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Wal-Mart drags on Dow

Blue-chip indicator dips after Wal-Mart's forecast, sales miss; broader market mixed on mild core inflation reading, narrowing of trade gap.

NEW YORK (CNNMoney.com) -- Stocks were mixed Tuesday morning as investors weighed a mild reading on core inflation, a narrowing of the trade gap and an earnings miss from Dow component Wal-Mart Stores.

The Dow Jones industrial average (up 0.00 to 13,236.53, Charts) lost 0.2 percent in the early going, while the broader S&P 500 (down 0.37 to 1,452.55, Charts) index was little changed. The tech-fueled Nasdaq Composite (up 3.69 to 2,545.93, Charts) index gained 0.2 percent.

Stocks ended little changed Monday, giving up the day's gains, as investors showed relief that central banks around the world are addressing credit crunch worries, but remained wary amid lingering questions about the economy.

Tuesday morning was mixed, as investors sorted through the news, including a disappointing profit report and forecast from Wal-Mart Stores (down $2.32 to $43.85, Charts, Fortune 500). Shares of the world's largest retailer fell more than 5 percent, dragging on the Dow industrials.

Fellow Dow retailer Home Depot (down $0.02 to $35.22, Charts, Fortune 500) slipped one percent after reporting higher-than-expected quarterly earnings on weaker-than-expected quarterly sales. The home improvement retailer also reiterated that its per-share profit will dip as much as 18 percent this year.

On the economic front, the Producer Price index (PPI), a measure of inflation at the wholesale level, rose 0.6 percent in July, topping forecasts. However, prices excluding volatile food and energy rose just 0.1 percent, short of expectations.

Separately, the U.S. trade gap fell unexpectedly in June, with strong imports countering the impact of higher energy prices.

Treasury prices slipped, raising the benchmark 10-year note yield to 4.80 percent from 4.76 percent late Monday. Treasury prices and yields move in opposite directions.

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

U.S. light crude oil for September delivery rose 58 cents to $72.20 a barrel on the New York Mercantile Exchange, giving up bigger morning gains.

COMEX gold for December delivery fell $2.90 to $678 an ounce. 

The Dow is now up 89 pts...

but looking at the period (3-month chart), the picture is very bearish...

Of course those who are "heated frogs" will disagree very strongly...

Possibly A Healthy Development?

From a different point of view, UOB Asset Management perceives the rout in the global market as a "re-pricing of risk" or a "phase where the price of risk is being normalized". It believes that this will ultimately turn out to be a healthy development, instead of a potential credit crunch.

"The global economy is as strong as it has been in the last four years and is currently on track to achieve 4.9% growth in 2007. Global growth is also now more balanced because it is not overly dependent on the US. The US is likely to grow below trend this year but the economies of Europe, Japan, China and the Emerging Economies are all currently firm," said UOBAM.

The local-based asset management firm also reiterated its positive long-term view on Asian equities, with the belief that the current developments in the financial markets will not likely derail structural trends such as globalization and the urbanization of China and India.

Fund Managers Remain Upbeat, But Expect Volatility

Generally, fund managers are adopting a sanguine view about the recent sharp global sell-down.

HSBC Investments sees that the correction is likely to be temporary but probably painful in the short term. It commented, "As the cycle is still healthy and interest rates are not high, the trend for equities is expected to be up." While maintaining its positive views on the Asian equity markets due to their good growth prospects, solid upward earnings revisions and relatively attractive valuations, it also cautioned investors that markets are likely to remain volatile.

Schroder Investment Management Ltd also offered an optimistic view, though it expects volatility to continue in the short term. "Short-term corrections are nothing new to global investors. Nerves were tested in June last year and then again in February this year. In both instances, the market over-reacted to what were arguably justified concerns," said Schroders. It pointed out that the investors were quick to recognize the attractiveness of the economic and corporate fundamentals of the global economies subsequent to both sharp corrections, possibly implying that the correction this time round may not stay for long. Nevertheless, it believes that the markets are likely to be exposed to volatility and remain very sensitive to negative newsflow in the short term.

Casting an upbeat view on the sub-prime issue, Christopher Molumphy, CIO of the Franklin Templeton Fixed Income Group, believes that sub-prime woes will most likely not spread to the much larger prime section of the mortgage market. He opined, "While there is certainly a risk, we are of the view that sub-prime loan problems will not have a dramatic impact on the overall financial markets."

Shane Oliver of AMP Capital Investors, however, painted a slightly more dismal picture of the situation. He opined that the fall-out from the US sub-prime mortgage crisis is likely to to run further. In his opinion, the uncertainty about the impact on the US economy will be around for a while and it will take time for investors in credit markets to recover their confidence. Oliver expects further downside in the global equity markets in the short term, and that the rough patch could last for several months, potentially shaving 15% off the global stock markets. Despite this, he maintains his view that the global economy is still in good shape, given the relatively low inflation and interest rates, attractive share valuations, low corporate gearing and solid profit growth.

Fund Managers' Views On The US Sub-prime Lending Woes

Sub-prime loans are a type of loans offered at a higher interest rate to home-buyers with poor credit histories who do not qualify for the prime rate loans. Currently, sub-prime mortgage loans account for 10% to 15% of the US'overall mortgage market.

The exacerbating situation of US sub-prime housing loan delinquencies had also led to the recent bankruptcy of two Bear Stearns' hedge funds ? the Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd and the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd; both of which were heavily exposed to the US sub-prime housing sector.

The Dow remains up 6.2% year to date while the Nasdaq is not far behind with a 2007 gain of 5.4%. The S&P 500 has lagged the other major indexes, clinging on to a year-to-date rise of 2.5%.

Analysts say investors should brace for more weeks like this .

"You're going to have choppy couple of weeks here with death by paper cuts," said Jason Trennert, chief investment strategist at Strategas Research Partners. "Ultimately the system is strong, valuations are very reasonable and the ECB and Fed seem to be on top of their game ? and are there to support the market if need be. Once the dust settles we think the Fed is going to ease and I think a lot of large cap stocks are on sale here."

Other market pros agreed that the recent selloff may have been overdone.

"Personally, I think its being overdone and every talking head is talking about the end of the world, but the reality is that it's not," said Patrick Fay, director of equity trading at DA Davidson.

"The fundamentals have gone out the window for awhile, and in some cases it means that better value has been created," Abby Joseph Cohen, chief U.S. portfolio strategist at Goldman Sachs, said on CNBC. "We think (the S&P 500) is about 10% underpriced and that typically has been a good entry point."