Rate cut talk revives Dow
Wall Street tumbled early Wednesday on fresh concerns about the housing market and financial companies, then recovered most of the losses on rumors of an emergency interest rate cut by the Federal Reserve.
No rate cut occurred by the final bell, but the Dow Jones industrial average still finished virtually flat after being down 206 points early in the day.
The Dow ended off 0.98 of a point at 13,675.25.
Broader indexes also surged in the final 90 minutes after heavy losses early on. The Nasdaq composite ended down 24.50 points, or 0.9%, at 2,774.76, after falling as much as 2.8%.
The Standard & Poor’s 500 eased 3.71 points, or 0.2%, to 1,515.88. It had been off as much as 2% at its low for the day.
Losers still outnumbered winners by about 3 to 2 on the New York Stock Exchange.
Stocks were tripped at the opening bell after a dismal report on September existing-home sales and after Merrill Lynch reported a shockingly large quarterly loss as it wrote down the value of troubled debt.
Merrill said it lost $2.2 billion in the third quarter, including a $7.9-billion write-down on complex mortgage securities such as collateralized debt obligations.
The announcement caught Wall Street flat-footed because the write-down far exceeded what Merrill had projected a few weeks ago.
Merrill’s shares ended down $3.90, or 5.8%, at $63.22, after falling as low as $61.40.
The brokerage’s inability to correctly estimate its losses on debt securities fanned new fears that financial companies in general face larger write-downs on those assets.
“It tells us that you didn’t have a real good sense of what your exposure was, for it to go up that much in that short period of time,” said Alan Skrainka, market strategist at Edward Jones in St. Louis.
Among other financial companies, mortgage giant Countrywide Financial ended at $13.83, down $1.22; Citigroup lost 62 cents to $41.82; and Bear Stearns slid $2.62 to $113.54.
But as gloom about the financial sector worsened, it triggered rumors that the Fed might make an emergency cut in its discount rate, the rate it charges banks that borrow directly from the Fed. That brought buyers pouring back into stocks.
The central bank cut the discount rate from 6.25% to 5.75% on Aug. 17, amid the worst of the stock market’s summer meltdown. That helped stabilize the market.
The Fed followed that cut with a reduction in its more important short-term rate, the federal funds rate, on Sept. 18.
Many analysts, however, said an emergency Fed cut was highly unlikely, given that policymakers already had been expected to announce a rate cut when they meet next week.
“I don’t think the Fed is that desperate” to act before next week, said Tom Di Galoma, a Treasury bond trader at Jefferies & Co. in New York.
The Fed is widely expected to reduce the federal funds rate from 4.75% to 4.50% next week in an effort to keep housing and credit problems from dragging the economy into recession.
Some of the selling in battered financial stocks such as Merrill and Countrywide in recent days may be by mutual funds taking losses for tax purposes, analysts said. Many funds end their fiscal years on Oct. 31 and often sell portfolio losers this month to record losses that can offset capital gains.
But financial issues weren’t the only weak spot in the market early Wednesday. Amazon.com, until recently a market highflier, plummeted as low as $83.27 as investors sold despite the company’s strong third-quarter earnings report. The stock ended at $88.73, down $12.09.
Irvine-based computer chip maker Broadcom sank $7.14 to $34.92 after its profit report also disappointed Wall Street. Other chip stocks pulling back included Intel, down 79 cents to $26.01, and Altera, off $3.66 to $19.66.
On the plus side, truck maker Paccar rocketed $5.84 to $56.22 after its quarterly earnings beat estimates.
Amid stocks’ swings, some investors ran for the relative safety of Treasury securities. The yield on the 10-year T-note ended at 4.34%, down from 4.40% on Tuesday. The yield has tumbled from 4.65% two weeks ago.
In other trading, oil prices jumped after the government reported an unexpected drop in U.S. inventories in its weekly update. Near-term crude futures gained $1.83 to $87.10 a barrel.
walter.hamilton@latimes.com
