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Stocks erase gains after Fed reduces 2009 outlook

BANK stocks led the market lower after the Federal Reserve cut its economic forecast and said unemployment could get worse.

The Fed's prediction yesterday that the jobless rate could approach 9.6 percent - worse than its previous forecast of 8.8 percent - was especially ominous for banks since that data is a component of the government's recent "stress tests" designed to determine how healthy banks are.

The midafternoon release of minutes from the Fed's meeting deflated an earlier rally in financial shares, which had been rising after Bank of America Corp. said it raised US$13.5 billion in a share offering. That put the bank more than halfway toward raising the capital it needed to under the "stress tests," whose results were announced two weeks ago.

The sharp swings in financial shares has been a typical market pattern in recent weeks as investors rush into and out of bank stocks based on the latest thinking about how well the industry will endure the economic slump and a credit crisis that brought down three Wall Street investment banks.

In other parts of the market, energy stocks surged as oil topped US$62 a barrel for the first time since November, and Treasury prices rose smartly after the Fed said it might increase its purchases of government debt.

Carl Beck, a partner at Harris Financial Group, noted that the Fed's new estimate for unemployment is much closer to the "worst-case scenario" figure the government used during its tests on the 19 largest U.S. banks.

"Does that mean there is a worse case scenario than that?" Beck said. "I don't think after what we've seen over the last six to eight months that you can discount anything at this point."

The Dow Jones industrials fell 52.81, or 0.6 percent, to 8,422.04. The blue chips had been up as much as 117 points in early trading. The Standard & Poor's 500 index slipped 4.66, or 0.5 percent, to 903.47, and the Nasdaq composite index fell 6.70, or 0.4 percent, to 1,727.84.

Bank of America was the only major bank to get through the downdraft in financial shares, ending up 24 cents, or 2.1 percent, at US$11.49.

Regional bank Regions Financial Corp. fell 35 cents, or 6.7 percent, to US$4.89 after announcing a US$1.25 billion capital raise in order to meet the government's demands to shore up its balance sheet.

Analysts are welcoming the capital raises from banks as a sign of stability and a vote of confidence in the financial system, but they fear banks are still a long way from scrubbing all the stains off their balance sheets.

"There is some uncertainty about the financials as a sector and people are a little bit leery about getting too involved with them," said Doreen Mogavero, president of Mogavero, Lee & Co. in New York.

Energy stocks posted some of the day's biggest gains. Marathon Oil Corp. rose 68 cents, or 2.3 percent, to US$30.38, while Schlumberger Ltd. rose US$1.03 to US$55.04.

Stocks ended mixed Tuesday after a record low in housing construction undermined optimism that had been building in recent weeks about the beleaguered housing market, which had been beginning to show some early signs of easing a three-year slide.

Despite back-to-back dips on Tuesday and yesterday, the S&P 500 index is still up 33.5 percent since March 9, and about even with the beginning of 2009. Many market-watchers think stocks could be due for another fall after their steep ascent over the past two months.

"Just as markets sometimes go too far on the negative in the short-term, they can go too far in the positive," said Subodh Kumar, an independent investment strategist in Toronto. "I think right now the markets will have trouble keeping momentum."

In other trading, the Russell 2000 index of smaller companies fell 3.91, or 0.8 percent, to 489.35.

Advancing issues narrowly outnumbered decliners on the New York Stock Exchange, where volume came to 1.65 billion shares.

Bond prices jumped after the Fed minutes indicated the central bank could buy more government debt. That pushed the yield on the 10-year Treasury note, a widely used benchmark for home mortgages and other kinds of loans, down to 3.19 percent from 3.25 percent late Tuesday.

The dollar plunged against the euro and the British pound, while gold prices rose.

Overseas, Japan's Nikkei stock average rose 0.6 percent. Britain's FTSE 100 fell 0.3 percent, Germany's DAX index rose 1.6 percent, and France's CAC-40 rose 0.8 percent.


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