Wall Street Rebounds; Investors Eye Fed

Friday August 17, 6:06 am ET
By Joe Bel Bruno, AP Business Writer Investors Eye Fed for Momentum After Dow Reverses From 343 Point Loss NEW YORK (AP) -- In what's becoming a familiar story on Wall Street, stocks have had a dramatic late-session turnaround as buyers streamed back into the market. The question of course is whether Thursday's surge, which pulled the Dow Jones industrials up from a more than 300 point loss to close only narrowly lower, will be the one that sticks.

The market, which has had several such comebacks this month, has been giving back all its gains of late and then some amid unrelenting volatility. And many analysts believe the answer lies with the Federal Reserve.

Bargain hunting rather than a belief that the bad times are over was partly behind this latest last-hour advance -- stocks have fallen so far amid worries about the availability of credit that investors were willing to place some bets. The market pretty much ignored the Fed's latest injection of cash into the banking system, a move designed to alleviate the fears about credit that have sent stocks plunging for weeks.

What investors really want is an interest rate cut, and one that comes before the Fed's Sept. 18 meeting.

"I think there is more confidence of a lasting rally in equities if the Fed cuts rates, and that makes it easier on days like this to do bargain hunting," said John Lonski, chief economist for credit-rating agency Moody's Investors Service. "And, the more investors sense that the U.S. economy can shoulder losses arising from subprime mortgages, the closer we are to stabilization in equities."

So far, though, the Fed shows no signs of acquiescing. It has relied on adding money into the banking system to try to soothe the markets. Central banks around the world have been supplying billions of funds to banks in the past week to make cash available for lending and keep interest rates from rising amid signs that credit was drying up.

The New York Fed -- which carries out the central bank's market operation -- announced Thursday an overnight repurchase agreement worth $12 billion. This was on top of a 14-day "repo" worth $5 billion announced before the market opened. The Fed uses a repo to buy securities from dealers, who then deposit the money into commercial banks.

It's not what the market wanted. The Dow was down as much as 343 points Thursday.

But the Fed has its reasons for not giving in -- for instance, moving too soon could send a message that policymakers are being too reactive. Also, lower rates risk sending inflation higher, and keeping inflation in check has been the Fed's primary concern.

"Speculation about what their move will be is what is going to control equities for the time being," Lonski said.

The turnaround Thursday was driven by buying of blue chip stocks, specifically among beleaguered banks and brokerages. Before the buyers returned, the major indexes had reached the levels of a correction, defined as a 10 percent drop from the market's highs.

The Dow, which closed just above 14,000 on July 19, was down about 1,150 points, or 8.2 percent, by Thursday's close.

Some analysts were hopeful that the market will be able to build on Thursday's momentum.

"The fundamental buyers are coming back into the market, and typically trading in the last half hour of the day is where the smart institutional money is going," said Jack Ablin, chief investment officer at Harris Private Bank. "There's a feeling that maybe we've pushed it too far, and this gives us a running start for positive markets worldwide on Friday."

Still, the market is quite fragile. Thursday's buying also came from traders or hedge funds trying to cover losses from what's known as short trading. In short trading, an investor sells borrowed stock on a bet that the market will fall; when the market rises, the investor must buy stock to pay back the debt.

Moreover, analysts contend each trading day seems to bring about new worries about credit -- needed to fuel corporate profits and takeovers -- is drying up. The latest catalyst for selling was bad news from Countrywide Financial Corp., the nation's largest mortgage lender, which had to draw on a billion-dollar credit line to fund its operations.

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