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Stocks zigzag, end lower after emergency rate cut

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NEW YORK — A stock market empowered by an emergency interest rate cut tried to find some stability Wednesday, rallying several times before another late-day drop left Wall Street down for the sixth straight day. Still, the pullback, while fed by comments from Treasury Secretary Henry Paulson, was milder than the massive declines of earlier in the week.

The Standard & Poor's 500 index, the market measure most closely followed by traders, fell 1.13 percent _ compared to a 3.85 percent slide Monday and a 5.74 percent drop Tuesday. The Dow Jones industrials fell 189 points, a number that while sizeable was less frightening than the 875 it lost over the first two days this week.

Trading was erratic right from the opening bell, after the Federal Reserve and other leading central banks cut rates in the hope that credit markets would soon relax and that banks would begin lending more freely to businesses and consumers. The Fed lowered the target for its federal funds rate by a half-point to 1.5 percent from 2 percent, saying in a statement that the turmoil in financial markets posed a further threat to an already shaky economy; it was joined in the rate cut by the European Central Bank, Bank of England, The Bank of Canada, the Swedish Riksbank and the Swiss National Bank.

Investors had been hankering for a rate cut, and they were clearly happy with the central banks' actions. However, they were also aware that in the near term, the credit markets remain tied up because banks are reluctant to lend.

That mix of emotions had the major indexes wavering between gains and losses until Paulson in late afternoon said financial markets remain severely strained. He also said it would be several weeks before the government's $700 billion financial rescue plan makes its first purchases of banks' troubled mortgage-backed assets.

Paulson's comments showed how vulnerable the market is, and how it can shoot up or down in minutes. The S&P 500 index, up more than 20 points at 3:35 p.m. EDT, tumbled to a loss of 11 by the 4 p.m. closing bell.

"Until we have some more confidence here it's going to be difficult to sustain any rally," said Bill Schultz, chief investment officer at McQueen, Ball & Associates in Bethlehem, Pa. "Unfortunately you probably sell the rallies for a little while until we run out of sellers."

The Dow Jones industrial average ended down 189.01, or 2.00 percent, at 9,258.10 after changing direction 36 times.

Broader stock indicators also fell. The S&P 500 index slid 11.29, or 1.13 percent, to 984.94, and the Nasdaq fell 14.55, or 0.83 percent, to 1,740.33.

With its precipitous drop of the past few weeks, Wall Street is approaching the magnitude of the losses it suffered during the bear market in the early part of this decade. By the time the Dow reached its low of that market, 7,286.27 on Oct. 9, 2002, it had fallen 37.8 percent from its record high close of 11,722.98, set in January 2000.

The Dow has now fallen about 35 percent from the closing high of 14,164.53, reached a year ago Thursday. This week alone, the Dow has lost 1,067 points, or 10.3 percent. It has lost 1,592.56, or 14.68 percent over the past six sessions.

The worries on the Street have been exacerbated by the spread of the U.S. credit problems overseas. Several banks in Europe have had to be bailed out, and earlier this week, the governments of Germany, Ireland and Greece took steps to guarantee private bank deposits.

Moreover, the markets are mindful of the fact that the government's $700 billion financial rescue plan is in its early stages of implementation and will take some time to have an impact on banks' balance sheets.

David Wyss, chief economist for Standard & Poor's, said the heavy losses in stock markets around the world signal that markets are determining that the credit crisis won't likely be resolved soon.

"There was a general disregard for risk going on in financial markets around the world, it wasn't just the U.S.," he said. "Now they're waking up to risk."

Investors had been anxious in recent days for a rate cut, and despite the Fed taking other steps this week to help the credit markets. Policymakers unveiled a plan to buy massive amounts of commercial paper, the short-term debt used by companies, in a bid to reanimate the credit markets.

It is likely that stocks won't begin to recover for good until investors are certain the credit markets are functioning in a more normal fashion. There are also severe economic problems including heavy job losses and high unemployment that will also need to show improvement.

The uncertainty in the market has driven investors to buy up anything deemed safe, including gold and government debt. For instance, prices of gold shot up $24.50 to $924.90 _ though still off its record of $1,033.90 in March.

Demand for short-term Treasurys remained high because of their safety; investors are willing to take extremely low returns just to have their money in a secure place. The yield on the three-month Treasury bill, which moves opposite its price, dropped to 0.63 percent from 0.81 percent late Tuesday.

However, longer term Treasury bonds fell because they are considered to be less attractive when the Fed cuts rates. The yield on the 10-year note rose to 3.65 percent from 3.51 percent late Tuesday.

The first third-quarter earnings reports are showing signs of strain on companies, and that is adding more uncertainty to the stock market. After the close Tuesday, Alcoa Inc. said it would conserve cash by suspending its stock buyback program and all non-critical capital projects. The aluminum company's earnings fell 52 percent.

Shares of the company fell $2, or 12 percent, to $14.71, by far the steepest decline among the 30 that comprise the Dow industrials.

Retailers' reports of bleak sales in October appeared to dampen investor sentiment at times.

Wal-Mart Stores Inc. said sales rose in September but issued a tepid forecast for October. Often discounters do better than other retailers during tough economic times so the forecast from the world's largest retailer caused some worries about overall consumer spending. Wal-Mart fell 29 cents to $54.55.

Luxury retailers turned in a generally weak performance. Saks Inc. fell 96 cents, or 13 percent, to $6.24 after sales fell more than Wall Street had expected.

Declining issues outpaced advancers on the New York Stock Exchange by about 3 to 1, while consolidated volume to a very heavy 8.54 billion shares, compared with 6.84 billion traded Tuesday.

The Russell 2000 index of smaller companies fell 12.38, or 2.21 percent, to 546.57.

Light, sweet crude fell $1.11 to settle at $88.95 on the Nymex. Oil at one point declined to $86.05 _ its lowest price since December.

European indexes had a short-lived bounce after the rate cut. In Britain, the FTSE-100 ended down 5.18 percent, Germany's DAX dropped 5.88 percent, and France's CAC-40 dropped 6.31 percent.

In Asia, Japan's Nikkei 225 closed 9.38 percent lower and Hong Kong's Hang Seng tumbled 8.17 percent hours before the rate cuts were announced; their declines showed the extent of the worldwide gloom. And Russia's two main stock exchanges were suspended because of a massive sell-off right after their openings.

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