Credit, Bailout Worries Drag on Stocks

Stocks declined Wednesday as disappointing economic data added to the weight on investors shoulders over the strained credit market and haggling on Capitol Hill.

The Dow Jones Industrial Average was off about 100 in the first half hour of trading, then added another 100 points to that after a reading on manufacturing, but pared that to a decline of 20 points by afternoon trading. (Track the Dow winners  and losers.)

The Institute for Supply Management reported its gauge of manufacturing activity contracted for a second month to its lowest level since October 2001. Measures of employment and exports fell sharply. A separate report showed construction spending was unchanged in August.

The ISM data "indicate the U.S. economy is contracting," Tony Crescenzi of Miller Tabak wrote in a note to clients, and "increase the odds of more Fed rate cuts, including the possibility of an intermeeting cut."

Meanwhile, private U.S. employers clipped 8,000 jobs from their payrolls in September, a surprisingly low figure, ADP reported. And mortgage applications dropped to their lowest in a month, the Mortgage Bankers Association said, amid anxiety about the health of the economy.

Crude oil fell below $97 a barrel after a report showed crude inventories rose by 4.3 million barrels, more than expected.

The Dow, Nasdaq and S&P 500 jumped higher Tuesday, but only managed to regain around half of their severe losses from Monday, when the bailout package was snarled in political wrangling and doubts over its effectiveness surfaced.

The Senate is expected to vote on a new version of the $700 billion bailout bill tonight. The unusual time was set in deference to Rosh Hashanah, the Jewish new-year holiday, which ends at sundown today.

Meanwhile, House Republicans are working on an alternative bailout package.

Meanwhile the strain in the money markets worsened with overnight dollar rates rising as high as 6 percent, Reuters reported citing traders in Asia, making it even tougher for banks to secure day-to-day funding.

And hedge-fund managers will get their report cards later as a wave of investors are expected to demand their investments back after disappointing returns from the sector. The funds are holding record levels of cash to meet a flood of redemptions as the end of the month and quarter results are released.

Big banks declined, with Goldman Sachs and Morgan Stanley lower. American depositary shares of UBS fell after the bank said it said it was cutting 1,900 jobs.

Shares of regional banks were mixed: National City and Sovereign Bancorp advanced, while State Street declined. Genworth Financial and Sallie Mae also declined.

General Electric, parent of CNBC, saw its shares skid after Deutsche Bank lowered its price target on the stock and earnings outlook for the company, citing the drag of GE's finance arm, which does everything from loans to mid-sized businesses to investments in real estate.

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GE warned last week that earnings could fall as much as 12 percent this year. Deutsche Bank analyst Nigel Coe added, "We now call for an earnings decline next year," in a note to clients.

Google shares rose 2 percent Wednesday. The stock was reset at $400.52 after Nasdaq canceled "erroneous orders" that sent the stock down to $341.43 late Tuesday.

It's already time to start thinking about the holiday-shopping season, and Wal-Mart was out front, announcing price cuts on toys to win over cash-strapped consumers. The discount retailer said it will offer ten toys, including certain Barbie dolls and Tonka trucks, for under $10.

THIS WEEK:

WEDNESDAY: Auto sales; weekly crude inventories; Eid (Muslim) holiday
THURSDAY: Short-selling ban expires at 11:59 pm ET; ECB announcement; jobless claims; factory orders; natural-gas inventories; Fed's Bullard speaks; earnings from Constellation Brands
FRIDAY: August jobs report; ISM services index; earnings from Family Dollar

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