Stocks Squeeze Out Small Gains

Traders weighed mixed economic data and news of credit troubles at a British mortgage lender. Next week's big event: The FOMC meeting Tuesday

Major U.S. stock indexes rose marginally in choppy trading Friday as investors looked past a sharp drop in August retail sales excluding autos and weak August industrial production growth to focus on an expected an interest rate cut by the Federal reserve next week.

The market showed resilience in the face of news of the Bank of England's emergency funding for a troubled U.K. lender and Merrill Lynch's (MER) warning that subprime assets may hurt its third-quarter profits.

On Friday, the Dow Jones industrial average gained 17.64 points, or 0.13%, to 13,442.52. The blue-chip benchmark was constrained by weakness in component American Express (AXP), which shed 2.7% on reports of a Merrill Lynch downgrade. The broader S&P 500 index added 0.3 points, or 0.02%, to 1,484.25.

The tech-heavy Nasdaq composite index added 1.12 points, or 0.04%, to 2,602.18. The index was aided by strength in Yahoo (YHOO), up 4.3% on the session.

Market sentiment was slightly positive, with 18 issues gaining in price for each 15 that declined on the NYSE. Nasdaq trading breadth was 16-13 positive. Trading volumwe was light as many market participants were absent in observance of the Jewish New Year.

One of Britain's largest mortgage lenders, Northern Rock (NRK.L), lost nearly a quarter of its market value Friday after it said it had been hit by the worldwide credit crunch. The Bank of England offered emergency cash to Northern Rock deal with a "severe liquidity squeeze" at the lender. The news sent the London benchmark stock index sliding on Friday, and sparked worries in other financial capitals.

Traders were wondering what an array of economic data mean for the Federal Reserve meeting on Sept. 18. The big question is whether the Fed cuts the federal funds rate by a quarter- or half-percentage point.

U.S. retail sales grew less than expected in August, but July sales were revised upward. August sales rose 0.3%, from 0.5% in July and vs. the 0.5% economists expected. Excluding autos, sales were down 0.4%, vs. the 0.2% expected. Part of the fall in spending was attributed to the lower price of gas. Gas station sales fell 2.4%, and excluding gas retail sales were up 0.6%.

U.S. industrial production rose 0.2% in August, a bit less than expected, but July and May figures were revised upward. That left "a stronger than expected trajectory," Action Economics says. Also Friday, U.S. import prices fell 0.3% in August and export prices were up 0.2%.

Meanwhile, the University of Michigan sentiment index edged up in September to 83.8 from a final 83.4 reading in August and above the 83.0 that markets had expected. The current conditions index dipped to 98.3 from 98.4 in August, but expectations rose to 74.4 from 73.7.

Overall, the ongoing negative impact from credit crunch stories and a bounce in retail gasoline prices held back optimism, but sentiment remains strong enough that a major drop in consumer spending seems unlikely, according to Standard & Poor's MarketScope.

John Merrill, chief investment officer at Tanglewood Capital Management looks at the stock market and sees a "two-tiered" situation. The slowdown in housing and worries about debt have hit the financial industry and caused consumers to spend less than planned. The result is that financial and consumer cyclical stocks make up almost all of the stock market's decline since its peak on July 19. As for the rest of the market -- industrials, health care, technology and other sectors -- "they're bystanders," Merrill says.

On Friday, crude oil for October delivery fell 99 cents in New York to close the session at $79.10 per barrel, as Hurricane Humberto was

downgraded to a tropical storm, and as new credit troubles in global banking sector hit equity markets. Before subsiding, the storm shut down oil shipping channels and three refineries when it slammed onshore in Texas, according to Reuters.

On Thursday, for the first time ever, crude oil closed the trading day above $80 per barrel.

Among stocks in the news on Friday, Goldman Sachs' (GS) Global Alpha Hedge Fund reportedly lost 22.7% of its value in August. That was the worst month in the fund's 12-year history, the Wall Street Journal reports.

Dell Inc. (DELL) says it will delay its second quarter profit report until it has completed restating its financial statements from 2003 through the first quarter of 2007. Dell was forced to restate the numbers after an internal accounting investigation.

Eli Lilly & Co. (LLY) won FDA approval to expand the use of its osteoporosis drug Evista to reduce the risk of breast cancer in some patients.

W.W. Grainger (GWW), a large distributor, reported August daily sales were 9% higher.

Monsanto Company (MON) and Dow AgroSciences (DOW) reached a licensing agreement to launch a new line of genetically modified corn seeds.

Cardinal Health (CAH) reaffirmed its profit guidance for fiscal 2008.

European equity indexes fell Friday as the Northern Rock news spooked investors, though a partial recovery at the close erased some of the day's losses. In London, the FTSE 100 index was down 1.17% to 6,289.3. Germany's DAX index dropped 0.51% to 7,497.74. In Paris, the CAC 40 index was off 0.49% to 5,538.92.

In Japan, the Nikkei 225 index traded higher by 1.94% to 16,127.42. In Hong Kong, the Hang Seng index was up 1.47% to 24,898.11. The Shanghai composite index rose 0.73% to 5,312.18.

Treasury Markets

Treasuries ended Friday's session little changed, paring or erasing early gains that were driven by a flight to safety on news the Bank of England will inject liquidity into mortgage lender Northern Rock.

The 10-year note finished unchanged at 102-09/32 for a yield of 4.46%. 30-year bond edged up 02/32 to 104-13/32 for a yield of 4.72%. The inability of the bulls to sustain gains likely reflects sentiment that a rate hike by the Federal Reserve at the Sept. 18 FOMC meeting has been fully discounted, says S&P MarketScope.

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