rally which had sent the yield on the benchmark 10-year Treasury bond down to 3.41%. The bond finished down 0.9% at 99.22, yielding 3.534%. See full story.

Retail sales fall

Consumer spending weakened again in February as U.S. retail sales fell 0.6%, the Commerce Department reported Thursday. Most kinds of retail stores reported lower seasonally adjusted sales in February, even before the impact of inflation was counted. The figures were weaker than Wall Street economists had expected, having forecast no change in retail sales.

"Retail sales were very disappointing, and it's one more indication that we're headed toward one quarter of negative growth," said Peter Cardillo, chief market economist at Avalon Partners.

"As for the situation with Carlyle, the market is looking for some sort of capitulation in credit markets," he added. "People want to get all the bad news out and wonder who else is going to go belly-up. Until then, it's going to be stop and go [for stocks]."

Separately, first-time claims for state unemployment benefits for the week ended March 8 came in at 353,000, the same as the revised number for the week ended March 1, the Labor Department reported Thursday.