Sell off

Wild Swings Drive Morning Trading

Stock prices swung sharply on Wall Street, with investors still selling heavily but also scooping up stocks that have been decimated by more than a week of huge losses.

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Washington Post Staff Writer
Friday, October 10, 2008; 3:15 PM

Stocks continued a relentless sell-off today as investor fears of a global recession pushed Wall Street toward one of its worst weekly performances.

After falling nearly 700 points within the first 30 minutes of trading, the Dow Jones industrial average regained some ground and bounced between positive and negative territory before turning negative for most of the day. It was down about 5 percent, or 459 points, just after 3 p.m. It fell below 8,000 briefly today for the first time since March 2003 after falling below 9,000 for the first time since June 2003 yesterday.

The broader Standard & Poor's 500-stock index fell 6.5 percent, and the tech-heavy Nasdaq was down 5 percent.

Stocks were entering their last hour of trading, which has become a critical period, particularly on Friday. It will be a test of investor willingness to stick with their bets or sell off more to hedge against unexpected overnight or weekend developments, analysts said. Recently, stocks have taken much of a day's losses in the last 45 minutes of trading.

"Who knows what's going to happen over the weekend," said Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati. But there is some hope that the market could be near its bottom, he said. "If we could close up today that would be fantastic. Even if it's by one point."

Wall Street is facing deepening fears about the financial crisis and its spillover to other parts of the economy. Traders have shrugged off drastic government efforts to address the problem, from a global rate cut to plans to buy bank's toxic mortgage debt. The Bush administration is now hammering out the final details of a plan that would allow the government to inject cash into banks in exchange for ownership stakes.

Helping fuel today's sell off were the results of an auction of credit default swaps backed by bankrupt Lehman Brothers. Credit default swaps, or CDSs, are insurance policies against a default and they are at the heart of much of the current financial crisis. Companies with those insurance policies now appear likely to get 9.75 cents on the dollar.

"That is disappointing some folks," said Art Hogan, chief market analyst at Jefferies & Company.

The U.S. turbulence also spilled overseas where fear of a global recession led stocks to plummet. In Japan, the Nikkei fell nearly 10 percent for the second time this week. London's FTSE was down 9 percent, while Germany's Dax and Paris' CAC fell about 8 percent.

In brief statements at the White House his morning, President Bush sought to reassure the public. The financial crisis is being driven by "uncertainty and fear" and has been "deeply unsettling for the American people," he said. But the American people are "innovative, industrious and resilient" and will make it though this crisis, he said.

The markets continued their downward trajectory after his statement and appears headed toward eight straight day of losses. Some of today's volatility, analysts said, may be because price drops reached pre-set trigger points that prompted automated buy orders of entire indexes, causing severe market whiplash.

"Yes, you're getting some computerized sales, but you're also dealing with hedge funds, Joe Six Pack, institutional investors, retail investors, every investor out there getting out of the market," said Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati. "It's testing the entire infrastructure of the market. People are selling and it's increasing volatility."

Traders have switched to capital preservation mode, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. "Two weeks ago people like me were saying you have to ride out the storm, that is what I was doing with my own money," said Chandler. But the S&P is down 41 percent this year and 22 percent of that drop occurred in the last week, he said. "Now people are saying we can't hold on any more."

There is a bright spot for American consumers: Oil prices also continued a steep two-month decline today, falling $9.21, or 10 percent, to $77.38 a barrel in New York today as traders bet that the slowing global economy will reduce demand for energy worldwide.

That should eventually flow through to American consumers' gasoline bills and could boost consumer spending, but has dragged down energy stocks. Exxon Mobil and Chevron were down 13 percent and 8 percent, respectively.

"We're in the throws of a market that is in liquidation mode," said Hogan. "We're indiscriminately selling stocks."

The government's efforts to stem the financial crisis have not been enough to address the fundamental weakness of the economy, analysts said, including rising unemployment rates and falling home prices, or the credit crunch that has gripped the market and left lenders reluctant to lend to each other. In fact, a key interest rate banks use to lend to each other went up today to $4.82 percent.

The near paralysis of the credit markets partly led Standard & Poor's to put General Motors and Ford on credit watch late yesterday. They also face a weakening global auto market that has raised concerns about their survival. After steep losses yesterday, they both regained some ground today. GM was down about 1.5 percent, while Ford lost 6 percent.

The financial sector continues to be among the hardest hit, as the Securities and Exchange Commission's ban on short selling, a bet that a stock will go down, was lifted. Yesterday was the first day of trading without the ban.

Morgan Stanley continues to face investors' concerns that Mitsubishi UFJ Financial Group may abandon plans for a $9 billion investment in the firm and Moody's Investors Service said today it may cut the company's rating. Executives from both companies say the deal is set to close Tuesday.

Morgan Stanley's stock is down 36 percent.

General Electric reported a 22 percent decline in net income this morning that met its lowered forecast. GE "is well positioned to perform in a very difficult environment," said Jeff Immelt, the company's chairman and chief executive.