More Credit Worries Ruin the Day

Word of trouble from the country's 10th-largest mortgage lender abruptly pulled the plug on the stock market's attempted recovery, with the Dow wiping out a two-day rally to end Tuesday with a near 150-point loss, and a monthly decline of 1.5%.

Concerns about credit markets and bad-home loans resurfaced with news that American Home Mortgage Investment Corp. might liquidate its assets after failing to meet margin calls. "That again brings up the issue that we don't know how the credit crunch is going to affect financials," said Art Hogan, chief market strategist at Jefferies & Co. The Dow Jones Industrial Average closed 146.3 points lower at 13,212, with 26 of its 30 components taking a hit. "There is not one signal that says the credit markets are okay; there is a tremendous amount of uncertainty, and it is going to take some time for confidence to return to the market," said Mike Malone, a trading analyst at Cowen & Co.

The S&P 500 fell 18.64 points to 1,455.27, giving it a 3.2% drop for the month, while the Nasdaq 100 dropped 37.01 points to 2,546.27, putting it on course for a 2.2% drop for July. "There is also attention being paid to crude oil possibly reaching new highs," said Hogan of Crude-oil futures, which advanced above $78 a barrel, with the September contract closing at $78.21 a barrel.

The Dow had surged more than 120 points in the early going after General Motors Corp. reported a return to profitability. The automaker's stock retained some of its advance, with its stock up 0.74%. But the market shifted course, and American Home Mortgage's stock lost nearly 90% of its value, after the mortgage lender said it had missed margin calls from lenders and had hired advisers to review its options, including liquidating its assets. Another indication of the shaky credit market came from IndyMac Bancorp. Inc. which reported a 57% slide in second-quarter profit from the year-ago period, with the mortgage lender declining to offer a full-year forecast due to the uncertain outlook for the housing and mortgage markets.

Given the market's massive drop last week, it's no surprise that doubt lingers, said Al Goldman, chief market strategist at AG Edwards. "After the emotional shock to the system that we had Thursday and Friday, it would be very unusual to have it go back up and away," he said. Volume hit 1.8 billion shares at the New York Stock Exchange, while 2.4 billion shares were traded at the Nasdaq. Declining stocks beat advancers 9-7 at the NYSE, and by 18-11 on the Nasdaq.

Stocks spent much of Tuesday in recovery mode, extending solid gains from the prior day, in an effort to shake off the stiff losses incurred the week before.
Tuesday's earnings and economic reports mostly offered support, with the Commerce Department reporting core consumer inflation increased 0.1% for the fourth consecutive month in June, pushing the yearly gain in core inflation down to the lowest level in three years.

Other stock-friendly news included the Conference Board's report that consumers were more positive about the economy and their own finances in July than at any time since 9/11.

Business activity in the Chicago region worsened in July, according to a survey of corporate purchasing managers. The Chicago purchasing-managers' index fell to 53.4% from 60.2% in June, with the number below economists' expectations.

Treasury prices climbed, pushing yields lower, after the stock market turned negative. The benchmark 10-year note closed up 7/32 at 97-27/32 with a yield 4.775%.

The dollar traded little changed against other major currencies. In New York trade, the Euro stood at $1.3699, compared with $1.3692 late Monday. Gold futures extended the prior day's gains, boosted by rising oil prices. Gold for August delivery climbed $2.80 to close at $666.90 an ounce.