Stocks make a big comeback

A sudden, powerful rally kicked in this afternoon, reversing the waves of selling that have plagued the stock market since New Year's.

The Dow Jones industrials closed up 146 points to 12,735. The Nasdaq Composite was up 34 points to 2,475, and the Standard & Poor's 500 Index was up 19 points to 1,409.

The reversal started around 2:10 p.m. ET, when the Dow hit about 12,500, an 80-point loss from Tuesday. Within an hour, the blue-chip index had blasted past Tuesday's close, pulling other indexes up with it.

The trigger was probably short-covering -- when short-sellers who had borrowed shares from brokers, betting that the market would move lower, decided to take profits. That meant they had to buy stocks to lock in their profits.

Stocks that had been getting battered suddenly moved higher. Garmin (GRMN, news, msgs), which had been down as much as 15% to $67.50, shot up to $76.06 for a loss 5.3% on the day. Countrywide Financial (CFC, news, msgs), down as much as 19% to $4.43, saw that loss trimmed to just 6.4%. The shares closed at $5.12.

Countrywide had been leading the market lower after reporting that the percentage of foreclosures and late payments on mortgages that it owns or services had risen in December to the highest since 2002, the earliest period for which data are available. Countrywide's mortgage servicing portfolio grew to $1.48 trillion, as homeowners prepaid fewer loans.

"The extent of the deterioration is a surprise and does not bode well for the fourth-quarter results of companies with mortgage credit exposure that may have to further add to reserves," Lehman Bros. analyst Bruce Harting wrote.

Whether bulls can use the reversal to push the market higher on a sustained basis obviously isn't yet clear. It's hard to turn a market around after the beating it took in the first five trading sessions of the year. And the major averages are still down 10% or more from their highs in October, which means the market correction of 2007-2008 is still alive.

But at least at the end of the day, there was some cheer on Wall Street.

Large and abrupt rallies often occur after big sell-offs, and the stock market saw two such rallies last August, when the major indexes dropped 10% from highs in July and again in late November, when the indexes slumped 10% from their October highs.

Jumps in shares of brokers Merrill Lynch (MER, news, msgs) and Morgan Stanley (MS, news, msgs) appeared to be catalysts for the rally. Merrill Lynch was up 4.8% to $50.48. Morgan Stanley jumped 3.5% to $47.73.

There was a big rebound in tech stocks as well, thanks in part to comments from a top executive from personal computer giant Hewlett-Packard (HPQ, news, msgs). Technology chief Phil McKinney said H-P can protect itself from economic slowdowns because of the breadth of its customer base. "We don't anticipate any form of significant adverse impact," he told Bloomberg Radio. H-P closed up 2.9% to $44.44.

Apple (AAPL, news, msgs), which had been down to $168.30, roared back to finish up 4.8% to $179.40. After Tuesday's close, the stock had been down nearly 14% in the first five sessions of 2008.

Another trigger may have been a drop in the price of crude oil. Crude finished down 66 cents to $95.67 a barrel in New York. Earlier today, the government reported a huge drop in domestic crude inventories but a big gain in gasoline and heating oil supplies.

Gold moved to a new high, finishing at $881.70 an ounce in New York. So far in January, the metal is up 5.2% after jumping 32% in 2007. But it was moving lower in electronic trading.

Retailers to report December sales

Retailers, including Wal-Mart Stores (WMT, news, msgs), Target (TGT, news, msgs), J.C. Penney (JCP, news, msgs), Macy's (M, news, msgs) and Kohl's (KSS, news, msgs), will report December sales on Thursday.

Their results will add a lot of clarity to the question of whether the holiday shopping season was mediocre or just plain bad. (No one has suggested it was terrific.)

Two early signals came late today from Men's Wearhouse (MW, news, msgs) and American Eagle Outfitters (AEOS, news, msgs). Both reported disappointing results.

Men's Wearhouse, in fact, cut fourth-quarter earnings guidance from 46 cents to 48 cents to 16 cents to 18 cents. "Substantially lower traffic levels at all of the company's retail stores, in both the United States and Canada, for the month of December drove weaker than planned comparable store sales results," the company said, and it expects soft January sales.

The stock was down nearly 14% in after-hours trading to $22 from a regular close of $25.44.

American Eagle Outfitters said earnings for its fourth quarter ending on Feb. 2 would be lower than expected.

The company said December sales at stores open at least a year fell 2%, hurt by weak customer traffic in its stores before Christmas. Reuters said analysts had expected a decrease of 2.1%.

The stock, amazingly enough, jumped 5.5% to $18.70 in after-hours trading.

Alcoa shows better-than-expected results

After the close, shares of aluminum giant Alcoa (AA, news, msgs) jumped 4.6% to $32.68 after the company said that its fourth-quarter profit rose on favorable restructuring and tax benefits, which more than offset lower aluminum prices.

More important, revenue was stronger than expected.

Alcoa earned $632 million, or 75 cents per share, compared with $359 million, or 41 cents per share, a year ago. The company recorded a 38-cent-per-share benefit in the most recent quarter because of its agreement to sell its packaging and consumer business. Analysts had expected earnings of 33 cents a share.

Revenue dropped to $7.39 billion from $7.84 billion, due to lower metal prices, the company said. But Wall Street had expected revenue of $6.9 billion.

• Get free, real-time stock quotes on MSN Money

On Monday, Credit Suisse had cut its outlook for Alcoa, citing lower aluminum prices, adverse currency and energy price changes and more pronounced weakness in some of its markets.

Since trading at $2,659 per ton on the London Metal Exchange on Nov. 7, the price of aluminum has slipped 6% to around $2,500 per ton.

