Stocks Pull Back as Profit-Taking Sets In

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NEW YORK - Wall Street traded lower Tuesday as investors were pleased with the government's plans to spend $250 billion to buy stock in private banks but still collected profits from the previous day's massive advance. The Dow Jones industrial average fell less than 100 points a day after its record 936-point jump.

Profit-taking started creeping into the market after the Dow surged more than 400 points at the opening, and it was expected that some investors would take some money out of the market after such a massive gain. Moreover, it was anticipated that Wall Street would continue to see jittery trading in the weeks and perhaps months ahead because of worries about the weak economy.

"We don't know if the bottom is in," said Lincoln Anderson, chief investment officer and chief economist at LPL Financial in Boston, referring to the market's advance Monday after huge losses last week. "We certainly expect heightened volatility for a fair amount of time while we sort out just exactly what's going on."

Investors had snapped up stocks Monday in anticipation of the government's plan. President Bush said Tuesday the government will use a portion of the $700 billion financial bailout passed at the start of the month to inject capital into the nation's major banks, which have been slammed by souring mortgage investments. The move follows a similar one announced Monday by European governments to invest about $2 trillion in their own troubled banks.

Investors are hoping extraordinary steps by government officials will help resuscitate stagnant credit markets. That led to buying among bank stocks, which helped lift the blue chip indexes but left the technology-heavy Nasdaq composite index lagging.

"The tone is cautious," Anderson said. "I don't think anybody is pile driving into the market and doubling up."

The revised bailout plan differs from the original in that it aims to recapitalize banks, not just buy the troubled assets off their books at prices that could leave the banks with losses.

"This begins to penetrate the core of the problem," said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc.

But, he said, "there will be a point in time where the euphoria of the bailout plan begins to wear off and the market begins to face reality. And that reality is likely to be a sour earnings season, and that the economy is in recession."

In the final minutes of trading, the Dow fell 82.12, or 0.87 percent, to 9,305.49.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 5.84, or 0.58 percent, to 997.51, and the Nasdaq composite index fell 54.59, or 2.96 percent, to 1,789.66.

Though the major indexes showed losses, advancing issues outnumbered decliners by about 3 to 2 on the New York Stock Exchange, where volume came to 1.61 billion shares.

Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, said investors pleased about the government's bank plan gravitated toward industrial companies, seeing them as more likely to benefit from a revived credit market than technology companies. That helped send the Nasdaq lower.

"People are thinking more of the blue chips are going to respond," he said.

Light, sweet crude fell $2.19 to $79 on the New York Mercantile Exchange.

The dollar was mixed against other major currencies, while gold prices declined.

The Dow remains 33.7 percent below its Oct. 9, 2007 record close of 14,164.53, and could fluctuate around these levels for some time as investors wait for signs of stabilization in the slumping housing market and deteriorating job market.

Cardillo said he believes the worst lows are behind the stock market, but other analysts have shied away from saying Wall Street had reached a bottom. The Dow has not yet fallen below its low during the last bear market, the closing level of 7,286.27 on Oct. 9, 2002.

The U.S. stock market has been rebounding from a gruesome week that obliterated about $2.4 trillion in shareholder wealth. The Dow came off an eight-day losing streak that amassed point losses of just under 2,400, or 22.1 percent, bringing the blue-chip index to its lowest level since April 2003. That 18.2 percent weekly plunge in the Dow was the worst in the index's 112-year history.

Following the Columbus Day holiday, the U.S. government bond markets reopened Tuesday and indicated that investors' desire for safe assets remains strong though overall demand appeared to ease. The three-month Treasury bill's yield rose to 0.25 percent from 0.21 percent late Friday, and the 10-year note's yield rose to 4.02 percent from 3.86 percent.

Banks appear to be growing somewhat more willing to lend to one another. The London interbank offered rate, or Libor, for three-month dollar loans fell to 4.64 percent from 4.75 percent. Libor is important because many consumer loans, including about half of all adjustable-rate mortgages, are tied to it.

The recent sell-off in stocks arrived amid a seize-up in lending, as banks and investors around the world grew fearful about the creditworthiness of other institutions following the bankruptcy of investment bank Lehman Brothers Holdings Inc. and the failure of thrift bank Washington Mutual Inc. When lending is at a virtual standstill, the economy cannot grow.

Robert Dye, senior economist at PNC Financial Services Group, said the government's actions likely will help revive the credit markets, where many businesses turn to fund day-to-day operations, but that investors' concern in the past month about the soundness of the financial system has overshadowed some trouble in the economy.

"These steps are not going to turn the real economy on a dime," he said of the government intervention. "The two keys to the fundamental economy right now are the job market and the housing market and both of those remain distressed."

Employers cut jobs in September for the ninth straight month, a concern for investors as people who are unemployed are likely to trim their spending and consumer spending accounts for more than two-thirds of U.S. economic activity. Housing prices generally have continued to decline.

"There isn't one bottom here. We're talking about multiple events. There will be a bottom in financial market and another in the labor market and one in the housing market. And they're not going to all line up," Dye said.

Many of the nine banks the government identified as ones in which it will invest advanced Tuesday. Among them, Citigroup Inc. rose $3.18, or 20 percent, to $18.93, while Bank of America Corp. rose $3.29, or 14 percent, to $26.08. JP Morgan Chase & Co. fell $1.09, or 2.6 percent, to $40.90.

Health care companies rose. Johnson & Johnson rose $1.98, or 3.2 percent, to $64.66 after the company reported a better-than-expected quarterly profit. Higher sales of consumer products and medical devices as well as the absence of a write-off that hurt results a year earlier helped drive earnings up 30 percent.

Many materials and tech companies pulled back. Steelmaker Nucor Corp. fell $4.96, or 13 percent, to $34.33, while Microsoft Corp. fell $1.41, or 5.5 percent, to $24.09.

Apple fell $3.22, or 2.9 percent, to $107.04 after announcing updates to its line of laptop computers. The company didn't make major price cuts.

The Russell 2000 index of smaller companies fell 14.88, or 2.61 percent, to 556.01.

Asian and European markets shot higher. Hong Kong's Hang Seng index rose 3.19 percent, after a more than 10 percent increase on Monday. Japan's Nikkei index, catching up from the country's market holiday Monday, jumped 14.15 percent — the largest increase ever.

In Europe, Britain's FTSE 100 jumped 3.23 percent, Germany's DAX index rose 2.70 percent, and France's CAC-40 rose 2.75 percent.


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