By: JOE BEL BRUNO
Posted 10/21/08 - Wall Street fluctuated Tuesday as investors, worrying that companies' earnings forecasts are signaling an economic downturn, decided to cash in some of the previous session's big gains. The Dow Jones industrial average fell 2 percent, while the Nasdaq composite index was down 3.5 percent.
Some retreat was to be expected after the Dow shot up 413 points on Monday. But investors poring over a mix of third-quarter earnings reports found enough unsettling outlooks, including forecasts from DuPont Co., Texas Instruments Inc. and Sun Microsystems Inc.
Still, investor anxiety appears to have lessened considerably compared to the previous two weeks when fears about tightening world credit and the health of the economy battered stocks across the globe.
Strains in the credit markets eased further in response to a sweeping series of bailout measures by world governments, including a joint U.S. and European plan to buy stakes in private banks to boost to their lending. Demand for Treasury bills, regarded as the safest assets around, lessened further Tuesday in a sign that credit markets are gradually returning to a healthy state.
But analysts have warned that the market will see a stretch of volatile sessions as Wall Street recovers from this month's huge drop. Even though investors have been expecting third-quarter earnings, and even fourth-quarter forecasts, to reflect the damage from the financial system's problems, the reality of companies' reports have been unnerving.
"It's just this back-and-filling stuff. It's driven by earnings, yes, but also emotion," said Harry Clark, chief executive of Clark Capital Management in Philadelphia. "It's going to be this tug-of-war for a couple weeks at least."
The technology-focused Nasdaq saw steeper declines than the other major indexes after server and software company Sun Microsystems warned it would post a big loss for its fiscal first quarter and book a write-down. Texas Instruments shares fell to their lowest level in more than five years after the chip maker turned in disappointing earnings and issued a lackluster forecast amid slowing orders.
In the final minutes of trading, the Dow fell 235.20, or 2.54 percent, to 9,030.23.
Broader indexes also declined. The Standard & Poor's 500 index fell 27.06, or 2.75 percent, to 958.34. The Nasdaq composite index shed 64.51, or 3.64 percent, to 1,705.52.
Declining issues outpaced advancers by about 2 to 1 on the New York Stock Exchange, where volume came to a light 952 million shares.
Kim Caughey, equity research analyst at Fort Pitt Capital Group, said the absence of the steepest late-session selloffs in the past few days and the lighter trading volumes are signs that some order is returning to the market. At its worst during the past month, investors simply sold whatever they could and the crush of those cashing out weighed on the market. Much of that selling came in the final hour of trading, creating wild swings and massive pullbacks.
"There were a huge amount of redemptions both on the hedge fund side and the mutual fund side that were driving that in the darkest of days," she said, noting that investors now have more time to evaluate stocks on merit. "It's a more or less a normal reaction to company-specific news."
On Monday, markets spiked on more signs of a reviving credit market and support from Federal Reserve Chairman Ben Bernanke for further steps to aid the economy, including an additional stimulus package.
"There is light at the end of the tunnel that this credit crisis is coming to an end," said Peter Cardillo, chief market economist at Avalon Partners. "But, until we see the credit markets turn to full normalcy, the stock market is going to be stop and go."
On Tuesday, the Federal Reserve took more steps to break through a credit clog that has hobbled lending and threatens to plunge the country into a deeper slowdown. The central bank announced it will start buying commercial paper - a crucial short-term funding mechanism many companies rely on for day-to-day operations - from money market mutual funds.
The three-month Treasury bill Monday yielded 1.08 percent, down from 1.12 percent late Monday. The levels are a notable improvement from the 0.20 percent seen last Wednesday, when investors were willing to take the slimmest of returns in exchange for a safe place to keep their money.
Longer-term Treasurys rose. The yield on the benchmark 10-year note, which moves opposite its price, fell to 3.72 percent from 3.87 percent late Monday.
Meanwhile, bank-to-bank lending rates continued their retreat, another indication that credit is getting easier to obtain. The London Interbank Offered Rate, or Libor, dropped to the lowest levels in more than a month Tuesday. The rate on three-month loans in dollars shed 0.23 percentage points to 3.83 percent, falling for the seventh straight day.
Besides being an indicator of the credit market's health, Libor is used to set rates for consumer loans including mortgages and credit cards.
The dollar was higher against other major currencies, while gold prices fell.
In corporate news, Kirk Kerkorian's investment firm said it sold 7.3 million of its shares in Ford Motor Co. and plans further sales. He owns a 6.1 percent stake of the company, whose shares fell 17 cents, or 7.3 percent, to $2.16.
Texas Instruments fell 89 cents, or 5 percent, to $17.09, while Sun dropped 96 cents, or 16.6 percent, to $4.82. DuPont fell $2.46, or 6.8 percent, to $33.71.
Caterpillar Inc. fell $1.70, or 4.2 percent, to $39.20 after reporting that its third-quarter profit fell 6 percent. The world's largest maker of construction and mining equipment said higher raw material costs offset record global sales. The company, which noted "recessionary conditions" in North America, forecast flat sales for 2009.
Pfizer Inc. rose 22 cents to $17.56 after the drug maker's results narrowly topped projections for the third quarter.
Light, sweet crude fell $3.36 to settle at $70.89 barrel on the New York Mercantile Exchange.
The Russell 2000 index of smaller companies fell 12.44, or 2.27 percent, to 534.40.
Overseas, Japan's Nikkei stock average closed up 3.34 percent. Britain's FTSE 100 fell 1.24 percent, Germany's DAX index fell 1.05 percent, and France's CAC-40 rose 0.78 percent.
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