Alcoa is the first of the 30 Dow companies to report fourth-quarter earnings; its report is the unofficial start to earnings season. Banking giant Citigroup (C, news, msgs) and semiconductor company Intel (INTC , news, msgs) will follow with reports on Tuesday.

Energy prices -- New York close

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$95.67	$96.33	-$0.66	-0.32%	-0.32%
Heating oil (per gallon)	$2.6134	$2.6363	-$0.0229	-1.36%	-1.36%
Natural gas (per million BTU)	$8.0990	$7.9670	$0.1320	8.23%	8.23%
Unleaded gasoline (per gallon)	$2.4355	$2.4739	-$0.0384	-2.22%	-2.22%

Goldman's grim outlook

The rally started after Goldman Sachs (GS, news, msgs) Chief Economist Jan Hatzius said that the U.S. economy is slipping into a recession.

"The latest data suggest that recession has now arrived, or will very shortly," Hatzius wrote in a note to clients this morning. "The recession is likely to last 2-3 quarters and should be relatively mild by historical standards."

• Video: Goldman's gloomy forecast

Looking further out, however, Hatzius' forecast brightened a bit: "Despite our near-term concerns, we are quite optimistic about the economy's longer-term prospects."

Hatzius predicted that the Federal Reserve will cut the benchmark federal funds rate to 2.5% by the third quarter of this year. The fed funds rate is currently at 4.25%.

Most economists expect the Fed to reduce interest rates by at least a quarter of a percentage point when it meets at the end of January. There were some suggestions today that the Fed may act earlier, perhaps as early as the end of this week.

Hatzius also said that the jobless rate in the U.S. will climb to 6.25% from the current 5% by the end of 2008.

• Is a recession dead ahead?

DuPont boosts forecast

Shares of chemical company DuPont (DD, news, msgs) fell 4.8% to $44.78 after the company said growth in emerging markets should more than compensate for a slower U.S. economy.

DuPont said that 2007 earnings would be at the upper end of a previous range of $3.15 to $3.20 per share. The company also said earnings for 2008 would be between $3.35 and $3.55 per share -- above a previous estimate of $3.31 to $3.52 per share. The consensus estimate is $3.19 per share for 2007 and $3.42 per share for 2008.

• Video: More on DuPont's outlook

MBIA slashes dividend

Mortgage-bond insurer MBIA (MBI, news, msgs) this morning cut its dividend by 62% to 52 cents per share in an effort to boost capital and maintain its AAA credit rating.

The company expects the move to save $80 million a year.

Protecting its credit rating is important both to MBIA -- so that it can continue to insure bonds going forward -- and to the billions of bonds the company insures: If MBIA loses its top AAA rating, the credit ratings of the bonds it insures will suffer.

• Talk back: Do you think '70s-style stagflation will return this year?

Shares of the company fell as much as 11% during the day but finished down just 4.2% to $13.40.

MBIA also said it will lose $737 million for the fourth quarter and announced that it will sell $1 billion in debt.

The company has been slammed by the subprime-mortgage mess, with shares falling 77% over the past six months.

Merrill to stay downtown

Merrill Lynch, meanwhile, says it is staying put in downtown Manhattan.

The company is in the final stages of negotiating the terms of its five-year lease at the World Financial Center, The Wall Street Journal reported.

Merrill had been talking earlier with Vornado Realty Trust (VNO, news, msgs) about the possibility of building a new home for the company across the street from Penn Station in midtown Manhattan.

• Video: Where to worry about inflation

But new Merrill CEO John Thain wants the company to stay downtown and avoid making a big investment now, with the economic and subprime storms brutalizing the industry, the paper reported. Merrill's current lease expires in 2013.

Credit card debt jumps

When times are tough, it's easy to just pull out a credit card to pay for that pair of shoes, groceries or a new iPhone.

The Federal Reserve reported Tuesday that borrowing by consumers rose at an annual rate of 7.4% in November 2007 -- a huge jump from the 1% increase in October.

Credit card debt alone rose at an annual rate of 11.6% in November, the highest level in six months. Auto loan debt increased at an annual rate of 5.1% after a decline of 3.5% in October.

Outstanding consumer debt across the U.S. totaled $2.51 trillion.

Short hits from the markets -- 4 p.m.

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	3.110%	3.160%	-0.050	-0.96%	-0.96%
5-year Treasury note yield	3.089%	3.157%	-0.068	-10.59%	-10.59%
10-year Treasury note yield	3.791%	3.840%	-0.049	-6.05%	-6.05%
30-year Treasury bond yield	4.321%	4.355%	-0.034	-3.09%	-3.09%
Currencies
U.S. Dollar Index	76.49	76.11	0.37	-0.27%	-0.27%
British pound in dollars	$1.9589	$1.9589	0.0000	-1.53%	-1.53%
Dollar in British pounds	£0.5105	£0.5105	0.0000	1.55%	1.55%
Euro in dollars	1.4667	1.4667	0.0000	0.35%	0.35%
Dollar in euros	€ 0.6818	€ 0.6818	0.0000	-0.35%	-0.35%
Dollar in yen	110.04	109.98	0.06	-1.62%	-1.62%
U.S. dollar in Canadian dollars	$0.990	$1.010	$0.0001	-0.25%	-0.25%
Canadian dollar in U.S. dollars	$1.010	$0.990	-$0.0007	0.18%	0.18%
Commodities
Gold	$881.70	$880.30	$1.40	1.85%	5.21%
Copper	$3.2835	$3.2985	-$0.02	3.99%	7.97%
Silver	$15.8400	$15.8150	$0.03	2.44%	6.17%
Crude oil (NYMEX) (per barrel)	$95.67	$96.33	-$0.66	-2.29%	-0.32%

By Charley Blaine and Elizabeth Strott