Rally Fizzles, Leaving Stocks Flat

Stocks finished mostly flat Wednesday as investors juggled encouraging news on the regulation of mortage lenders with another round of bleak news on housing and the economy.

The Dow Jones Industrial Average finished up just over five points, adding to its gain of more than 400 points in the past two sessions. The Nasdaq also ticked higher, while the S&P 500 index closed lower.

"The market is pretty much ruled by technicals" right now, said Michael Cohn, chief investment strategist at Atlantis Asset Management. It's "been shaking off bad news of recent," and today it was on track for a short-term correction before regulators announced plans to ease regulations on mortgage giants Fannie Mae and Freddie Mac.


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Cohn said investors are coming to two realizations: 1) Oil has pushed above $100 a barrel and, 2) despite all of the Fed's rate cuts, mortage rates haven't budged.

Banks are "borrowing cheaper but not lending it out cheaper," Cohn points out. "They're taking these rate cuts and pocketing the money ... to shore up their own balance sheets."

What people are realizing," Cohn said, "is that the interest-rate cuts haven't helped anybody but the banks."

Still, Cohn sees some opportunities. He likes municipal bonds because, right now, some muni bond yields are equivalent or higher than Treasury yields, plus, you get double or triple tax advantages. Cohn also likes refiners such as Valero Energy and miners such as BHP Billiton and
Anglo-American. He says it's also time to start looking at biotechs, which have taken a beating, but are still pretty immune from economic swings.

Shares of Fannie Mae and Freddie Mac closed mixed after the Office of Federal Housing Enterprise Oversight said it will lift investment caps effective March 1, freeing up billions so the lenders can buy up more mortgages.

The move opens the companies to more risk, but regulators kept in place a requirement that the firms maintain large reserves against potential losses.

Ofheo Director James Lockhart cited the companies' progress and timely results as a basis for the decision, according to a statement accompanying the decision. (Read the full text of the Ofheo statement.)

The news gave a boost to shares of most banks, homebuilders and financial-services firms, with Citigroup leading advancers on the Dow.

The news helped offset the morning's grim news from the housing sector.

The Commerce Department reported that new home sales fell 2.8 percent in January to an annual rate of 588,000, the lowest in 13 years. Meanwhile, Fannie Mae reported a worse-than-expected $3.6 billion quarterly loss, and luxury home builder Toll Brothers reported it swung to a loss amid heavy writedowns for land and other assets.

There was good news on the corporate-spending front, as IBM said it is more confident about its U.S. business in the first quarter than it was in the fourth quarter.

Another encouraging sign for corporate spending came in the morning's durable-goods report. The headline number fell 5.3 percent, more than expected, in January, but most of that came from volatile aircraft orders. Nondefense capital goods orders excluding aircraft, a good gauge for business spending, dropped 1.4 percent, which is less than the 2 percent Wall Street had expected.

The big event of the day was on Capitol Hill, where Federal Reserve Chairman Ben Bernanke kicked off his two-day semi-annual economic testimony in Washington D.C.

"The economic situation has become distinctly less favorable" since the summer, the Fed chief told the House Financial Services Committee.

Still, the central bank is prepared to continue lowering interest rates"to provide adequate insurance against downside risks," Bernanke said. (Read the full text of Bernanke's testimony.)

The euro reaching a new high of $1.51 agains the dollar. Crude pulled back to finish below $100 a barrel -- after earlier topping $102 a barrel -- following news that crude inventories rose more than expected last week. Crude inventories were up 3.2 million barrels to 308,500 million barrels, higher than the 2.5 million build expected, according to a report from the Energy Information Administration.

Microsoft received a record-high $1.35 billion fine from the European Commission for defying sanctions imposed for antitrust violations. Shares of the software giant traded about 0.4 percent lower in premarket trading.

Telecom-equipment giant Nortel Networks announced plans to cut 2,100 jobsas its loss ballooned to $844 million in the fourth quarter from $80 million a year earlier.

Zale shares jumped after the struggling jeweler said it plans to close more than 100 stores and cut more than 200 jobs in order to boost profits and survive the downturn in consumer spending.