Stocks struggle on credit woes

NEW YORK (CNNMoney.com) -- The Nasdaq slipped and the broader market struggled Thursday after comments by the CEO of troubled lender Countrywide Financial revived investor worries about the ongoing turmoil in the credit and mortgage markets.

The Dow Jones industrial average (down 0.25 to 13,235.88, Charts) ended little changed. The broader S&P 500 (down 1.57 to 1,462.50, Charts) index fell 0.1 percent. The tech-fueled Nasdaq Composite (down 11.10 to 2,541.70, Charts) gave up 0.4 percent.

Stocks had risen in the morning after Bank of America said it was making a $2 billion investment in Countrywide Financial. But the advance was short-lived, and stocks turned lower in the afternoon.

Treasury prices ended little changed. The dollar rose versus the yen and fell against the euro. Oil climbed and gold prices slipped.

It's not realistic to expect that the stock market will be able to sustain any one direction for too long now due to the problems in the subprime and broader credit markets, said John Davidson, president at PartnerRe Asset Management.

"The nature of the issue is one in which information will keep seeping out over time, because the subprime issue doesn't have a lot of transparency," Davidson said. "As a result, I think there will be a number of surprises that emerge and will sometimes knock the market back, like today."

Friday brings reports on July durable goods orders and July new home sales.

Gap (Charts, Fortune 500) was among the stocks likely to be active Friday after the retailer reported quarterly earnings late Thursday that topped estimates, on revenue that missed estimates. Gap also boosted its fiscal 2008 earnings guidance. Shares gained 2 percent in extended-hours trading.

Brocade Communications (Charts) reported higher quarterly earnings after the close, sending shares of the networking gear maker higher in extended-hours trading.

The major gauges posted slim gains at the open Thursday morning as investors welcomed news that Bank of America (up $0.18 to $51.83, Charts, Fortune 500) agreed to invest $2 billion in troubled mortgage lender Countrywide Financial (up $0.20 to $22.02, Charts, Fortune 500).

Regardless, ratings agency Moody's said it could still cut the lender's debt rating into junk territory.

And Countrywide CEO Angelo Mozilo said in a late morning television interview that there is still a big liquidity problem and that the housing slump could lead the United States into a recession.

All of which caused stocks to give up early gains.

Also adding to worries: news that the Federal Reserve Thursday injected $17.5 billion in temporary reserves into the banking system.

Stocks have been in recovery mode the last week after a tough month, marred by worries about the impact of the tightening credit market on equities and the economy. Investors have taken some comfort in corporate takeover talk, big infusions of cash from central banks around the world - and bets that the Federal Reserve will cut the fed funds rate - which affects consumer loans - at its policy meeting next month.

Last week, the Fed cut the largely symbolic discount rate - the rate the central bank charges for loans directly to banks. On Wednesday, four major banks, led by Bank of America and Citigroup (Charts, Fortune 500), said that they had taken advantage of this by borrowing $500 million each from the Fed.

Separately, the Congressional Budget Office said Thursday that the U.S. budget deficit will shrink more than expected this year, due to the strong economy. Looking forward, the non-partisan agency acknowledged uncertainty because of the housing market, but said that the economic outlook was sound.

In corporate news, the sale of Home Depot's wholesale supply division, due to close Thursday, could be in trouble, according to reports. Shares of Dow component Home Depot (down $0.75 to $34.02, Charts, Fortune 500) fell over 2 percent.

Other Dow decliners included Alcoa (down $0.45 to $35.77, Charts, Fortune 500), Boeing (down $1.25 to $96.74, Charts, Fortune 500), General Motors (down $0.58 to $30.75, Charts, Fortune 500) and Walt Disney (down $0.41 to $33.16, Charts, Fortune 500).

Strength in Dow stocks Hewlett-Packard (up $1.23 to $47.65, Charts, Fortune 500), IBM (up $1.45 to $111.45, Charts, Fortune 500) and McDonalds (up $0.49 to $49.85, Charts, Fortune 500) helped temper the losses.

In other news, Children's Place Retail Stores (down $5.59 to $27.43, Charts) slumped 17 percent after posting a preliminary net second-quarter loss that almost doubled from a year ago, cutting its 2007 outlook and saying that its full financial filings could be delayed. The retailer also said its licensing deal with Walt Disney could be in trouble.

Market breadth was mixed and volume was moderate. On the New York Stock Exchange, winners and losers were roughly even on volume of 1.24 billion shares. On the Nasdaq, decliners beat advancers three to two on volume of 1.65 billion shares.

In the Treasury market, the 10-year note ended little changed to yield about 4.64 percent. Bond prices and yields move in opposite directions.

In currency trading, the dollar slipped versus the euro and rose versus the yen.

U.S. light crude oil for October delivery rose 57 cents to settle at $69.83 a barrel on the New York Mercantile Exchange.

COMEX gold for December delivery fell 30 cents to settle at $668.40 an ounce.

A morning report showed that the number of Americans filing new claims for unemployment fell last week by a smaller-than-expected 2,000 to 322,000.

Meanwhile, mortgage lenders cut 18,000 jobs this month, reflecting the fallout from the subprime lending market - mortgages given to consumers with flawed credit.