Stock Rally Runs Out of Steam

U.S. stocks closed mostly lower Monday, snapping a four-session winning streak as buying in the financial sector became more selective and profit taking weighed down technology and manufacturing issues.

Banks remained in the spotlight; Barclays (BCS) said it had a strong start to 2009, echoing similar comments made last week by Citigroup (C), Bank of America (BAC), and JPMorgan Chase (JPM). Barclays rose 20% on the day, but certain other financials and the broader market lost ground as the day progressed.

Weakness in tech bigwigs Microsoft (MSFT), Google (GOOG), and Yahoo! (YHOO) weighed down the Nasdaq composite index.

On Monday, the 30-stock Dow Jones industrial average finished lower by 7.01 points, or 0.10%, at 7,216.97. The broad S&P 500 index was down 2.66 points, or 0.35%, at 753.89. The tech-heavy Nasdaq composite index fell 27.48 points, or 1.92%, to 1,404.02. NYSE breadth was 18-13 positive, while Nasdaq breadth was 15-12 negative. Trading was active.

Bonds were off as a report indicated foreigners were selling their holdings of U.S. assets. The dollar index and gold futures were also lower. Oil futures were higher as OPEC left quotas unchanged.

Traders eyed reports that showed the New York Fed's March Empire State index declining to a new all time record low, a 1.4% drop in February industrial production, and a decline in February capacity utilization to 70.9% from 72% January. Some market observers were hopeful Tuesday's housing starts and producer price index data for February would spur more buying.

Markets were higher in Europe, and rose overnight in Asia as finance ministers from the Group of 20 pledged to fight the global recession. Officials vowed to work together to clean up the toxic assets that helped trigger the financial crisis and led banks to rack up more than $1 trillion in losses. Officials meeting near London this weekend outlined guidelines on how governments should rid banks of distressed securities that have devastated companies from Citigroup to Royal Bank of Scotland Group.

With the G20 calling the fight its "key priority," U.S. Treasury Secretary Timothy Geithner vowed to "move quickly," Bloomberg reported. The commitment, made three weeks before G20 leaders gather in London, comes as investors demand faster action in the face of turmoil that's showing few signs of abating.

Separately, the Obama administration may give the Fed new powers to impose tougher capital requirements for large banks, The Wall Street Journal said Monday, citing people familiar with the matter.

According to a Journal report, troubled insurer American International Group (AIG), now 80% owned by U.S. taxpayers, spent the weekend deflecting mounting criticism of how government funds have been funneled to various banks and used to pay employee bonuses at the business unit that almost sank the company. After calls for more transparency, AIG disclosed Sunday that roughly two-thirds of the $173.3 billion in federal aid it received has been paid out to trading partners such as banks and municipalities in the U.S. and abroad. The disclosures came as AIG was lambasted for about $450 million in bonus payments planned for employees at a business unit that lost $40.5 billion last year. The unit's woes pushed the company to near-collapse, forcing the government bailout.

The AP reports President Barack Obama and his economic team, seeking to counter a chorus of unhappy Republicans and nervous Wall Street investors, are taking a cheerier tone while making billions in federal loans available to the nation's struggling small businesses. Obama and Treasury Secretary Timothy Geithner plan to announce a broad package that includes reduced small-business lending fees and an increase on the guarantee to some Small Business Administration loans.

The Journal reports in a rare direct message to the American people, Federal Reserve Chairman Ben Bernanke appeared on CBS TV's "60 Minutes" and defended government actions being taken to shore up the banking system, saying that a recovery won't happen until the financial system stabilizes. "I'd just like to say to the American people...that I have every confidence that this economy will recover, and recover in a strong and sustained way," said the Fed chief.

In economic news Monday, February industrial production sank 1.4%, worse than the 1.2% decline that markets expected and after a downwardly revised 1.9% drop in January. Industrial production has contracted in five of the last six months. Capacity utilization fell to 70.9% from 71.9% in January. Manufacturing production declined 0.7% after plunging 2.7% the month before. Capacity utilization in manufacturing dropped to 67.4% from 67.9 in January and a new record post-war low. Utility output plunged 7.7% in February, though largely on warmer weather. Mining declined 0.4% after falling 1.0% the month before.

The U.S. Empire State manufacturing index declined to -38.2 in March, a new all time record low, after dropping like a stone to -34.7 in February (the prior low). The deterioration is worse than expected. The index was at -22.2 a year ago. The employment index improved slightly to -38.2 from -39.1 (4.5 a year ago). The new order index dropped sharply to -44.8 versus -30.5 (-4.7 last March). Prices paid fell to -14.6 compared to -13.8 (they were 50.6 last year). Prices received declined to -23.6 from -20.7 (15.7 a year ago). The 6-month ahead General Business Conditions index improved, however, to 3.1 from -6.6 (25.8 last March).

The European Union statistics office, Eurostat, said prices in the 16 countries using the euro rose an expected 0.4% month-on-month for a 1.2% year-on-year gain, up from 1.1% in January. The European Central Bank wants to keep headline inflation just below 2% over the medium term. It cut interest rates to a record low of 1.5% this month as inflation pressures wane while the economy sinks deeper into recession.

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