Tuesday, October 14, 2008

Stocks erase early gains

Stocks turned lower Tuesday, erasing earlier gains, with investors pulling back in the face of the government announcement that it will spend $250 billion to buy stock in banks, the latest effort to thaw the frozen credit markets.

Credit markets eased a bit, with a key overnight bank lending rate falling. Treasury prices slumped, raising the corresponding yields. The dollar fell against the euro and gained versus the yen. Oil prices rose and gold prices fell.

The Dow Jones industrial average (INDU)fell 76 points, or 0.8% more than an hour into the session. The Dow was up as much as 406 points in the first minutes of trading.

The Standard & Poor's 500 (SPX) index slipped 0.9%.

The Nasdaq composite (COMP) tumbled 2.9%, with some of its large technology shares slumping after the previous session's advance. Microsoft (MSFT, Fortune 500), Dell (DELL, Fortune 500), Oracle (ORCL, Fortune 500) and Google all declined.

The Dow rallied 936 points Monday, its best one-day point gain ever, on bets that the worst of the credit crisis is over. Investors welcomed more specifics on the $700 billion bank bailout plan as well as a series of global initiatives aimed at loosening up credit.

The S&P 500 rose 104 points and saw its best single-day point gain ever. The Nasdaq's jump of nearly 195 points was the 10th best ever.

$700 billion: The Treasury Department, unveiling details of the $700 billion bailout plan approved earlier this month, said Tuesday it will pour $250 billion directly into the nation's banks in a dramatic move meant to stabilize the flailing financial system.

Nine of the largest banks have already agreed to participate. The program calls for the government to buy preferred shares in the banks, hold those shares until the market stabilizes and then sell them back to the banks. The program also limits executive pay.

The government is insuring all deposits in non-interest bearing bank accounts. This enables companies to manage their payroll and checking accounts without fear of surpassing the limits backed by the Federal Deposit Insurance Corp.

President Bush has also asked Congress for an additional $100 billion of the $700 billion to aid financial institutions.

And the Federal Reserve said it will start buying huge amounts of commercial paper starting Oct. 27, putting a start date to a program announced last week. Commercial paper is a key form of short-term debt that companies rely on for daily operations. (Full story)

The Fed has also pumped funds - possibily trillions of dollars - into the banking system in an effort to get banks to lend again. Central banks around the world have also stepped in to keep the system functioning.

But the credit markets have remained frozen amid the housing market collapse and subprime lending meltdown. Stocks have retreated as the credit crisis has dragged the already strapped economy deeper into what many say is a recession.

Last week was the Dow's worst ever, ending a stunning eight-session selloff that cut 2,400 points and 22% off the blue-chip indicator. The selling erased $2.4 trillion in market value from the Dow Jones Wilshire 5000, the broadest measure of the stock market.

Company news: In earnings news, Johnson & Johnson (JNJ, Fortune 500) reported quarterly earnings that ralllied from a year ago and topped estimates. The health care company also boosted its full-year profit forecast.

Other markets: U.S. light crude oil for November delivery rose 43 cents to $81.62 a barrel on the New York Mercantile Exchange. Oil prices have tumbled on bets of slowing demand since the price of crude hit an all-time high of $147.27 a barrel on July 11.

Gasoline prices fell another 4.3 cents overnight, to a national average of $3.163 a gallon, according to a survey of credit card activity by motorist group AAA. It was the 27th consecutive day that prices have decreased - in the past month alone, they're down more than 63 cents a gallon.

COMEX gold for December delivery tumbled $8.50 to $834 an ounce.

In currency trading, the dollar slipped against the euro and gained against the yen

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