Stocks Trade Mixed

Indexes barely budged from Friday's closing levels as investors tried to decipher Fed speeches and fretted about credit markets and the economy

Stocks turned in mixed results Monday as concerns about credit markets, interest rates and the economy continued to weigh on the market.

Earlier in the day, some were expecting stocks to bounce back from a sell-off on Friday, when stock indexes fell almost 2% after a disappointing jobs report raised questions about the health of the U.S. economy. But stocks spent most of the day in negative territory before recovering a bit late in the day.

A big worry on Wall Street is the state of credit markets. Action Economics notes that $140 billion in commercial paper, the short-term funding for corporations, comes due for refinancing in the next ten days. If that goes smoothly, it could reassure nervous investors.

Traders also watched the Federal Reserve closely, hoping an interest rate cut at its Sept. 18 meeting might help push the markets and the economy back to normal. No fewer than four Fed officials spoke on Monday, and Fed Chairman Ben Bernanke speaks on Tuesday.

On Monday, the Dow Jones industrial average was up 14.47 points, or 0.11%, to 13,127.85 after spending most of the day in negative territory. The broader S&P 500 dropped 1.85 points, or 0.13%, to 1,451.7. The tech-heavy Nasdaq composite index fell 0.26%, or 6.59 points, to 2,559.11.

Bill Larkin, portfolio manager of fixed income at Cabot Money Management, says that he and other debt investors are in a "holding pattern," waiting for clearer signals from the Fed. In the last couple of months, investors have fled from riskier debt toward safe investments like Treasury bills. Michele Gambera, chief economist at Ibbotson Associates, a subsidiary of Morningstar (MORN) expects financiers of commercial paper to be much pickier, working on a case-by-case basis.

Despite that caution, Larkin says pressure is building up "like a wave" for a re-entry into riskier debt like commercial paper. That's because yields on Treasuries are very low; the two-year bond yield was at about 3.8%. That's a terrible return, Larkin says, and investors may soon be seeking a much better return in corporate debt.

Many said Friday's weak jobs data, by raising the likelihood of an economic slowdown, made it a near certainty that the Fed would cut interest rates at its Sept. 18 meeting. Kurt Karl, chief U.S. economist at Swiss Re, pegged the chance of a recession at 35%, up from 20% last month. "Careful action is now needed from the Fed to keep the illiquidity in the credit markets from severely affecting the real economy," Karl wrote.

The market is poring over a series of speeches from Fed officials Monday, looking for clues. A key question is whether the Fed cuts the federal funds rate by 0.25 or 0.5 percentage points. After Friday's jobs report, "the risks are clearly skewed toward a larger initial cut," Deutsche Bank (DB) chief U.S. economist Joseph LaVorgna wrote Monday. But, he added: "There is still enough time between now and the FOMC meeting that the market may settle down a little. It will be an interesting week."

In their talks Monday, Fed speakers, while acknowledging poor conditions, seemed to be lowering expectations for a deep rate cut. Janet Yellen, president and chief executive of the Federal Reserve Bank of San Francisco spoke of maintaining a sense of perspective: "Past experience does show that financial turbulence can be resolved more quickly than seems likely when we’re in the middle of it." According to Action Economics, "it looks as though Fedspeak is trying to gear the markets for policy to do as little as they can get away with."

Though so much of Wall Street's attention is on the Fed, Gambera argues that the true impact of the Fed meeting next week will be small. Markets may react strongly to Fed moves, but the economic effects of monetary policy changes typically take a year to kick in, he says. "There is no quick solution," he says.

Traders worried about global growth got more bad news Monday when Japan revised down its economic growth numbers from earlier this year.

Oil prices rose Monday.

October West Texas Intermediate crude rose 79 cents to $77.49 per barrel.

Gold prices were continuing to rise, after topping $700 an ounce last week. On Monday, gold was up $2.50 or 0.35%, to $712.20 per ounce. Commodities experts say gold, which often moves along with fluctuations in the U.S. dollar and oil prices, is rising because of demand for gold jewelry ahead of major holidays in developing countries like India.

Among stocks in the news on Monday, investors reacted to Friday's late report that Countrywide Financial Corp. (CFC) is laying off 10,000 to 12,000 employees in the next three months, up to 20% of its workforce. Total mortgage originations are expected to fall 25% from 2007 to 2008, Countrywide says. The stock fell more than 5%.

Thornburg Mortgage (TMA) was reportedly upgraded to hold from underperform by a Jefferies analyst, but the stock fell more than 2.5%.

Analog Devices (ADI) will sell products and operations, including its Othello radio and SoftFone baseband chipset, to MediaTek for $350 million in cash.

Apple Inc. (AAPL) jumped more than 4% after it announced it had sold its one millionth iPhone.

NCR Corp. (NCR) traded higher after saying it expects earnings in 2007 of 91 to 96 cents per share.

Intel Corp. (INTC) was flat despite raising its third quarter revenue guidance to a range of $9.4 to $9.8 billion, from $9 to 9.6 billion.

European stocks turned lower late on Monday. In London, the FTSE 100 index fell 0.92% to 6,134.1. Germany's DAX index dropped 0.82% to 7,375.44. In Paris, the CAC 40 index was off 0.8% to trade at 5,386.43.

In Japan, the Nikkei index fell 2.22% to 15,764.97. In Hong Kong, the Hang Seng index edged up 0.07% to 23,999.7. The Shanghai composite index rose 1.48% to 5,355.29.

Treasury Markets

Treasuries rose after worries about Japanese economic growth sent Asian buyers into U.S. bonds, according to Standard & Poor's MarketScope. The 10-year note rose 13/32 to 103-11/32 for a yield of 4.33%, and the 30-year bond surged 28/32 to 105-21/32 for a yield of 4.65%.

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