Monday, August 20, 2007


U.S. stocks staged a comeback as the closing bell neared after a rally in short-term Treasury bills highlighted concerns about the effectiveness of the Federal Reserve's move to boast liquidity by cutting its discount rate.

"It's not your father's bull market anymore." Elliot Spar, Stifel Nicolaus & Co.
Volume at the New York Stock Exchange hit 1.3 billion shares, with advancing stocks outpacing decliners 9 to 7.

At the Nasdaq, nearly 1.5 billion shares exchanged hands, with advancing stocks edging ahead of decliners 15 to 14.

"Liquidity is not yet flowing to those areas of the credit markets that need liquidity most, such as toward the mortgage market and the commercial paper markets," said Tony Crescenzi, fixed-income analyst at Miller Tabak. "Yields have plunged sufficiently enough today to indicate that the psychotic atmosphere that has gripped the financial markets recently remains in place."

Yields on Treasury bills declined sharply as money market funds unloaded asset-backed commercial paper in exchange for the shortest-maturity government debt, with three-month yields down the most since the 1987 market crash.

"Heavy buying, particularly in the very shortest dated Treasury bills at rates below 2% reflected craven fear," said analysts at Action Economics LLC. "Investors were reportedly getting out of even supposedly 'safe' money markets, and taking cover in T-bills, especially after several 'enhanced" money market funds were hurt by their exposure to the now shaky commercial paper market."

The latest reminder of the trouble sparking the credit crunch now roiling the markets came from Thornburg Mortgage Inc. which said it sold a "substantial" part of its triple-A-rated mortgage securities portfolio.

Thornburg, a residential-mortgage lender focused on jumbo adjustable-rate loans, will report a third-quarter capital loss of about $930 million as a result of the mortgage-securities sales, the company said in a statement. Thornburg's stock fell 9.8%.

"When we get fresh evidence of what is going wrong, the markets tend not to be able to hold onto any gains," said Art Hogan, chief market strategist at Jefferies & Co.
Others impacted by the global credit crunch include FCStone Group Inc. which on Monday said it anticipates a $3.5 million charge after losing 25% of its investment with Sentinel Management Group, which filed for bankruptcy on Friday.

Stunted growth?

With investors focused on developments in the credit markets, the market displayed little reaction to an indication of slow growth for the rest of the year, with U.S. leading economic indicators increasing 0.4% in July, according to the Conference Board.

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