Talk of rate cut lifts Dow from 200-point drop

10/24/2007

By Tom Petruno and Walter Hamilton,
Los Angeles Times
October 24, 2007


In one of the wilder sessions of late, the stock market plunged today on fresh concerns about the housing market and financial companies, then recovered most of the losses on rumors of an emergency interest rate cut by the Federal Reserve.

No rate cut occurred by the final bell, but the Dow Jones industrial average still finished virtually flat after being down 206 points early in the day.

The Dow ended off 0.98 of a point at 13,675.25.

Broader indexes also surged in the final 90 minutes after heavy losses early on. The Nasdaq composite index ended down 24.50 points, or 0.9%, at 2,774.76, after falling as much as 79 points.

Stocks were tripped at the opening bell after a dismal report on September existing-home sales and after Merrill Lynch & Co. reported a shockingly large quarterly loss as it wrote down the value of troubled debt.

Merrill said it lost $2.2 billion in the third quarter, including a $7.9-billion write-down for devalued sub-prime mortgage securities and related debt.

The announcement caught Wall Street flat-footed because the write-down was considerably larger than the roughly $5-billion hit Merrill had projected a few weeks ago.

Merrill's shares ended down $3.90, or 5.8%, at $63.22, after falling as low as $61.40. They are down 32% this year.

The brokerage's inability to correctly estimate its losses on debt securities fanned new fears that financial companies in general face larger asset write-downs, as mortgage defaults rise and other borrowers struggle to repay loans.

"It tells us that you didn't have a real good sense of what your exposure was, for it to go up that much in that short period of time," said Alan Skrainka, chief market strategist at Edward Jones in St. Louis.

Shares of Countrywide Financial, the Calabasas-based mortgage giant, tumbled $1.22 to $13.83, a four-year low.

But as gloom about the financial sector worsened, it triggered rumors that the Fed might make an emergency cut in its discount rate, the rate it charges banks that borrow directly from the Fed.

The central bank cut that rate from 6.25% to 5.75% on Aug. 17, amid the worst of the stock market's summer meltdown. That helped stabilize the market.

The Fed followed that cut with a drop in its more important short-term rate, the federal funds rate, on Sept. 18.

Many analysts, however, said an emergency Fed cut was highly unlikely, given that policymakers had already been expected to announce a rate cut when they meet next week.

"I don't think the Fed is that desperate" to act before next week, said Tom Di Galoma, a Treasury bond trader at Jefferies & Co. in New York.

The Fed is widely expected to reduce the federal funds rate from 4.75% to 4.50% next week in an effort to keep housing and credit problems from dragging the economy into recession.

Some of the selling in battered financial stocks such as Merrill and Countrywide in recent days may be by mutual funds taking losses for tax purposes, analysts said. Many funds end their fiscal years on Oct. 31 and often sell portfolio losers this month to record losses that can offset realized capital gains on other stocks.

But financial issues weren't the only weak spot in the market today. Amazon.com, until recently a market high-flier, plummeted $12.09 to $88.73 as investors sold despite the company's strong third-quarter earnings report.

Irvine-based computer chip maker Broadcom sank $7.14 to $34.92 after its profit report also disappointed Wall Street.

As usual when stocks sink, some investors ran for the relative safety of Treasury securities.

The yield on the 10-year T-note ended at 4.33%, down from 4.40% on Tuesday. The yield has tumbled from 4.65% two weeks ago.