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Wall
Street zigzagged Wednesday as an emergency interest rate cut failed to
alleviate investors' fears that the paralysis in the credit markets
will set off a global recession. The major indexes moved in and out of
positive territory, with the Dow Jones industrials at times falling
more than 200 points or rising more than 100.
The rate cut by the Federal Reserve and other leading central banks
failed to convince investors that credit markets would soon relax and
that banks would begin lending more freely to businesses and consumers.
The Fed lowered rates by a half-point, saying in a statement that the
turmoil in financial markets posed a further threat to an already shaky
economy; it was joined in the rate cut by the European Central Bank,
Bank of England, The Bank of Canada, the Swedish Riksbank and the Swiss
National Bank.
But interest rate changes take months to work their way through the
economy, and while investors clearly were happy with the central banks'
actions, they were also well aware that in the near term, banks remain
reluctant to lend because of fears they won't be paid back.
That fear, which increased after the failure of Lehman Brothers
Holdings Inc. in mid-September, has all but shut down the credit
markets, making it increasingly hard for companies and individuals to
borrow, and in turn, posing a further threat to the economy. Wall
Street has plunged in response to scarcity of credit; stocks initially
rose on the rate cut, but turned lower as the reality of the credit
markets' troubles set in again.
The fears on the Street have been exacerbated by the spread of the U.S.
credit problems overseas. Several banks in Europe have had to be bailed
out, and earlier this week, the governments of Germany, Ireland and
Greece took steps to guarantee private bank deposits.
Moreover, the markets are mindful of the fact that the government's
$700 billion financial rescue plan is in its early stages of
implementation and will take some time to have an impact on banks'
balance sheets.
Stocks drew some early support from signs that the housing industry -
whose troubles set off the series of events leading to the current
credit problems - might be faring better than expected. The National
Association of Realtors said pending home sales for August jumped
unexpectedly, rather than falling 1.8 percent as had been predicted.
Pending sales, which reflect signed contracts, rose 7.4 percent in
August from an upwardly revised reading of 87 in July.
But investors who have been selling frantically because of the stymied
credit markets, eventually discounted the home sales report. They did
some selected buying of stocks that have been turned into bargains by
massive losses, but the advances - largely reflected in the major
indexes - did not hold for long.
In midafternoon trading, the Dow rose 160.89, or 1.7 percent, to
9,608.00. It fell 875 points during the first two days this week.
Broader indexes also were in positive territory. The tandard &
Poor's 500 index rose 1.68, or 0.17 percent, to 997.91. The Nasdaq
composite index rose 4.75, or 0.27 percent, to 1,759.63.
But declining issues led advancers by a 2 to 1 basis on the New York
Stock Exchange, where volume came to a heavy 1.2 billion shares.
With its precipitous drop of the pst few weeks, Wall Street is
approaching the magnitude of the losses it suffered during the bear
market in the early part of this decade. By the time the Dow reached
its low of that market, 7,286.27 on Oct. 9, 2002, it had fallen 37.8
percent from its record high close of 11,722.98, set in January 2000.
Te Dow has now fallen about 33 percent from the closing high of 14,164.53, reached a year ago Thursday.
David Wyss, chief economist for Standard & Poor's, said the losses
around the world signals that markets are finally realizing that the
credit crisis can't be resolved soon.
"There was a general disrgard for risk going on in financial markets
around the world, it wasn't just the U.S.," he said. "Now they're
waking up to risk."
Investors had been extremely anxious in recent days for a rate cut, and
despite the Fed taking other steps this week to help the credit
markets. Policymakers unveiled a plan o buy massive amounts of
commercial paper, the short-term debt used by companies, in a bid to
reanimate the credit markets.
"With all of this occurring as a coordinated effort it is showing that
everybody out there is trying to fight this thing, nd that should bring
some confidence back to the market," said Scott Fullman, director of
derivatives investment strategy for WJB Capital Group. "But, the big
question now is can the credit market open for business."
It is likely that stocks won't begin to recover for good until
investors are certain the credit markets are functioning in a more
normal fashion. There are also severe economic problems including heavy
job losses and high unemployment that will also need to show
improvement.
The uncertainty in the market has driven investors to buy up anything
deemed safe, including gold and government debt. For instance, prices
of gold shot up $19.90 to $901.90 - though still off its record of
$1,033.90 in March.
Demand for short-term Treasurys remained high because of their safety;
investors are willing to take extremely low returns just to have their
money in a secure place. The yield on the three-month Treasury bill,
which moves opposite its price, dropped to 0.77 percent from 0.81
percent late Tuesday.
However, longer term Treasury bonds fell because they are considered to
be less attractive when the Fed cuts rates. The yield on the 10-year
note rose to 3.72 percent from 3.51 percent late Tuesday.
The first third-quarter earnings reports are showing signs of strain on
companies, and that is adding more uncertainty to the stock market.
After the close Tuesday, Alcoa Inc. said it would conserve cash by
suspending its stock buyback program and all non-critical capital
projects. The aluminum company's earnings fell 52 percent.
Shares of the company plunged $1.99, or 11.9 percent, to $14.72, by far
the steepest decliner among the 30 that comprise the Dow industrials.
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