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Falling bank stocks unravel US stock rally

NAGGING worries about banks upended a stock market rally yesterday.

Financial stocks steered the overall market for the third straight day after Morgan Stanley and credit card issuer Capital One Financial Corp. posted lackluster quarterly reports. Investors have been worried about rising levels of souring debt on bank balance sheets.

A late-session drop in banks left Wall Street's major benchmarks mixed. The Dow Jones industrial average fell 83 points, while the technology-heavy Nasdaq composite index ended modestly higher ahead of a quarterly report from eBay Inc. and following earnings from Yahoo Inc.

Banks had tumbled on Monday after Bank of America warned of further loan losses, only to jump back on Tuesday after Treasury Secretary Timothy Geithner told Congress that most banks were well-capitalized.

The jumpy trading in financial shares came just as major companies report first-quarter earnings. Results from AT&T, Boeing and McDonald's contained glimmers of hope about consumer spending and the economy in general.

"We're starting to see a little light at the end of the tunnel," said Frank Ingarra, co-portfolio manager at Hennessy Funds. "The challenge is I don't know how long the tunnel is."

The Dow fell 82.99, or 1 percent, to 7,886.57.

Broader market measures were mixed. The Standard & Poor's 500 index fell 6.53, or 0.8 percent, to 843.55, while the Nasdaq composite index rose 2.27, or 0.1 percent, to 1,646.12.

Anton Schutz, portfolio manager of Burnham Financial Industries Fund and Burnham Financial Services Fund, said with bank earnings mostly in hand investors are now focused on the results of the government's "stress tests," which are aimed at determining whether banks will need more government bailout money.

Schutz said the late slide in bank stocks yesterday reflects fear over what those details might reveal about the industry. Results from the tests are due to be released May 4.

Morgan Stanley fell US$2.21, or 9 percent, to US$22.44 after reporting it lost US$578 million and reduced its dividend. The company said it was hurt in part by a deteriorating commercial real estate market.

Morgan's report interrupted a string of better-than-expected results from banks that had investors hoping some of their problems were easing. Banks have largely dictated the stock market's direction since last fall, when the collapse of Lehman Brothers Holdings Inc. shocked the financial system. Analysts say it's crucial that banks become more stable and resume normal levels of lending in order for the economy to recover.

Wells Fargo & Co., which bought Wachovia last fall at the height of the credit crisis, said it earned US$2.38 billion. That compares with a profit of US$2 billion a year earlier. Wells fell 63 cents, or 3.4 percent, to US$18.18 after rising for much of the day.

Bank of America Corp.'s announcement Monday that it was expecting rising levels of bad debt touched off the market's intensified focus on the well-being of banks this week. Those worries often overshadowed other news. Bank of America fell 50 cents, or 5.7 percent, to US$8.26 yesterday.

AT&T Inc. said strong results from its wireless business softened the effect of the weak economy and helped the country's biggest telecommunications carrier beat analyst estimates for the first quarter. The stock rose 46 cents to US$25.74.

Boeing Co. said its first-quarter earnings fell 50 percent, partly because of planned production cuts as airlines postpone deliveries of new planes. The world's second-largest plane maker also lowered its forecast for the year. The stock rose 65 cents to US$37.30.

McDonald's Corp. fluctuated after saying its first-quarter profit climbed nearly 4 percent. Earnings of 87 cents per share topped the 82 cents per share figure Wall Street had been expected. The stock fell US$1.38, or 2.5 percent, to US$54.25.

Yahoo rose 10 cents to US$14.48 after saying it would lay off nearly 700 workers. The company's earnings fell 78 percent to US$118 million for the first three months of the year.

EBay Inc. rose 49 cents, or 3.4 percent, to US$14.78 ahead of its report.

A Goldman Sachs analyst upgraded Ford Motor Co. saying the company is best positioned to benefit from sweeping changes in the U.S. auto industry. The stock jumped 48 cents, or 12.6 percent, to US$4.28.

J.C. Penney Co. rose 86 cents, or 3.3 percent, to US$26.92 after the retailer raised its first-quarter earnings forecast. The company said business is stabilizing but that it expects consumer spending will remain weak this year.

In other trading, the Russell 2000 index of smaller companies rose 0.66, or 0.1 percent, to 470.71.

Rising stocks outpaced those that fell by about 8 to 7 on the New York Stock Exchange, where volume came to 1.8 billion shares.

Bond prices fell, sending the yield on the 10-year Treasury note up to 2.95 percent from 2.90 percent late Tuesday.


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