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Stocks fluctuate as investors digest Fed rate cut

Wed, 12/17/2008 - 7:05am
The Associated Press

NEW YORK (AP) – Wall Street fluctuated in late afternoon trading Wednesday, as investors' enthusiasm over the Federal Reserve's rate cut was dampened by downbeat corporate news.

Stocks declined moderately earlier in the day after a larger-than-expected loss from Morgan Stanley offered fresh evidence of the sizable obstacles the battered financial industry still faces. The company posted a loss of $2.37 billion, or $2.34 per share, for the fiscal fourth quarter. The report came a day after rival Goldman Sachs Group Inc. posted its first quarterly loss since going public in 1999.

Some selling had been expected after Tuesday's huge rally in which the Dow Jones industrial average rose more than 4 percent and other indexes gained more than 5 percent. The moves came after the central bank lowered its federal funds rate target to a range of zero to 0.25 percent – the lowest levels on record.

After briefly moving into positive territory, stocks fluctuated in mid-afternoon trading as investors tried to look past concerns about the financial sector and let the magnitude of the Fed's actions begin to sink in.

"This is a whole lot of new information for people to digest," said David Waddell, senior investment strategist and chief executive of Waddell & Associates. "Now we need time to sit back ... and figure out what it all means."

The Fed's move was an unprecedented one aimed at boosting borrowing and lending. The central bank said Tuesday it anticipates the weak economy will keep the target rate low for "some time," and added that it is mulling the possibility of buying Treasurys – in effect, printing new money.

Investors have been rather resilient in recent trading sessions, an encouraging sign for analysts who believe the market might be entering a period of stability after the unrelenting selling of the past three months.

"Even if the market is down 100 points, the fact that it's been in a narrow trading range I think is very positive," Waddell said.

In mid-afternoon trading, the Dow Jones industrial average fell 62.44, or 0.70 percent, to 8,861.70, after falling as many as 146 points earlier in the session.

Broader stock indicators were slightly lower. The Standard & Poor's 500 index slipped 2.54, or 0.28 percent, to 910.64, and the Nasdaq composite index fell 3.10, or 0.19 percent, to 1,586.79.

But the Russell 2000 index of smaller companies was up 5.25, or 1.09 percent, to 488.10.

Advancing issues outnumbered decliners by about 3 to 2 on the New York Stock Exchange, where volume came to a light 815.19 million shares.

In other news, Securities and Exchange Commission Chairman Christopher Cox blamed regulators for a decade-long failure to investigate Wall Street money manager Bernard L. Madoff, who is accused of running a $50 billion Ponzi scheme. Cox said staff attorneys never bothered to seek a formal commission-approved investigation that would have forced Madoff to surrender vital information under subpoena.

In response to the Fed's interest rate cut, most banks lowered their prime rate, or the rate they charge their best customers, to 3.25 percent from 4 percent – the lowest it's been in more than 50 years. The move is expected to lower rates on everything from home equity loans to credit card loans. Mortgage rates are also expected to fall further after the Fed renewed its pledge to buy up billions of dollars of mortgage debt.

These moves could put billions of dollars into the pockets of consumers at a time when many Americans have lost the will to spend amid a worsening recession.

But many experts believe that the interest rate cuts alone won't be enough to spur spending.

"It's a tall order to get them to go out and spend again," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. "That's why you also need a stimulus."

President-elect Barack Obama's advisers are currently contemplating an economic recovery plan that could cost as much as $1 trillion over two years.

After being down by as much as 8 percent earlier in the session, Morgan Stanley shares jumped $1.56, or 9.7 percent, to $17.69. Goldman Sachs added $4.86, or 6.4 percent, to $80.86.

The dollar was mixed against other major currencies, while gold prices rose.

Bond prices extended sharp gains Wednesday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.21 percent from 2.28 percent late Tuesday. The yield on the popular three-month T-bill – whose yield has at times gone negative due to frenzied buying – was at 0.01 percent down from 0.03 percent late Tuesday.

Light, sweet crude fell $2.93 to $40.67 a barrel on the New York Mercantile Exchange.

OPEC said Wednesday it will cut production by 2.2 million barrels a day – the largest ever at one time – to stem prices that have plunged more than 70 percent from highs near $150 this summer.

The recent decline in oil prices is helping to lower the U.S. current account trade deficit – the amount of money the country is borrowing from foreigners. The Commerce Department said Wednesday the current account trade deficit fell by 3.7 percent to $174.1 billion in the July-September quarter. That was a better showing than the $178.8 billion deficit economists expected.

Overseas, Japan's Nikkei stock average rose 0.52 percent, while Hong Kong's Hang Seng index rose 2.18 percent. Britain's FTSE 100 rose 0.35 percent, Germany's DAX index fell 0.46 percent, and France's CAC-40 fell 0.30 percent.

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