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Stocks Waver as Market Looks to Bernanke

CNBC.com
Wednesday, 2 Apr 2008 | 10:53 AM ET

Stocks wobbled at the open Wednesday as the market looked to Federal Reserve Chairman Ben Bernanke, testifying on Capitol Hill today and tomorrow, for direction.

Bernanke warned that the economy may shrink in the first half of this year but stopped short of using the "R" word -- recession.

He also said that the Fed saw no choice but to orchestrate a dramatic rescue of Bear Stearnslast month amid concerns that the bank's collapse would have a ripple effect through the financial sector and markets.

"Normally, the market sorts out which companies survive and which fail, and that is as it should be," Bernanke said in prepared remarks to be delivered to the congressional Joint Economic Committee. "However, the issues raised here extended well beyond the fate of one company." (Watch the live streaming video or view the full textof Bernanke's testimony.)

Analysts say Bernanke's speech will be closely watched for signs that an end is in sight for the credit crunch, as many traders did not share the view that UBS's massive $19 billion writedown announced on Tuesday was the worst of the bad news.

"I'm not convinced about that myself," Clive Crooke, CEO at City Index, told "Worldwide Exchange."

Tuesday's rally was not meant to last, Crooke said, as "it was the first day of the new quarter, there was an awful lot of short covering."

Analysts are closely watching Merrill Lynch and Citigroup amid increasing nervousness about the banks' upcoming earnings reports. Analysts have lowered their forecasts for both in recent weeks.

"My concerns are that, while [financial] stocks may look cheap on a P/E basis right now, the 'E' part of the equation -- earnings -- might be falling faster than people are expecting," said Chris Orndorff, head of equity for Payden & Rygel in Los Angeles, "and therefore, stocks that appear to be cheap may, in fact, turn out to be expensive."

Lehman Brothers announced Tuesday that it had raised $4 billion in an oversold offering. Finance chief Erin Callan told CNBC that the offering was intended to make a "strong statement" about the firm's stabilityamid growing rumors that the firm was facing the same kind of liquidity problems that brought down Bear Stearns.

“Unfortunately, we’re in a market where perception trumps reality,” Callan said. “We didn’t want to wait for it to get to a point where we were in a wholly defensive mode,” Callan said. “We felt it was necessary to make a strong statement.”

Callan also said that the SEC is investigating short-selling in the bank's stock.

Among regional banks, Ohio's National City, which has been battered by the housing downturn, is considering a plan to sell itself to local rival KeyCorp , according to the Wall Street Journal.

Fannie Mae , the largest U.S. home funding company, told lenders this week that it will now require a minimum credit score of 580 for most loans, according to a report in the Wall Street Journal.

Shares of Thornburg Mortgage skidded after RBC Capital lowered its price target on the stock to 50 cents from $1. Earlier this week, the mortgage lender announced that it's raising $1.35 billion, money it will use to cover margin calls and stave off bankruptcy.

Also in Congress, the beleaguered housing market is likely to get more help as Democrat and Republican Senators agreed to draft a housing rescue bill that could deliver billions of dollars to homeowners facing foreclosure.

Homebuilders, which have taken a beating in 2007, have been among the leading gainers this year, with several big names in the field posting double-digit percentage gains so far this year.

Those stocks were among the few advancers in today's trading, with notable gains in Centex and KB Homes .

Before the opening bell, ADP Employer Services reported that 8,000 jobs were added to private-sector payrollsin March, compared with February's revised decline of 18,000. Separate reports showed planned layoffs by U.S. companies fell 26 percent in March from the prior month, and mortgage applications plunged last week.

The ADP report comes ahead of Friday's employment report from the Labor Department. The consensus is for nonfarm payrolls to have dropped by 60,000, following a 63,000 decline in February, and for the unemployment rate to tick up to 5 percent from 4.8 percent.

Factory orders fell 1.3 percent, more than expected, in February after a 2.5 percent drop in January, the Commerce Department reported. Orders for durable goods, items such as cars and appliances that are meant to last three years or longer, were down 1.1 percent, revised from a prior estimate of a 1.7 percent decline.

Retail stocks posted modest gains Wednesday after electronics retailer Best Buy reported its net declined but beat expectations. Same-store sales slipped 0.2 percent as a decine in U.S. sales offset strength overseas.

In other earnings news, agriculture giant Monsanto reported its fiscal second-quarter profit soared but its outlook range of $3.15 to $3.25 a share began to slide below analysts' expectations.

Still to Come:

WEDNESDAY: MBA applications; factory orders; oil inventories; Bernanke testifies; Earnings from Monsanto, Best Buy, Research In Motion
THURSDAY:Jobless claims; ISM services index; Bernanke testifies; Fed's Yellen speaks
FRIDAY: Jobs report

Send comments to cindy.perman@nbcuni.com.

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