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Wall Street plunges, rallies, ends day mixed

Wall Street pulled off a dramatic late-session turnaround to close mixed Thursday after bargain hunters lured by weeks of massive declines came back to the stock market.
Trader Louis Paolillo, second left, works on the floor of the New York Stock Exchange Thursday. Stocks plunged as investors became concerned that trouble in the mortgage sector is spreading.
Trader Louis Paolillo, second left, works on the floor of the New York Stock Exchange Thursday. Stocks plunged as investors became concerned that trouble in the mortgage sector is spreading.Richard Drew / AP
/ Source: The Associated Press

Wall Street pulled off a dramatic late-session turnaround to close mixed Thursday after bargain hunters lured by weeks of massive declines came back to the stock market. The Dow Jones industrials, down more than 340 points in afternoon trading, ended the day with a loss of just 15.

The market appeared to be on an almost relentless downward spiral after problems at Countrywide Financial Corp. confirmed investors’ fears that credit problems are spreading. Moreover, for much of the day, investors shrugged off the Federal Reserve’s injection of $17 billion into the banking system.

The revival showed that investors want to turn stocks around. The market clawed back with a bounce in blue chip stocks, with a leadership role going to the downtrodden financial sector.

In spite of the big comeback, most of which came in the final hour of trading, Wall Street is still an uncertain place, having been pounded by weeks of losses including triple-digit slides in the Dow. All three of the market’s big indexes reached levels Thursday where they were down 10 percent from their mid-July highs — the definition of a stock market correction.

Some analysts were hopeful.

“The fundamental buyers are coming back into the market, and typically trading in the last half hour of the day is where the smart institutional money is going,” said Jack Ablin, chief investment officer at Harris Private Bank. “There’s a feeling that maybe we’ve pushed it too far, and this gives us a running start for positive markets worldwide on Friday.”

Still, while the market has seen big gains over the past few weeks, those gains quickly evaporated the next day. Often, the buying has been done by traders or hedge funds trying to cover losses from what’s known as short trading. In short trading, an investor sells borrowed stock on a bet that the market will fall; when the market rises, the investor must buy stock to pay back the debt. While bargain hunting helped lift stocks, it’s likely that Thursday’s gains were also due to short covering.

According to preliminary calculations, the Dow fell 15.69, or 0.12 percent, to 12,845.78.

The S&P rose 4.56, or 0.32 percent, to 1,411.26, and the Nasdaq composite index dropped 7.76, or 0.32 percent, to 2,451.07. The Russell 2000 index of smaller companies rose 17.29, or 2.30 percent, to 768.83.

Bonds continued their rally as investors fled into safer securities. The yield on the benchmark 10-year Treasury note dropped to 4.66 percent from 4.72 percent late Wednesday. Yields had been as low as 4.60 percent earlier in the session, but began to reverse as stocks rebounded.

Investors have also been hoping that policymakers might lower interest rates to help bolster the economy, which is a positive step for Treasurys. The likelihood of a rate cut before, or at, the next Fed meeting seemed less likely as the central bank instead chose to add more liquidity to the market.

The New York Fed — which carries out the central bank’s market operation — announced an overnight repurchase agreement worth $12 billion. This was on top of a 14-day “repo” worth $5 billion announced before the market opened.

Central banks around the world have been supplying billions of funds to banks in the past week to make cash available for lending and keep interest rates from rising amid signs that credit was drying up. The Fed uses a repo to buy securities from dealers, who then deposit the money into commercial banks.

St. Louis Fed President William Poole told Bloomberg Television after the closing bell Wednesday it wasn’t necessary for the central bank to consider lowering short-term interest rates before the regularly scheduled meeting of its rate-setting committee next month.

The Fed left rates unchanged at its last meeting at 5.25 percent, where it has stood since last summer. However, policymakers said during their commentary that inflation continues to be a worry, and also recognized the debt and credit crunch for the first time.

“I think there is more confidence of a lasting rally in equities if the Fed cuts rates, and that makes it easier on days like this to do bargain hunting,” said John Lonski, chief economist for credit-rating agency Moody’s Investors Service. “And, the more investors sense that the U.S. economy can shoulder losses arising from subprime mortgages, the closer we are to stabilization in equities.”

Countrywide fell $2.34, or 11 percent, to $18.95 after the mortgage lender borrowed $11.5 billion from a group of 40 banks to fund loans, in a move that shows just how deep the lending crisis has become. The company has been slammed as the credit crunch has driven a number of its smaller peers to bankruptcy.

But, there appeared to be renewed sense that bigger financial institutions would be able to withstand troubles in the mortgage industry. Delinquencies and defaults among loans extended to risky borrowers have seeped into the fixed-income market, where mortgage-back securities have suffered.

Bear Stearns Cos. shares have tanked because two hedge funds it managed failed because of wrong-way bets on mortgage-backed securities, surged $13.29, or 12.9 percent, to $116.55 on Thursday. Goldman Sachs Group Inc., which announced some of its hedge funds also have taken a massive hit, rose $4.95, or 3 percent, to $169.85.

Bill Strazzullo, partner and chief market strategist at Bell Curve Trading, pointed out that the S&P financial select exchange-traded SPDR, a key indicator that tracks financial stocks, has fallen to levels not seen since July 2006 — just ahead of the stock market’s big record-breaking run.

“That was the beginning of a major rally — we retraced the whole thing,” said Strazzullo. “The financials have been hammered. Most people who are bullish on the market think that bigger picture, everything will be OK, and look at it as an opportunity to buy in.”

But, investors certainly had their share of worries to contend with during most of the session. The Federal Reserve Bank of Philadelphia said its general economic index dropped to zero in August from 9.2 in July. This meant that the regional economy is not expanding, or contracting; the news only further soured the mood on the Street.

Also adding to the unease, the yen rose to a one-year high against the dollar, stirring concern that some investors were getting out of a trading strategy referred to as the yen carry trade — using the Japanese currency to acquire higher-yielding assets elsewhere. The dollar was down against most major currencies on Thursday.

The Commerce Department reported that construction of new homes fell to the lowest level in more than a decade in July as builders continued to struggle with the steepest housing slump since 1991.

Advancing issues outpaced decliners by a 2 to 1 basis on the New York Stock Exchange, where volume came to 2.92 billion shares.

Light, sweet crude fell $2.33 to $71.00 per barrel on the New York Mercantile Exchange, giving back Wednesday’s gains as storms brewing in the Caribbean didn’t appear to pose a threat to energy operations. Analysts believe worries about the economy, and stocks, have also struck fear among oil investors.

Overseas, markets reacted to the declines in the U.S. Britain’s FTSE 100 fell 3.05 percent, Germany’s DAX index fell 1.86 percent, and France’s CAC-40 fell 2.52 percent. In Asia, Japan’s Nikkei stock average fell 1.99 percent. Hong Kong’s Hang Seng Index fell 3.3 percent, while the often-volatile Shanghai Composite Exchange fell 2.1 percent.