Stocks Erase Morning's Large Gains

Updated from 10:20 a.m. EDT

Stocks on Wall Street descended from their impressive early gains Tuesday to trade in and out of the red after the Treasury Department outlined a plan to invest some $250 billion in U.S. banks, with about $125 billion reportedly earmarked for the nine largest.

The Dow Jones Industrial Average, up more than 400 points earlier, was lately up just 19.5 points at 9407, and the S&P 500 was up just 1.5 points to 1004. The Nasdaq was giving back 39 points to 1804.

On Monday, stocks snapped back from their eight-session October losing streak with massive gains. The Dow registered its largest-ever one-day point gain, rising 936 points, or 11%. The S&P 500 and the Nasdaq each jumped nearly 12%. The large gains came as central banks around the world collaborated on plans to inject capital into the global financial system.

Ahead of the new session, Treasury Secretary Henry Paulson said his agency would dedicate $250 billion of the $700 billion bailout package to buying equity positions in U.S. banks.

The government would buy preferred shares in Goldman Sachs ( GS), Morgan Stanley ( MS), JPMorgan Chase ( JPM) , Bank of America ( BAC), Merrill Lynch ( MER) , Citigroup ( C), Wells Fargo ( WFC), Bank of New York Mellon ( BK) and State Street ( STT), the Journal reported.

Speaking in Washington Tuesday morning, Treasury Secretary Henry Paulson said that he dislikes government ownership in U.S. financial firms but that the equity investment will help unfreeze liquidity markets and alleviate the crisis. Federal Reserve Chairman Ben Bernanke praised Paulson's plan, and FDIC Chair Sheila Bair said that additional insurance of deposits in banks would also boost confidence in the financial system.

Action in the money markets suggested the international relief effort may have been gaining traction against the credit crunch. Bloomberg reported that three-month dollar Libor, a measure of the rate banks charge one another for large loans, declined 12 basis points to 4.64%. The overnight rate lost 29 basis points to 2.18%.

Fear looked to be retreating from equity markets as well, as the CBOE Volatility Index, a measure of investor fear, has declined to 54 from a peak above 76 on Friday.

"We don't want to sound too Pollyanna-ish, but it is clear from the events of the past week that the body politic of the developed economies has been shaken to the core and will now do whatever is necessary to maintain the operation of the system. The daily threat of institutional failure has, therefore, now receded greatly," wrote Ian Shepherdson, chief U.S. economist at High Frequency Economics, in an email.

Shepherdson also wrote that owners of equities will still suffer as a result of the financial crisis. "The gigantic loss of wealth will reverberate throughout the real economy for years to come, though the biggest hit will come in the near term," he wrote. He said that the consumer still poses a large downside risk for the U.S. economy.

Goldman Sachs was undertaking some of its own maneuvers, seeking a New York state charter for its new banking subsidiary. Goldman, along with Morgan Stanley, became a bank holding company on Sept. 21. Many major commercial banks apply for charters from federal rather than state regulators.

Elsewhere in the financials, Hank Greenberg, former CEO of AIG ( AIG), was preparing a proposal to keep the company from being taken over by the government. AIG is rushing to pay back a bridge loan from the government to avoid being seized.

Spanish bank Banco Santander ( STD), meanwhile, confirmed it was expanding on its existing stake to buy the entirety of Sovereign Bancorp ( SOV) for $1.9 billion.

Bruce Bittles, chief investment strategist at RW Baird, said that the market began to reverse its downward course when it started last Friday with a panic selloff. That broke the trend of selling into the afternoon, and after the market failed to approach Friday morning's lows, it appeared that the lows were in place. A solid performance by the major indices bolstered his belief that the market had put solid lows in place the previous week, he said.

"The market was as oversold as it has ever been in history coming into Monday," said Bittles. He said he expected to see some selling today by nervous people. Nonetheless, "I think the trend is higher." He said a close in positive territory today would indicate an uptrend. "If the market folded today, I think that would be problematic."

In the technology space, Internet concerns Yahoo! ( YHOO) and Google ( GOOG) were working with the Justice Department to try to stave off an antitrust case against a proposed ad-sharing deal between the two companies.

Meanwhile, Boeing ( BA) looked headed for trouble as negotiations with its machinist union broke down. Boeing's machinists have been on strike for five weeks.

As for corporate earnings, consumer-products developer Johnson & Johnson reported third-quarter earnings that rose year over year and topped estimates.

PepsiCo wasn't as rosy, announcing it would reduce its workforce and reporting falling profit.

In the realm of commodities, crude oil was gaining 67 cents to $81.86 a barrel. Gold was slipping $5.50 to $837 an ounce.

Longer-dated U.S. Treasury securities were declining in price. The 10-year note was down 2/32, yielding 3.98%. The 30-year was losing 1-22/32 to yield 4.23%. The dollar was rallying vs. the yen but falling against the euro and pound.

Abroad, European indices including the FTSE in London and the DAX in Germany were trading higher. Looking at Asian markets , Japan's Nikkei closed 14.2% higher, a one-day record, and Hong Kong's Hang Seng closed with gains.

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