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Stocks in U.S. Struggle for Direction

Mike Taylor

Stocks in New York were having another erratic session Thursday, starting with a rally, then taking a sharp detour southward before buyers re-emerged to lift the averages back to the flat line.

The Dow Jones Industrial Average was up 10 points to 10,620, and the S&P 500 was better by half a point at 1157. The Nasdaq was up 1 point to 2100.

On Wednesday, stocks took a severe beating following the government bailout of insurance firm AIG (AIG Quote - Cramer on AIG - Stock Picks), which reminded investors of the severity and scope of the credit crisis. Pessimism on Wall Street was ramping in the wake of the AIG bailout, a bankruptcy for Lehman Brothers (LEH Quote - Cramer on LEH - Stock Picks) and a last-minute merger between Merrill Lynch (MER Quote - Cramer on MER - Stock Picks) and Bank of America (BAC Quote - Cramer on BAC - Stock Picks).

Ahead of the latest session, more news emerged from the struggling financials space. Washington Mutual (WM Quote - Cramer on WM - Stock Picks) hired Goldman Sachs (GS Quote - Cramer on GS - Stock Picks) to help it prepare for a sale, while private equity firm TPG had helped clear the way for a merger by waiving an anti-dilution clause that would make WaMu pay for any dilution related to a capital raise or buyout.

Meanwhile, The New York Times and other news outlets reported that Morgan Stanley (MS Quote - Cramer on MS - Stock Picks) was in discussions to merge with Wachovia (WB Quote - Cramer on WB - Stock Picks). The Government of Singapore Investment Corp. said it would take a stake in Morgan if approached, and CNBC reported that HSBC (HBC Quote - Cramer on HBC - Stock Picks) and China's CITIC Group were also interested. On Wednesday, Morgan Stanley and Goldman Sachs shares both faced pressure as investors wondered if any firm was safe on its own.

The market staged an early relief rally, said Mark Fightmaster, market analyst at Schaeffer's Investment Research. Historically, mergers in the financial sector have drawn a positive reaction from the markets, he said, but "It's just tough to read the market right now."

Dow Jones replaced AIG with Kraft (KFT Quote - Cramer on KFT - Stock Picks) on its 30-stock Industrial Average index, and Lehman Brothers ceased trading on the New York Stock Exchange and instead took residence on the pink sheets under the ticker LEHMQ.PK.

The Federal Reserve and other central banks, including the Bank of England and European Central Bank, announced Thursday they would coordinate efforts to quell soaring international demand for dollar liquidity. The Fed said it would provide an additional $180 billion for its temporary reciprocal currency arrangements. This added support would provide dollar funding for both term and overnight liquidity operations by other central banks.

Although it's hard to gauge the long-term impact of the Fed's overnight operations, the short-term impact has been relief, followed by a return to credit stresses, said Mike Feroli, economist at JPMorgan. "So far, we're at least getting the first half of that proposition," he said. He said that the Bank of England's involvement may provide additional support, because London money markets show high demand for dollar funding.

Because Europe has no lender of last resort, the best way to provide dollars following a global spike in demand is to have the ECB buy short-term euro-denominated securities in exchange for dollars, said Brian Bethune, director of financial economics for Global Insight. "These are just short-term liquidity operations. The hope is the crisis will die down, and you'll be able to pull the liquidity back in," he said.

Reflecting credit turmoil overseas, British bank Lloyds TSB said it would buy British mortgage lender HBOS for $21.85 billion. The HBOS takeover was encouraged by the British government in an effort to prevent the company from failing.

Elsewhere, MidAmerican Energy, a subsidiary of Berkshire Hathaway (BRKA Quote - Cramer on BRKA - Stock Picks) said it would buy Constellation Energy (CEG Quote - Cramer on CEG - Stock Picks) for $4.7 billion, or $26.50 a share in a cash deal.

As for earnings, shipping firm FedEx (FDX Quote - Cramer on FDX - Stock Picks) reported first-quarter earnings of $384 million, or $1.23 a share, vs. $494 million, or $1.58 a share, a year ago. Despite the drop in EPS, the results from FedEx met Thomson Reuters analyst estimates.

In the commodities space, crude oil was rising 9 cents at $97.25. Gold was up $41.40 at $891.90 an ounce, after settling up $70 an ounce on Wednesday, the biggest one-day price jump ever.

Shifting to economic data, the Department of Labor's reported a surprise rise in initial jobless claims to a seasonally adjusted 455,000 for the week ended Sept. 13, up 10,000 from the prior week. Analysts had expected the figure to dip to 440,000, but the report reflects job losses associated with Hurricane Gustav.

Traders got an added boost in confidence from the Philadelphia Federal Reserve's September manufacturing report. The survey showed a reading of 3.8, beating expectations and improving dramatically from -12.7 in August.

On the other hand, the Conference Board's index of leading indicators for August fell 0.5%, suggesting the economy had been headed for a downturn even before the escalation of trouble in the credit markets.

Longer-dated Treasury securities were mixed. The 10-year note was up 8/32, yielding 3.38%. The 30-year was 10/32 lower to yield 4.08%.

Overseas, European indices were mixed. The FTSE in London was down fractionally, and the Dax in Frankfurt was marking slight gains. Asian markets, such as the Nikkei in Tokyo and Hong Kong's Hang Seng, finished in the red.