Updated from 1:56 p.m. EDTU.S. stocks continued to fluctuate wildly Wednesday after the Federal Reserve authorized an emergency 50-basis point reduction in the fed funds rate. The rate cut, which was coordinated with a similar cut by the European Central bank as well as lenders in Britain, Canada, Sweden and Switzerland, marks a significant step in efforts to stem a global economic slowdown and free up constrained credit markets. The Fed's rate cut reduces the target interest rate to 1.5%. The ECB reduced its key rate half a point to 3.75%, and the Bank of England cut rates 50 basis points to 4.5%. In highly volatile trading, the major indices were recently marking gains. The Dow Jones Industrial Average, which earlier fell some 250 points, was lately up 55 points to 9502, and the S&P 500 was better by 13 points at 1009. The Nasdaq was adding 30 points to 1785. Robert Pavlik, chief investment officer at Oaktree Asset Management, said that the rate cut will have a positive effect on markets, but that it's going to be partially psychological, giving hope and confidence to consumers by reducing some of their costs. Pavlik also said there's also skepticism about the real effects of the cut, and that was evident in the selloff in premarket futures following the Fed's announcement. "I think the market is more focused on what's going on in the Libor rates," he said. He said that the rate cut wasn't made to reduce lending rates among banks, but designed to offer a psychological boost.
Credit markets were looking to relax slightly, wrote Tony Crescenzi, chief bond market strategist at Miller Tabak, wrote on his Realmoney.com blog. He wrote that Treasury yields were rising, the 10-year swap rate was declining and Fannie Mae ( FNM) successfully sold Treasury bills at significantly reduced levels. "If 2-year swap rates follow these gauges and if Eurodollar and Euribor futures contracts begin to show signs that investors are betting on a decline in LIBOR, a substantial rally in riskier assets such as equities and corporate bonds will likely follow," he wrote. Ten-year Treasury yields were up 27 basis points, suggesting investors were shifting away from the relative safety of those securities and into other asset classes, Crescenzi wrote. Speaking in Washington, D.C., Wednesday afternoon, Treasury Secretary Henry Paulson said that the internationally coordinated rate cuts were a step in the right direction. Paulson said that governments should work to pump additional liquidity into markets and called for a meeting of the Group of Twenty finance ministers and central bank governors to continue coordination. He also said that the crisis would not resolve itself immediately, and predicted additional pain in the next few months. James Paulsen, chief investment strategist for Wells Capital Management, said the Fed rate cut cannot address the primary problem in the stock market, which is a crisis of confidence. He also said that there's more of a chance investor fears will be assuaged when the Treasury's $700 billion Troubled Asset Relief Program takes effect next week.
On Tuesday, stocks fell hard as credit markets remained tight after an unprecedented Federal Reserve decision to begin buying commercial paper from U.S. businesses. Pavlik said that Tuesday's selloff was encouraging, and the market may be primed for a short-term bounce. He said that although some companies may offer better-than-expected third-quarter earnings, "The picture is very cloudy for many companies. That's what may temper any bounce going forward." However, he did predict that the S&P 500 will end above 1000 for the year, somewhere between 1100 or 1200. What's most important, said Paulsen, is that policymakers and leaders show confidence in the economy. "Maybe it's time to tell the market that, 'Look, we've done enough. We think there's plenty of liquidity. There's plenty of juice ... . You guys figure this out.'" Paulsen said the market is priced for the worst-case scenario and not the actual current state of the economy. "If we could come down and come back just on confidence, that would do wonders," he said. Before the internationally coordinated rate cuts, conditions were looking dire Wednesday. As evidence of a worldwide slowdown piled up, European governments struggled to put together their own rescue plans. The U.K. government set up an $87 billion rescue package for U.K. banks. Stateside, investors faced the final day of trading with the Securities and Exchange Commission's temporary ban on short-selling of more than 900 financial stocks. As for company news, The Wall Street Journal reported Citigroup ( C) is looking for partners in its buyout of Wachovia ( WB). Citi and Wells Fargo ( WFC) had earlier agreed to cease their buyout battle for Wachovia until noon Wednesday. Following the expiration of that deadline, Citi and Wells agreed to prolong their truce until Friday morning.
Bank of America ( BAC) also concluded a common stock offering, raising $9.8 billion after expenses at $22 a share, lower than the stock's Tuesday closing price of $23.77. The same day, BofA agreed to buy back as much as $4.7 billion in auction-rate securities to settle a lawsuit alleging it misled customers about the safety of the instruments. After announcing a capital raise the previous day, insurance firm MetLife ( MET) announced it was reducing its work force by an unspecified amount as it copes with the tough lending environment. To kick off earnings season, aluminum processor and Dow component Alcoa ( AA) reported a decline in third-quarter profit thanks to rising costs and softening demand. Bulk retailer Costco ( COST) said its fourth-quarter profit rose year over year, but nevertheless fell short of Wall Street estimates. Discount stores Wal-Mart ( WMT) and Costco announced decent September sales figures but fell shy of analyst estimates. Target's ( TGT) September revenue decline was wider than the Street had expected. Agricultural products developer Monsanto ( MON) posted a narrowed fourth-quarter loss on rising revenues, sending shares higher. Looking at the day's economic data, August pending home sales figures from the National Association of Realtors climbed unexpectedly. The NAR report showed a 7.4% increase in its sales index, which rose to 93.4 from 87 in July. Economists had been anticipating a 1.3% decline in pending home sales. The International Monetary Fund said in its World Economic Outlook that the U.S. and world economy would slow sharply for the remainder of 2008. The IMF said that the global economy would grow 3.9% in 2008, down from 5% in 2007. For 2009, the Fund forecast even slower growth at 3%.
Weekly oil inventories from the Energy Information Administration showed a larger-than-expected increase in oil reserves. Crude inventories rose by 8.1 million barrels for the week ended Oct. 3, well above analyst expectations. Over in the commodities arena, crude oil was declining $1.32 to $88.74 a barrel. Gold advanced $24.50 to settle at $906.50 an ounce. Longer-dated U.S. Treasuries were declining. The 10-year was down 1-30/32 to yield 3.73%, and the 30-year was off 24/32, yielding 4.08%. The dollar was declining sharply vs. the yen, inching down against the euro and gaining on the pound. Lately, European indices such as the FTSE in London and the Dax in Frankfurt were lower. Asia fared worse; Japan's Nikkei closed down 9.4%, and Hong Kong's Hang Seng dropped 8.2%.