Morgan Stanley writedown further saps confidence

Wall Street shares reversed early gains yesterday after a rating agency lowered its credit outlook on Ambac Financial and MBIA, two bond insurers, to "negative" raising fears of heightened turmoil in credit markets.

The successful conclusion of the Federal Reserve's first $20bn term loan auction was not enough to reassure investors after S&P also cut its credit rating on ACA Financial Guaranty, a smaller bond insurer, to junk.

Morgan Stanley added to the negative sentiment after it announced another $5.7bn in writedowns but the shares gained after it secured a capital injection from China.

The S&P 500 rose as much as 0.5 per cent after the Fed published details of the loan auction and but later fell 0.2 per cent to 1,452.02. The Nasdaq Composite was flat at 2,595.58 while the Dow Jones Industrial Average declined 0.3 per cent to 13,198.82

Financials pared early gains after S&P said "worsening expectations" for the performance of mortgage-backed securities meant it was lowering its outlook on MBIA and Ambac Financial 's AAA-rating to "negative" and was cutting ACA Financial Guaranty from A to CCC. MBIA fell fell 6.4 per cent to $25.93 while Ambac declined 6.3 per cent to $25.30. Both companies may now need to raise additional capital.

Shares in Morgan Stanley climbed as much as 6.8 percent after it said China Investment Corp, an investment vehicle controlled by the Chinese government, would inject $5bn to help shore up its balance sheet. The capital infusion provided an early boost to financial stocks as traders bet that other banks will look abroad for much-needed funding.

The company is the latest financial group to seek funding from foreign investment groups, following similar moves by Citigroup and UBS. CIC owns a stake in Blackstone Group, the publicly traded private equity group. "Meaningful investments into various financial entities suggest that the capital constraint dilemma may be finding some solutions, which could be part of the stabilisation process needed to calm down both debt and equity markets," Tobias Levkovitch, chief US equity strategist at Citi Investment Research, said.

Morgan fell to a $3.6bn loss in the fourth quarter after it took $9.4bn in mortgage-related writedowns, $5.7bn more than the company had advised in November. Full-year earnings were down 62 per cent to $3.44bn. The shares were up 3.3 per cent at $49.65 at midday.

Goldman Sachs, up 0.6 per cent at $202.63, reported stellar quarterly results on Tuesday but the bank warned that a difficult November period had clouded its outlook in the near-term. Bear Stearns , 1.3 per cent weaker at $91.43, reports its fourth-quarter results today.

Stocks had climbed in early trade after the Federal Reserve revealed details of its first term loan auction which provided $20bn in funds to help ease liquidity problems. Bids totalled $61.6bn for the $20bn in available financing, and funds were awarded at a 4.65 per cent interest rate, slightly below the 4.75 per cent rate available at the discount window.

"It seems that it did have a positive reaction initially. But now we can't really get any traction to the upside," Richard Sparks, senior equities analyst at Schaeffer's Investment Research, said.

Mr Levkovitch said recent central bank moves to help ease funding could be among the building blocks of a "substantive recovery".

In other earnings news Palm disappointed after it fell to a $9.6m secondquarter loss and revenues slid 11 per cent to $349.6m, slightly below expectations. The shares sank 8.8 per cent to $5.41 after Deutsche Bank cut its price target to $4.50.

Hovnanian Enterprises , the homebuilder, fell 8.8 per cent to $7.66 after it reported a wider than expected $469m loss with the company reporting a rise in buyers cancelling contracts.

Transport stocks also suffered a bad day after Union Pacific , the rail company, lowered its fourth-quarter guidance because of rising fuel costs. Its shares fell 4.8 per cent to $123.26. The drop hit Burlington Northern Santa Fe , down 2.5 per cent at $81.58.

Darden Restaurants , operator of the Olive Garden and Red Lobster chains, fell 19.2 per cent to $29.38 after its 2008 earnings guidance missed expectations.