Stocks pared losses to finish mixed Tuesday as investors were encouraged by rumors of a possible Ambac bailout and comments from Cisco CEO John Chambers.
The Dow Jones Industrial Average and S&P 500 index closed lower, but the Nasdaq turned positive after Chambers said that there are no signs of further weakness in IT spending.
The market had taken a beating earlier, with the Dow down 200 points at one time, amid some disappointing news about Citigroup and Intel.
Ambac Financial shares shot up amid speculation that banks are close to working out a rescue planfor the troubled bond insurer, though no deal has been reached yet, according to people familiar with the matter.
Talks are expected to continue through the night, and the banks hope to reach an agreement by Wednesday morning. There is, of course, always the danger that talks could fall apart at the last minute.
Still, the rumors gave a boost to the broader market.
"I've heard a fair amount of conversation that we're going to see [an Ambac deal] by tomorrow morning," John Massey, portfolio manager at AIG SunAmerica Asset Management, said. "I think a lot of people don't want to be caught short into tomorrow morning," he added.
Meawhile, beaten-down techs got a boost after Chambers said that Cisco , which makes network equipment, will hit some "bumps" in the U.S. economy, but such bumps would likely be short-lived. Speaking at a Morgan Stanley conference, Chambers said his outlook has not changed since the company's last conference call in early November.
Chambers was the first tech CEO to actually address the slowdown, back in early November, Massey points out. So, Wall Street looks to him for direction, and "he's saying that they're not seeing anything materially weaker than they have seen when they had their last conference call," Massey said.
The 2001 slowdown was driven by the fact that IT spending slowed -- it wasn't consumer-led, Massey said. This time, as evident today by Intel's comments about the consumer slowdown affecting chip prices, the slowdown does appear to be consumer driven.
"The question is, if we have a consumer-led recession ... does it back up the food chain into IT spending?" Massey asked. "There are indications as such, but the question is how severe? how widespread?"
Energy stocks skidded as oil prices fell back around $100 a barrel, after coming just shy of $104 a barrel in intraday trading Monday. OPEC is expected to keep output unchanged.
ExxonMobil and Chevron were among the Dow's decliners. ConocoPhillips , which has gained 25 percent in the past 12 months, fell after Lehman Brothers cut its rating on the stock to "equal weight" from "overweight."
Citi Puts Financials in Focus
Financials finished lower following news that Citigroup's job cuts could reach 30,000or more over the next year and a half due to more writedowns and comments from the head of Dubai International Capital that the Citi, which has already raised $30 billion, will need "a lot more money."
Citigroup executives shot back, saying they're confident with the company's capital levels and aren't looking to raise additional funds from outside investors, the Wall Street Journal reported.
Several financial stocks, including Citigroup, hit notable lows and the S&P Financial index broke through its January low in intraday trading. Citi, the Dow's top decliner, hit a nine-year low. Lehman Brothers and Freddie Mac also reached new intraday lows.
Merrill Lynch cut its earnings forecast for Citigroup, saying it now expects a first-quarter loss of $1.66 a share, compared with its earlier view of 55 cents a share, amid $15 billion in writedowns related to subprime mortgages, theflyonthewall.com reported.
Earlier, Federal Reserve Chairman Ben Bernanke called for banks to take additional measures to prevent more homeowners from falling into foreclosure. "This situation calls for a vigorous response," Bernanke said in a speech to a banking group in Florida. (Read the text of the speech.)
Among other pressures on financials, Wachovia lowered its earnings estimates for four U.S. investment banks including Bear Stearns , saying the first quarter would be one of the worst in years for the sector.
The municipal-bond-insurance industry was in the spotlight again after California, the country's largest issuer of municipal bonds, decided to stop using municipal-bond insurance, saying they bring no value to taxpayers in the current market conditions.
Chips Claw Their Way Back
Most chips recovered after taking a beating for much of the day.
Intel , the world's largest chip maker, lowered its gross margin forecast for the current quarter to 54 percent from 56 percent, citing falling prices of flash-memory chips used in portable electronic devices such as digital cameras and MP3 players.
Jefferies and Banc of America cut their price targets on Intel to $30 and $21 respectively, but kept their ratings on the the stock. Jefferies has a "buy" rating and Banc of America has a "neutral" rating on Intel.
Intel shares finished only slightly lower. However, shares of companies such as Sandisk and Micron Technology, which focus more specifically on that type of chip, logged sharper declines.
The Philadelphia Stock Exchange semiconductor index closed up nearly 1 percent.
Shares of Applied Materials jumped after the chip-equipment maker struck a $1.9 billion deal with a private buyer outside the U.S. The stock is up 14 percent year to date.
Elsewhere in tech, Apple CEO Steve Jobs said at the company's annual shareholder meeting that there are no plans for a share buyback or dividend. Shareholders approved a resolution for an annual advisory vote on executive compensation.
Jobs also said Apple is on track to sell 10 million iPhones in 2008. Operating chief Tim Cook said Apple plans to sell the iPhone in Asia this year, and in China "one day."
A day earlier, two brokerages lowered their price targets on Apple stock, citing a slowdown in sales of iPods and iPhones as consumers cut back. Apple shares have tumbled nearly 40 percent in 2008 alone.
Speaking of big tech decliners, Google , which is down about 40 percent from its November 7th high, hit a new 52-week low for the first time since going public in August 2004. Google touched down at $435.78 before regaining some ground to finish at $444.60.
Staplesreported its profit was flatas international sales helped offset a slowdown in North American stores. Earnings were $333 million, or 47 cents a share, in line with expectations. The office-equipment retailer also increased its dividend by 14 percent to 33 cents per share.
"We believed the slow sales situation might turn around by midyear as the credit crisis looked like it would get cleaned up by then ... it now looks like it could take longer," Staples CFO John Mahoney said.
Barnes & Noble tumbled nearly 5 percent after the bookseller said its earnings will be below expectations for the entire year.
Best Buy slipped after Banc of America downgraded its rating on the stock to "neutral" from "buy," saying that "many factors that drove Best Buy's 2007 outperformance will reverse," notably television margins. Analyst David Strasser said demand for televisions has weakened as consumers cut back spending while manufacturers are excessively optimistic.
Jackson Hewitt shares plunged 33 percent after the tax preparer issued earnings and a profit outlook well short of analysts' forecasts, citing taxpayer procrastination in filing their tax returns. The company now sees 2008 earnings between $1.48 and $1.60 a share, much lower than the $2.11 a share analysts were expecting.
TUESDAY: Ohio, Rhode Island, Texas and Vermont primaries
WEDNESDAY: Factory orders; ISM services index; Fed beige book; Pfizer and Intel analyst meetings
THURSDAY: Weekly jobless claims; Retailers' Feb. sales reports; ECB and BOE rate decisions; Disney shareholder meeting
FRIDAY: February jobs report
Send comments to Cindy.Perman@nbcuni.com.