U.S. stocks higher in volatile trading

NEW YORK -- The global sell-off in stocks raged on Wednesday and Wall Street stocks were choppy despite a coordinated interest rate cut by central banks around the world designed to boost credit markets and investor confidence.

The Dow Jones industrial average opened lower, rose by more than 100 points by 10 a.m. ET, but was negative again within half an hour. By noon ET, stocks had lost more than 200 points, but by 2 p.m. ET, the index was up more than 125.

The volatility came despite a coordinated interest rate cut involving the Federal Reserve and several major European central banks. It also comes one day after the blue-chip index fell more than 500 points to five-year lows. U.S. stocks followed sell-offs in Asia and Europe.

Stocks in Japan plunged 9.4%, its biggest drop in more than two decades, pushing the Nikkei 225 index to a five-year low. Shares in England, Germany and France lost 6.5%, 5.9% and 6.3% respectively.

Increasingly, investors on Wall Street and around the world are concerned that all the steps taken by governments and central banks around the world won't be enough to quickly stem the mushrooming credit crisis, which started in the U.S. mortgage market and spread around the world.

In a knee-jerk reaction, "The coordinated easing could be perceived as a sign of just how bad things are," says Kevin Lane, chief market strategist at Fusion Analytics Research Partners.

Lane says fear is on the rise but that investors should "not be in a rush to find the bottom," Lane says. But he adds that spike in panic and pessimism shows "we are getting very close to a buy."

Earlier Wednesday, the Federal Reserve, in concert with the European Central Bank, Bank of England, The Bank of Canada, the Swedish Riksbank and the Swiss National Bank, slashed short-term interest rates. The Fed cut its overnight bank-to-bank lending rate by half of a percentage point, lowering the so-called Fed funds rate to 1.5%. It was the first time banks joined forces to cut rates at the same time in an effort to resuscitate ailing financial markets.

In a statement, the Fed said the credit crunch posed a further threat to the economy, reiterating what chairman Ben Bernanke said Tuesday.

In a research report, Rich Bernstein, chief investment strategist at Merrill Lynch, says investors should watch jobless claims to get a gauge of where stocks are headed in the weeks and months ahead.

"The government can come up with any number of refinancing and liquidity plans, but households are likely to increasingly default on mortgages and other debts if cash flow is not stabilized via employment," Bernstein said.

He says investors should stay defensive and put their money in consumer staples and healthcare stocks. He also recommends dividend-paying stocks, companies in developed markets, as well as high-quality bonds and Treasuries.

Hong Kong's Hang Seng index dropped 8.2% to 15,431.73. Shares fell 5.8% in South Korea, 6% in Thailand, more than 10% in Indonesia, 6.6% in Singapore.

Nothing policymakers have come up with — not even the $700 billion U.S. bailout of Wall Street — has been able to calm markets terrified about a financial contagion that began in the U.S. housing market.

"In a moment of panic, investors need to see something powerful and easy to understand," said Tim Condon, chief Asian economist for ING bank in Singapore. Condon and other analysts would like to see a coordinated effort by U.S. and European central banks to pump massive amounts of capital into a fragile banking system. Even frightened investors would "think twice before swimming against a tsunami of central bank liquidity," Condon said.

Before Wednesday's coordinated action, said equity strategist Christopher Wood of CLSA Asia-Pacific Markets, government efforts have been "ad hoc." In Hong Kong Wednesday, for instance, the Monetary Authority cut its benchmark interest rate by a full percentage point to 2.5% to thaw out frozen credit markets. And Britain announced that it would partially nationalize major banks.

Stewart Ferns, equity strategist for Macquarie Securities in Hong Kong, said stocks are being pushed down by investors scrambling to raise cash to repay cheap loans they'd used to finance risky investments.

Enticed by unusually strong global economic growth the past several years, many investors would engage in "carry trades," taking out loans in countries with rock-bottom interest rates (often Japan) to invest in markets elsewhere that offered higher potential returns, Ferns said. Now that those riskier investments are going sour, investors hustling raise cash to repay the loans, often denominated in Japanese yen. The process is driving down stocks and strengthening the yen — so much so that the U.S. dollar temporarily slipped below 100 yen Wednesday.

A stronger yen hammers Japanese exporters such as Toyota, which saw its shares fall 12% Wednesday, by making their products more expensive and by shrinking their overseas profits when they are brought back to Japan. Japanese media reported that Toyota would slash its earnings forecasts in the face of weakening worldwide sales.

