Street snaps rally after Bernanke comments

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NEW YORK -- Stocks retreated Wednesday as investors reacted uneasily to Federal Reserve Chairman Ben Bernanke's comments on the economy and news that two Bear Stearns Cos. hedge funds were essentially worthless. The Dow Jones industrials fell more than 100 points.

Even without any bad news, a downturn in stocks was expected after the rally that began last week and that Tuesday nudged the Dow past the 14,000 mark for the first time. With no major catalyst behind the advance, the record run has perhaps been puzzling to market watchers trying to determine if it has room to build or has run its course.

Investors sold off shares as Bernanke, speaking before the House Financial Services panel as part of the central bank's midyear forecast, said the economy should strengthen into 2008 and inflation risks remain the Fed's "predominant" concern. He also said the housing sector might get worse before it gets better -- and remains a risk to consumer spending and overall economic growth.

Bernanke's assessment of housing exacerbated investors' concern over news that the Bear Stearns funds were left essentially worthless by bad bets on subprime loans, which are made to those with poor credit. A weaker housing market has made it more difficult for borrowers who get behind on payments to refinance and pay off debts.

Analysts said the market was trying in vain to glean some idea from Bernanke where interest rates might be headed. His comments on inflation again dashed any hopes to see a reduction in interest rates anytime soon. Still, Bernanke did note that the Fed will take the overall economy's health in formulating its policy.

Meanwhile, corporate earnings reports continued in earnest. JPMorgan Chase & Co. posted better-than-expected earnings, but the bank said it increased reserves set aside to cover mortgage losses. Also adding to investor concern, Intel Corp. reported lackluster profit margins for the second quarter, and Yahoo Inc. lowered its forecast.

In midday trading, the Dow fell 115.67, or 0.83%, to 13,855.88. The Standard & Poor's 500 index fell 12.35, or 0.80%, to 1,537.02, while the Nasdaq composite index dropped 31.33, or 1.16%, to 2,680.96.

Bonds rose as fixed-income investors interpreted Bernanke's comments on housing as favorable; they're looking for interest rates to at least remain stable. The yield on the benchmark 10-year Treasury note falling to 5.01% from 5.07% late Tuesday. The dollar was mixed against other major currencies, while gold prices rose.

A barrel of light sweet crude rose $1.03 to $75.05 on the New York Mercantile Exchange. Oil rose after the U.S. Department of Energy said gasoline stockpiles unexpectedly fell, despite a bigger-than-expected rise in refinery operations.

The market had more bad news on the housing market when builder Pulte Homes Inc. reported late Tuesday it expects to report a hefty loss from continuing operations for the second quarter, due to large charges and a worsening consumer environment. Shares of the company fell 88 cents, or 3.87%, to $21.83.

Bear Stearns late Tuesday said its hedge funds were squeezed by wrong-way bets on the direction of the mortgage market, which has been struggling with a spike in defaults among risky borrowers. Shares dropped $2.13 cents to $137.78.

JPMorgan Chase, the nation's third-largest bank, said Wednesday its earnings rose 20% in the second quarter amid benefits from a surge in investment banking fees. However, Chief Executive Jamie Dimon said the firm remains on guard for a possible fallout from the mortgage industry, and shares fell $1.82, or 3.7%, to $48.10.

Investors also sifted through the latest inflation reading. The Labor Department said its Consumer Price Index rose 0.2% in June following a big 0.7% jump in May. The reading was in line with market expectations and had little effect on index futures trading.

Core inflation, which excludes often volatile energy and food costs, also rose a moderate 0.2% last month.

The Commerce Department also said Wednesday home construction rose 2.3% in June following two consecutive months of declines. Wall Street had expected a more modest increase.

The tame readings on consumer prices could help ease some concerns about inflation, which remains among Wall Street's chief concerns. Investors are hoping rising prices won't prompt the Federal Reserve to put off an eventual interest rate reduction or even to raise rates. Even if the Fed doesn't act, higher costs could prompt some consumers to curtail their spending. Such a retrenchment could dent corporate profits.

In other corporate news, Intel reported second-quarter profits that met Wall Street's expectations after the bell Tuesday but turned in weak profit margins because of lower chip prices. Shares fell $1.29, or 4.9%, to $25.04.

Yahoo reported a 2% decline in its second-quarter earnings and brought down its forecast for the year. Shares fell $1.28, or 4.6%, to $26.25.

Altria Group Inc., parent of the Philip Morris cigarette companies, saw its second-quarter profit fall 18.3% but reported higher earnings from continuing operations as well as increased revenue. The company, one of the 30 that comprise the Dow industrials, lowered its full-year earnings forecast. The stock declined $1.13 to $70.15.

United Technologies Corp., also a Dow component, fell $1.54, or 2%, to $75.30 after it reported a 4% increase in its second-quarter earnings amid growth in the conglomerate's commercial aerospace and construction businesses.

Declining issues outpaced advancers by a 2 to 1 basis on the New York Stock Exchange, where volume came to 722.1 million.

The Russell 2000 index of smaller companies was fell 11.52, or 1.36%, to 838.37.

Overseas, Japan's Nikkei stock average fell 1.11%. In afternoon trading, Britain's FTSE 100 fell 0.64%, Germany's DAX index fell 1.34%, and France's CAC-40 fell 1.11%.
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