NEW YORK Wall Street ended a volatile session mixed Wednesday as investors wrestled with a troubling outlook for bond insurers, a $9.4 billion writedown at Morgan Stanley and a weakening economy that many believe is headed for recession.
Not all of Wednesday's news was bad. Morgan Stanley managed to get a $5 billion investment from a Chinese sovereign wealth fund, and the Federal Reserve said its Monday auction of $20 billion in 28-day credit was met with solid demand signs that there is cash out there to help the struggling banking industry recover.
But with only six trading days left in 2007 and little data to convince Wall Street that the economy is on the upswing, investors hesitated to make any big bets on stocks.
"The sign that the selling is over is when bad news doesn't make stocks go down anymore," said Matt Kelmon, portfolio manager of the Kelmoore Strategy Funds. He said there's particular pressure on stocks right now because of options expirations at the end of the week, plus the tendency to sell off weak stocks at the end of the year to offset taxes on stocks with big gains.
Stocks reversed direction several times during the session.
The stock market lifted in early trading but gave back gains after Standard & Poor's lowered its outlook for bond insurers, suggesting that the ratings on the bonds the companies insure may be headed lower.
S&P slashed the credit rating of ACA Financial Guaranty Corp., and put Financial Guaranty Insurance Co., another bond insurer, on watch for a downgrade. The agency maintained the ratings on Ambac Financial Group Inc., MBIA Insurance Corp. and XL Capital Assurance Inc., but gave the bond insurers negative outlooks meaning there is a one-third chance of a ratings cut for those companies in the next two years.
According to preliminary calculations, the Dow Jones industrial average fell 25.20, or 0.19 percent, to 13,207.27.
The Standard & Poor's 500 index fell 1.98, or 0.14 percent, to 1,453.00, but the Nasdaq composite index added 4.98, or 0.19 percent, to 2,601.01.
Treasury bond prices rose on S&P's outlook for bond insurers, as investors sought the safety of government securities. The yield on the 10-year Treasury note, which moves opposite the price, fell to 4.03 percent from 4.12 percent late Tuesday.
Morgan Stanley rose $2.01, or 4.2 percent, to $50.08 after announcing the $5 billion China investment on Wednesday.
The deal represents China's largest minority stake purchase in a U.S. company, said Thomson Financial analyst Richard J. Peterson. The U.S. markets, though still distressed, are increasingly finding buyers in governments overseas. Recently, Citigroup Inc. sold $7.5 billion worth of shares to the Abu Dhabi Investment Authority.
"We're not running into any brick walls," said Edward Yardeni, an economist who runs Yardeni Research in Great Neck, N.Y. "Doors are opening to make this process continue relatively smoothly."
Central banks also have been working to help bring demand back to the tight credit markets, which froze up over the summer as mortgage defaults spiked. Investors were relieved to see that about one in three U.S. banks who applied for the $20 billion in 28-day credit the Federal Reserve offered Monday received a loan, according to results announced Wednesday.
The Fed is conducting a similar auction Thursday as part of its continuing effort to pump liquidity into the financial system.
On Tuesday, stocks finished higher on relief that the European Central Bank was willing to issue half a trillion dollars in 16-day loans to banks, but it was a volatile, back-and-forth session due to concerns about the prospect of a U.S. recession next year.
Earnings reports were, for the most part, disappointing.
General Mills Inc. said profit in the most recent quarter edged higher, but the cereal and packaged food maker's results were damped by soaring ingredient costs and other expenses. General Mills fell $1.08 to $57.99.
Palm Inc., the maker of the Treo and Centro smart phones, said late Tuesday it swung to a loss in the most recent quarter. Its shares dropped 41 cents, or 6.9 percent, to $5.52.
Hovnanian Enterprises Inc. also posted a quarterly loss late Tuesday after facing a difficult housing market in the fourth quarter. The homebuilder's shares fell 96 cents, or 11.4 percent, to $7.44.
RealtyTrac Inc., a mortgage research firm, said Wednesday that foreclosure filings nationwide fell in November compared to October, but were a whopping 68 percent higher than a year ago.
The dollar rose against most other major currencies. Gold prices rose.
Light, sweet crude futures gained $1.16 to settle at $91.24 a barrel on the New York Mercantile Exchange after the Energy Department said U.S. inventories of crude and heating oil dropped last week while gasoline stockpiles rose.
Declining issues outnumbered advancers by about 9 to 7 on the New York Stock Exchange, where volume came to 1.35 billion shares, compared with 1.49 billion shares traded Tuesday.
The Russell 2000 index of smaller companies rose 2.07, or 0.27 percent, to 756.13.Overseas, Japan's Nikkei stock average fell 1.17 percent, and Hong Kong's Hang Seng index rose 1.11 percent. Britain's FTSE 100 rose 0.08 percent, Germany's DAX index fell 0.17 percent and France's CAC-40 fell 0.22 percent.