There was some good news on the homes front on the U.S. The National Association of Realtors said pending home sales rose 7.4% in August

Tuesday: Fed's action fails to stem huge stock losses: Dow down 508

Stocks tumbled again Tuesday, despite efforts by the Federal Reserve to keep credit flowing to businesses and word from Fed Chairman Ben Bernanke that the central bank could soon cut interest rates to re-energize the economy.

The Dow Jones industrial average, down nearly 370 points Monday, sank another 508 points, or 5.1%, to 9447. It was the Dow's fifth-consecutive drop, during which its slid more than 1,400 points, or 13%. The Standard & Poor's 500 tumbled 61 points, or 5.7%, to 996. It was the first time the S&P 500 — the index to which trillions of dollars of investors' money is linked — had closed below 1000 since Sept. 30, 2003. The S&P 500 has now fallen 36.3% from its October 2007 high, outstripping the average 31.5% decline in the typical post-World War II bear market.

Stock market losses continued to accelerate after passage of Friday's $700 billion rescue plan for the financial industry, which was supposed to restore investor confidence. Tuesday, investors bailed even after the Fed made one of its most dramatic moves yet to help corporations through the global credit crunch. The Fed said it would buy corporate commercial paper — a way to lend short-term cash directly to creditworthy companies that need funds for payroll and other immediate needs.

Money market and mutual funds are the biggest buyers of commercial paper. The Fed said the market for short-term loans fell $52.1 billion to $1.8 trillion the week ended Sept. 17.

The Fed's Commercial Paper Funding Facility can buy up to $1.3 trillion in three-month corporate IOUs until April 30, 2009. The program is expected to lead to much lower interest rates and more credit availability — although details, including when the Fed will start buying, are still being worked out.

Bernanke noted credit has tightened even for the worthiest business and consumer borrowers. That was underscored by a report Tuesday from the Fed that showed consumer borrowing fell in August for the first time since January 1998, reflecting both a tight credit market and a spending slowdown. Borrowing fell for both revolving loans, which include credit cards, and non-revolving, which includes borrowing to buy big-ticket items.

Interest rate cut

Tuesday, Bernanke suggested the central bank may cut interest rates to shore up a rapidly deteriorating economy and address a credit crisis of "historic dimensions."

The Fed followed up Wednesday by slashing a key interest rate a half-percentage point. But James Paulsen, chief investment strategist at Wells Capital Management, says cutting interest rates could backfire.

"The policymakers need to stand down now and stop reacting to every move in the markets," he says. "The thing that is driving this is fear, and they are contributing to it."

Credit woes squeeze stocks

The declines on Wall Street are adding up to historic losses for investors. The Dow's losses the past five days represent the worst five-day percentage loss since Sept. 21, 2001, and the largest five-day point loss in history. The dollar losses are brutal. More than $700 billion in shareholder wealth was wiped out Tuesday and $5.7 trillion this year, according to the DJ Wilshire 5000 index. Investors have lost $7.2 trillion since the market topped on Oct. 9, 2007. Year to date, the S&P 500 is down 32.2%. If it ended 2008 down this much, it would be the largest annual loss by the stock market since 1937.

In testimony Tuesday to the House Budget Committee, Peter Orszag, director of the non-partisan Congressional Budget Office, said data suggest that private and public pension plans, because they invest in stocks and other financial instruments, took a combined hit of $2 trillion — or 20% of their assets — in the past 15 months.

Real pain is expected to be reflected in the third-quarter earnings that companies are beginning to report. After the market closed Tuesday, Alcoa, the aluminum producer whose quarterly earnings report typically kicks off companies' earnings season, reported a 52% drop in quarterly earnings, to $268 million, which included a $31 million one-time charge.

That's a big reminder that quarterly earnings reports are not expected to be rosy. Analysts are calling for an 8.1% decrease in profits for companies in the S&P 500, and that estimate is likely too optimistic, says Dirk van Dijk, director of research at Zacks Investment Research.

"The expectations are clearly too high," he says. "The numbers are not picking up just how bad things will be." The only sector of the economy expected to post higher earnings is energy, he says, and that's because oil prices only really started to fall in September.

The credit crunch "is spreading to the real economy, and you'll see it in corporate earnings — and it's not going to be a pretty picture," he says.

Contributing: Barbara Hagenbaugh, Theresa Howard, Sue Kirchhoff, Matt Krantz, David Lieberman, Julie Schmit, Paul Wiseman, Richard Wolf, Jeffrey Stinson, Paul Wiseman