Economic Jitters Put a Damper on Rally

U.S. stocks traded mixed Tuesday as a pair of gloomy economic reports put a damper on the recent market rally.

The tech-heavy Nasdaq held up slightly better than the Dow Jones Industrial Average after an upbeat report on chip maker Qualcomm.

Merrill Lynch raised its rating on Qualcomm to "buy" from "neutral," saying it expects the telecom-chip maker to benefit from more companies adopting 3G technology and that the company is in a good position to weather the economic slump.

Consumer confidence hit a five-year lowin March, the Conference Board reported, while expectations for the future tumbled to their lowest since January 1974. The group said its consumer-sentiment index dropped to 64.5 in March from an upwardly revised 76.4 in February. Economists had expected a less-severe slide to 73.5. A gauge of future expectations fell to 47.9 from 58.

"This is a surprise," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a note to clients. "The expectations component undershot the Michigan survey in February so we thought there was scope for a modest rebound."

If consumer sentiment remains at this level, Shepherdson said, it will depress consumer spending to levels last since in late 1974, which would not only spur a recession, but probably a severe recession. "In short, this is one of the most alarming economic reports we have seen in this cycle so far," Shepherdson wrote.

The confidence report was "nothing short of abysmal," Robert Brusca, chief economist at Fact And Opinion Economics, added. "This one sure looks like recession," he wrote, adding, "the bottom could [be] falling out of more measures to come."

U.S. home prices continued to slump in January, according to a report from Standard & Poor's/Case Shiller on Tuesday. Prices in 20 metropolitan areas fell 2.4 percent in January from December, following a 2.1 percent drop in December. Prices were down 10.7 percent from a year earlier.

Helping to fuel the rally on Monday was news that JPMorgan will raise its bid for Bear Stearns to $10 a share from $2 a share, suggesting that there is more value in financials than previously thought, analysts said.

Of course, it's hard to please Wall Street, and while the $10 a share offer was still warm, there were rumblings for $15 a share. Some analysts suggested that the offer may go higher, but only by a dollar or two, to about where it was trading on Monday.

But Punk Ziegel analyst Richard Bove said JPMorgan isn't underbidding for Bear Stearns. Bove, who was among the first analysts to call for selling financial stocks last July and just last week declared the financial crisis over, said, according to his calculations, JPMorgan is really paying more like $65 a share.

What is most disturbing about this deal is that it uses a great deal of Morgan capital to buy a company that is losing market share, in a series of businesses that are declining in size, with a top management team that is best described as sclerotic," Bove wrote in a note to clients.

Bear Stearns shares declined Tuesday after closing at $11.25 a share on Monday. JPMorgan shares also slipped.

The housing market clearly isn't out of the woods yet, which means financial stocks, which rebounded Monday, are not yet a definite buy.

"I see problems on construction and development loans, commercial loans and home equity loans, just to name three," Richard Suttmeier from told "Worldwide Exchange."

Capital One shares tumbled after a slew of brokerage downgrades.

Merrill Lynch downgraded a trio of local banks -- Bank of America , PNC Financial and Suntrust Banks -- citing the toll that housing problems will take on the banks' lending and home-equity practices. It lowered Bank of America and Suntrust to "sell" from "neutral" and has PNC down to "neutral" from "buy."

"The downgrades reflect a weaker earnings outlook [for all three banks] and a recent rebound in their prices driven by [Federal Reserve] rate cutting and other central banking actions, which should ease the pain, but will not preclude a deep and protracted credit cycle, in our view," Merrill research analyst Edward Najarian wrote in a note accompanying the downgrade.

Thornburg Mortgage announced plans to sell up to $1.35 billion of bonds as the "jumbo" mortgage lender tries to stave off bankruptcy.

Mortgage insurer MGIC Investment said it has priced $420 million in stock and $325 million in convertible bonds in an attempt to secure its capital base.

Valero Energy , the largest independent U.S. refiner, warned that its first-quarter earnings will be sharply lower.

This Week:

WEDNESDAY: Durable goods; new-home sales; oil inventories; Oracle earnings
THURSDAY: GDP; jobless claims; Lennar earnings; Fed auction
FRIDAY: Personal income and spending; consumer sentiment; KB Home earnings

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