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Wall Street wobbly but holds against big losses
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.
"Lifting the short ban restores the balance in the marketplace," said Peter Sorrentino, a money manager at Huntington Asset Advisors in Cincinnati, which oversees $16.5 billion. "It should bring liquidity back into the market, which will cap some of the volatility we've seen lately."
Treasury Secretary Henry Paulson signaled the government may take limited ownership in banks as the next step in trying to resolve the deepening credit crisis. Mr. Paulson said Wednesday that a $700 billion bailout plan that Congress passed last week to rescue financial institutions gave him broad authority that he intends to use, beyond just buying mortgage-related assets on banks' balance sheets. He indicated that an option available may be boosting companies' capital with cash infusions. "It is the policy of the federal government to use all resources at its disposal to make our financial system stronger," Paulson said. "We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size."
Meanwhile, fewer Americans filed first-time applications for unemployment benefits last week, but the number of people staying on benefit rolls climbed to the highest level in five years.
Initial jobless claims declined by 20,000 to 478,000 in the week that ended Oct. 4, compared with 498,000 the prior week, the Labor Department said Thursday.
Hurricanes Gustav and Ike, which hammered the coasts of Texas and Louisiana late summer and forced the evacuation of more than 2 million people, have distorted claims figures in recent weeks. Last week's figures included about 17,000 applications from storm-related job losses, down from close to 50,000 in the previous two weeks, the department said.
The U.S. unemployment rate remained unchanged at 6.1 percent.
• This article is based in part on wire service reports.
About the Author
Sean Lengell covers Congress and national politics and can be reached at email@example.com.
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