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Stocks Churn as Credit Markets Tighten

Stocks retreat from early gains as reports suggest the U.S. Treasury may take equity positions in U.S. banks.

Updated from 12:44 p.m. EDT

Stocks in New York experienced jumbled trading Thursday, as tight credit markets and pessimism about the financial sector accompanied new developments for the Treasury Department's $700 billion bailout package.


Dow Jones Industrial Average

, earlier up as much as 190 points, was recently down 139 points at 9119. It was one year ago today that the Dow closed at an all-time record high of 14,164. The

S&P 500

was losing 16 points to 969. The


was falling 6.5 points at 1734.

On Wednesday, markets sold off even after the

Federal Reserve

, along with central banks in Europe and Canada, orchestrated a coordinated cut in interest rates to help free up the credit markets.

As Thursday's session got underway, credit markets continued to tighten despite the rate cuts. Three-month Libor, a measure of the rate banks charge one another for large loans, was up 43 basis points to 4.75%. Overnight Libor was up 1.16 percentage points to 5.09%.

Commercial paper wasn't faring much better. The Fed reported that the market for company debt declined by $56.4 billion to $1.55 trillion for the week ended Oct. 8. Paper issued by financial institutions was down $42.4 billion to $641 billion, the Fed said.

In an effort to further prop up the financial system, the


was considering buying equity stakes in U.S. banks to try to bolster their capital levels, according to media reports. Financial firms have been crippled by their exposure to illiquid mortgage-backed securities, and the Treasury's previous plan, known as the Troubled Asset Relief Program, was designed to buy those assets from banks in exchange for fresh capital.


reported that


(BLK) - Get Free Report



, a unit of



, had both proposed to

manage mortgage-backed securities

to be bought by the Treasury as part of its $700 billion financial-sector rescue plan.

Neil Hennessy, manager of Hennessy Funds, said that the assistance package will bring up the value of mortgage-backed assets, which he said are currently undervalued. "We know for a fact that 93% of people are paying their mortgages on time," he said. Even if only 50% were paying, mortgage-backed securities are worth more than their current market value, he said.

Furthermore, Hennessy said, investors have irrationally fled stocks. The total dividend return on the entire Dow Industrials index is currently at 3.5%, and every company in the index but


(C) - Get Free Report


General Motors

(GM) - Get Free Report

is highly profitable, he said. Over the long term, said Hennessy, stocks are a good value. "Tell people to turn off their TV for the next week," he said.

"Are we at a bottom or at a point of capitulation or despair? I don't know. It could get worse before it gets better," said Brian Gendreau, investment strategist at ING Investment Management.

Financial stocks were holding the spotlight as a three-week ban on short-selling of stocks in the sector lifted just before midnight. The

Securities and Exchange Commission

had implemented the rule on Sept. 19 as an emergency measure to help stem massive selling in bank stocks.

Morgan Stanley

(MS) - Get Free Report

shares were lately down 14%, and

Goldman Sachs

(GS) - Get Free Report

was lately by 3%.

The Wall Street Journal

reported that

National City


was in discussions with other banks, perhaps

PNC Bank

(PNC) - Get Free Report


Bank of Nova Scotia

(BNS) - Get Free Report

about potentially selling itself.

Insurance firms were also facing investor scrutiny after


(MET) - Get Free Report

earlier this week said it wasn't offering earnings guidance and intended to raise capital. Shares of

Prudential Financial

(PRU) - Get Free Report

dropped as much as 30%.

MetLife, however, was buoyed by a report in the


that it has recently discussed a potential merger with

Hartford Financial

(HIG) - Get Free Report

. The report said the discussions didn't lead to a deal, but that they indicate the strain the credit crunch has exacted from insurance firms.

Separately, the Fed said it would grant insurance company


(AIG) - Get Free Report

up to $37.8 billion in exchange for fixed-income securities. The cash infusion comes on top of the $85 billion already lent out in September to keep the company from going bankrupt.

Suffering in the automotive sector hindered the major indices.

General Motors

(GM) - Get Free Report

shares dropped 16%, reaching lows not seen since 1951.


(F) - Get Free Report

was also skidding, down 7.9%.

Looking at corporate earnings, Dow component

IBM preannounced

its third-quarter results, saying it made a profit that increased year over year and topped analyst estimates.

As for economic data, initial jobless claims for the week ended Oct. 4 came in at 478,000, down from 498,000 the previous week but slightly above economists' estimates for 475,000 jobs lost.

The Commerce Department reported that wholesale inventories for August were up 0.8%, a larger increase than anticipated by economists.

In commodities, crude oil was losing $1.72 at $87.23 a barrel. Gold was declining $13.80 to $892.70 an ounce.

Longer-dated U.S. Treasury securities were declining in price. The 10-year note was down 1-5/32 to yield 3.78%, and the 30-year was down 1-8/32, yielding 4.12%. The dollar was gaining ground on the euro and pound, but softening vs. the yen.

Overseas, European indices, such as the FTSE in London and the DAX in Frankfurt, were mostly lower. Asia was mixed, as the Nikkei in Japan closed on the downside while the Hang Seng in Hong Kong finished with gains.