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Stocks modestly lower after Merrill's credit losses, decline in existing home sales

NEW YORK — Wall Street recovered from steep losses Wednesday amid hopes for an imminent interest rate cut, but stocks still closed down in response to Merrill Lynch & Co.'s credit-related losses and a sharp drop in existing home sales.

The Dow Jones industrials fell in morning trading by as many as 200 points after the market got one of its most-feared scenarios: Not only is the housing implosion dampening corporate profits, it appears to be accelerating.

But the blue chip index reversed direction later in the day, briefly bobbing into positive territory as rumors circulated that the Federal Reserve — scheduled to meet next week — might be lowering the discount rate before then. The central bank has also been adding a substantial amount of liquidity to the financial system over the last three days.

"Once people hear about a rumor, they cover their shorts. Even though it's just a rumor that's out there," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. Short-covering is when traders undo bets that the market is going to fall. "There was a lot of bad news this morning. It's pretty clear Wall Street wants a rate cut and wants it soon."

Investors have been clamoring for a cut with fresh evidence that the housing slump and summer's credit crisis continues to drag on the economy. Merrill Lynch said it wrote down $7.9 billion from its exposure to mortgage-related securities, while a new housing report showed existing home sales plunged last month.

According to preliminary calculations, the Dow was off just 0.98, or 0.01 percent, at 13,675.25.

Broader stock indicators also dipped, but were off earlier lows. The Standard & Poor's 500 index fell 3.71, or 0.24 percent, to 1,515.88, while the technology-dominated Nasdaq composite index lost 24.50, or 0.88 percent, to 2,774.76.

Speculation about an emergency meeting of Fed governors rippled through Wall Street in the late afternoon, and caused stocks to rebound. However, such a meeting seemed unlikely given that the Fed meets next week to decide whether to lower interest rates to make borrowing cheaper.

"The market wouldn't want to hear that Fed was turning a blind eye to the news flow," said Jeff Kleintop, chief market strategist at LPL Financial Services in Boston. "They want to hear more signs that the Fed is noticing this weakness."

The increasing possibility of a cut sent Treasury bond prices sharply higher during the session. The yield on the benchmark 10-year Treasury note, which moves inversely to the price, fell to 4.34 percent from 4.40 percent late Tuesday.

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

Meanwhile, investors kept a close watch on oil prices to gauge inflation. Oil resumed its climb after a surprise drop in inventories, with a barrel of light sweet crude up $1.83 at $87.10 on the New York Mercantile Exchange.

The financial sector was among the hardest hit on Wednesday after Merrill reported worse-than-expected loss of $2.3 billion. Adding to worries, Merrill Chief Executive Stan O'Neal pointed to "renewed signs of volatility and weakness" in the market environment.

Shares of the world's largest brokerage tumbled $3.90, or 5.8 percent, to $63.22.

Further deterioration in the housing market could aggravate the financial sector's troubles. The National Association of Realtors reported that existing home sales fell in September for the seventh straight month by a larger-than-expected 8 percent — the largest decline in records dating back to 1999.

The tech sector lost the momentum it had earlier the week. The biggest loser among the 30 Dow companies was Nasdaq-traded Intel Corp., which suffered a blow after several chip companies, including Broadcom Corp., reported disappointing results late Tuesday. Intel fell 79 cents, or 3 percent, to $26.01 while Broadcom slid $7.14, or 17 percent, to $34.92.

And Amazon.Inc. shares plunged $12.09, or 12 percent, to $88.73 after it reported quarter profit only beat per-share estimates by a penny. Investors didn't see enough reason to bring the Internet retailer's shares, already at their loftiest level since 1999, even higher.

The Russell 2000 index of smaller companies fell 7.68, or 0.94 percent, to 810.85.

And, the session continued a pattern of volatility as investors remained reactive to news items. Declining issues led advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 1.58 billion, up from 1.34 billion on Tuesday.

"Volatility has increased substantially primarily because we have a very nervous market," said Al Goldman, chief market strategist at A.G. Edwards. "If there is good news, the market pops up. If there is bad news, it falls."

In Asian trading, Japan's Nikkei stock average fell 0.56 percent, while Hong Kong's Hang Seng index fell 0.15 percent. In European trading, Britain's FTSE 100 fell 0.49 percent, Germany's DAX index fell 0.18 percent, and France's CAC-40 fell 0.56 percent.

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