Wall Street : Falling bank stocks unravel rally; Dow loses 82.99 pts (23 April 2009)

Nagging worries about banks upended a stock market rally Wednesday as investors contemplate rising level of bad debt

Volatile financial stocks steered the overall market for the third straight day after Morgan Stanley and credit card issuer Capital One Financial Corp. posted lackluster quarterly reports. Investors have been worried about rising levels of souring debt on bank balance sheets.

A late-session drop in banks left Wall Street's major benchmarks mixed. The Dow Jones industrial average fell 83 points, while the technology-heavy Nasdaq composite index ended modestly higher ahead of a quarterly report from eBay Inc.

Banks had tumbled on Monday after Bank of America warned of further loan losses, only to jump back on Tuesday after Treasury Secretary Timothy Geithner told Congress that most banks were well-capitalized.

The jumpy trading in financial shares came just as major companies report first-quarter earnings. Results from AT&T, Boeing and McDonald's contained glimmers of hope about consumer spending and the economy in general.

"We're starting to see a little light at the end of the tunnel," said Frank Ingarra, co-portfolio manager at Hennessy Funds. "The challenge is I don't know how long the tunnel is."

The Dow fell 82.99, or 1 percent, to 7,886.57.

Broader market measures were mixed. The Standard & Poor's 500 index fell 6.53, or 0.8 percent, to 843.55, while the Nasdaq composite index rose 2.27, or 0.1 percent, to 1,646.12.

Anton Schutz, portfolio manager of Burnham Financial Industries Fund and Burnham Financial Services Fund, said with bank earnings mostly in hand investors are now focused on the results of the government's "stress tests," which are aimed at determining whether banks will need more government bailout money.

Schutz said the late slide in bank stocks Wednesday reflects fear over what those details might reveal about the industry. Results from the tests are due for release May 4.

Morgan Stanley fell $2.21, or 9 percent, to $22.44 after reporting it lost $578 million and reduced its dividend. The company said it was hurt in part by a deteriorating commercial real estate market.

Banks have largely dictated the stock market's direction since last fall, when the collapse of Lehman Brothers Holdings Inc. shocked the financial system. A string of better-than-expected results in recent weeks initially reassured investors that the industry was not as troubled as many feared, but Bank of America Corp. touched off worries again when it said it was expecting a sharp rise in levels of bad debt.

Analysts say it's crucial that banks become more stable and resume normal levels of lending in order for the economy to recover.

Bank of America fell 50 cents, or 5.7 percent, to $8.26 Wednesday.
Wells Fargo & Co., which bought Wachovia last fall at the height of the credit crisis, said it earned $2.38 billion. That compares with a profit of $2 billion a year earlier. Wells fell 63 cents, or 3.4 percent, to $18.18 after rising for much of the day.

Technology shares fared better.
EBay Inc. rose 49 cents, or 3.4 percent, to $14.78 ahead of its report, and then climbed another 8.6 percent in after-hours trading. The Internet auction company's earnings and revenue fell for the second quarter in a row due to the slumping economy, but they surpassed analysts' expectations.

Apple Inc. slipped 25 cents to close at $121.51 but rose 2.6 percent in after-hours trading after reporting a better-than-expected 15 percent rise in profit.

AT&T Inc., meanwhile, rose 46 cents to $25.74. It said strong results from its wireless business softened the effect of the weak economy and helped the country's biggest telecommunications carrier beat analyst estimates for the first quarter.

And Yahoo Inc. rose 10 cents to $14.48 after saying it would lay off nearly 700 workers. The Internet company's earnings fell 78 percent to $118 million for the first three months of the year.

In other trading, the Russell 2000 index of smaller companies rose 0.66, or 0.1 percent, to 470.71.

Rising stocks outpaced those that fell by about 8 to 7 on the New York Stock Exchange, where consolidated volume came to 7.15 billion shares, down slightly from 7.22 billion shares Tuesday.

Bond prices fell, sending the yield on the 10-year Treasury note up to 2.94 percent from 2.90 percent late Tuesday.

The dollar was mixed against other major currencies, while gold prices rose.

Overseas, Britain's FTSE 100 rose 1.1 percent, Germany's DAX index rose 2.1 percent, and France's CAC-40 rose 1.7 percent. Japan's Nikkei stock average rose 0.18 percent.