- The Washington Times - Thursday, October 9, 2008

The financial markets slumped Thursday afternoon after early gains but avoided a deep tailspin amid worries that the lifting of a three-week ban on short selling financial stocks could cause a trading panic.

U.S. stocks slid for a seventh day, the longest losing streak for the Standard & Poor’s 500 Index since 1996, as higher lending rates sent a gauge of financial shares to its lowest level in almost 12 years.

The S&P fell 10.8 points, or 0.98 percent, to 974.86 at 2 p.m. in New York. The the Dow Jones Industrial Average slid 81.64 points, or 0.88 percent.

But the Nasdaq Composite Index increased 2.22 points, or 0.13 percent, to 1,742.55, as better-than-estimated earnings at International Business Machines Corp. spurred gains in technology stocks. Four stocks fell for every three that rose on the New York Stock Exchange.


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The London Interbank Offered Rate, or LIBOR, for three-month dollar loans rose to 4.75 percent from 4.52 percent on Wednesday. Just a month ago, three-month LIBOR was at 2.81 percent.

The sharp LIBOR jump over the past month is worrisome because consumer loans such as adjustable-rate mortgages are tied to the rate — meaning that those mortgages could become harder to pay.

Analysts say that continued stress in LIBOR will result in a significant jump in defaults for outstanding non-deliquent adjustable-rate mortgages when they reset.

“Everyone’s watching the LIBOR, looking for the credit market to thaw and it’s not there yet,” said Alec Young, a New York-based equity strategist at Standard & Poor’s. “Until you get some convincing thawing in the credit markets, the threat of a global recession and a global profits recession remains and it’s going to be difficult for stocks to build momentum.”

A three-week Securities and Exchange Commission (SEC) ban on short sales of almost 1,000 finance-related stocks expired Thursday — a move designed curb speculation after the chief executive officers of Lehman Brothers Holdings Inc. and Morgan Stanley accused hedge funds of driving down prices.

Companies on the SEC’s list slid 18 percent on average during the ban, compared with 24 percent drop for all financial companies in the Standard & Poor’s 500 Index.

Some analysts predict the unprecedented ban on short selling — an effort to bolster investor confidence amid the worst financial crisis since the stock market crash of 1929 — will do more harm on the economy than good at a time of historic market volatility.

But dire predictions by some that the market would collapse Thursday proved untrue.

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