Stocks Decline From Paper Tiger Start

Updated from 10:18 a.m. EDT

Stocks in New York were undulating under the baseline Tuesday after the Federal Reserve said it would buy short-term debt from U.S. companies to provide relief from the credit crisis.

The Fed announced creation of a new lending facility to buy short-term commercial paper from businesses and said it expects the new lending program to remove the stoppage in the credit markets.

The Dow Jones Industrial Average was recently down 16 points to 9940, and the S&P 500 was losing 2.6 points to 1054. The Nasdaq lost 10 points to 1853.

The Fed's decision to begin buying commercial paper is "a radical change in the nature of the Fed," said Dirk Van Dijk, director of research at Zacks Equity Research. He said that the Fed is now essentially making unsecured loans to corporations. "The commercial paper market was the most constipated of all the financial markets," said Van Dijk. Getting commercial paper moving makes some sense, he said, although the actual impact of the Fed's move remains to be seen.

"Under all this, the real economy is headed south in a very big way. That is in itself going to put a lot more pressure on these banks," said Van Dijk. He said he foresees 200,000 to 250,000 jobs lost in October, a worse loss than the discouraging 159,000 decline in September payrolls. "It's going to be quite bad."

Dysfunctional credit markets were also prompting speculation that the Fed and other central banks would coordinate rate cuts to jump-start lending.

"I think at this point it's needed," said Van Dijk. "Actually, if you look at the effective fed funds, it's trading well below the target rate," he said. A reduction in the U.S. target interest rate, therefore, would be a recognition of reality rather than a policy shift, he said.

After the close Monday, Bank of America ( BAC) announced it would cut its dividend and raise $10 billion in fresh capital as it reported quarterly earnings ahead of schedule.

Meanwhile, Citigroup ( C) and Wells Fargo ( WFC) agreed to take a two-day breather from their legal fight over who would get to acquire Wachovia ( WB).

In the technology sector, chipmaker Advanced Micro Devices ( AMD) announced a plan to spin off its manufacturing operations.

Automaker Adam Opel, a segment of General Motors ( GM), said it would cease production at its Eisenach, Germany plant, according to the AP.

As for economic data, traders will get a look at minutes from the Federal Open Market Committee's Sept. 16 meeting, when it elected to leave its key interest rate unchanged at 2%. Later in the afternoon, the Fed's look at U.S. consumer credit is due for release.

In commodities, crude oil was gaining $2.84 to $90.65 a barrel. Gold was gaining $12.40 to $878.60 an ounce.

Longer-dated U.S. Treasury securities were declining in price. The 10-year was down 15/32 to yield 3.51%, and the 30-year was down 18/32 to yield 4%.

Abroad, markets were higher. The FTSE in London and the Dax in Frankfurt were logging gains. Asian exchanges finished mixed following a rate cut from Australia's central bank.

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