Fed cuts key rate, but rally fizzles

By Charley Blaine and Elizabeth Strott

Stocks slumped in the last 10 minutes of the session today after a news report claimed that the CEO of General Electric (GE, news, msgs) had warned of lower-than-expected revenue and flat earnings in 2009.

The sell-off came after the Federal Reserve cut its key interest rate to 1% from 1.5% -- its lowest level since 2004 -- in another bid to stimulate the American economy.

The Dow Jones industrials, which had been up 255 points at 3:45 p.m. ET, lost all of that gain and closed down 74 points, or 0.8%, to 8,991.

The Standard & Poor's 500 Index was down 10 points, or 1.1%, to 930. The Nasdaq Composite Index, however, finished up 8 points, or 0.5%, to 1,657.

Futures trading suggests U.S. stocks will open higher on Thursday. Asian markets were higher in early Thursday trading.

One development that may affect markets: The New York Times reported late today that the Bush administration is completing a plan that could help up to three million homeowners struggling to pay their mortgages to stay in their homes.

The GE warning, first attributed to CEO Jeff Immelt by the Dow Jones News Service, said that Dow component hoped 2009 earnings would be the same as those in 2008. The company is expected to earn $1.96 a share in 2008. The consensus estimate for 2009 is $1.78.

The report caused no end of confusion. After the close, GE spokesman Russell Wilkerson told Reuters that the report was "completely out of context and inaccurate."

Later, Dow Jones corrected the report, saying Immelt had been speaking hypothetically when he told a business group in Spain that he would ask his managers to maintain profits even if sales at their businesses fell, say, 10% to 15%.

GE has already warned that profit will fall this year as a result of troubles at its big finance arm. But the damage had long since been done. GE shares plunged, cutting the knees out of what had been a big rally and potentially the first two-day rally for the Dow and the S&P 500 since Sept. 25-26.

GE shares had been up 2.6% at 3:50 p.m. ET, dropped precipitously and then recovered slightly, finishing down 1.5% to $19.20. Shares continued to fall after hours until CNBC questioned the report's validity. Then, the stock recovered and was up 0.8% to $19.40 at 6:50 p.m.

The shares are down more than 48% this year.

Wall St. likes the Fed's rate cut

The GE turmoil overshadowed the Fed decision. It shouldn't have. For the most part, investors were cheered by the Fed.

The central bank cut its federal funds rate -- the rate it wants banks to charge each other for overnight loans -- to 1% from 1.5%. The fed funds rate is a benchmark used to establish rates on business loans, car loans and credit cards.

The Fed also cut its discount rate, the rate it charges banks for short-term loans, to 1.25%.

The Fed's decision was based on more evidence of a weakening economy and scant signs of inflation, its statement said.

"Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports," the statement said. "Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

The Fed acknowledged the economy is in a recession "with scant prospects for a near-term recovery" without using the actual words, Michael Darda, chief economist at MKM Partners, said in a note to clients.

The Fed last cut rates on Oct. 8 amid similar moves by major central banks around the world.

The goal of the rate cut is to entice more bank lending and minimize the damage of the economic slowdown. The slump has forced the government to rescue some of the nation's largest financial institutions and pour billions of dollars into the credit system to try to generate more bank lending.

New-home construction has fallen by more than half in the last three years.

On Tuesday, the Conference Board said consumer confidence tumbled to its lowest level on record as Americans reacted with growing pessimism to financial uncertainty and widespread job losses.

On Monday, Avis Budget Group (CAR, news, msgs) said it will cut 700 jobs as Americans travel less. Appliance maker Whirlpool (WHR, news, msgs) said Tuesday it would cut 5,000 jobs to cope with declining sales.

Additional confirmation of the slump will come Thursday. The Commerce Department is expected to announce that the economy shrank at a 0.5% annual rate in the third quarter, the most since the 2001 recession.

The fourth quarter is likely to be very weak, Darda said on CNBC this afternoon.

Almost the first 2-day rally in a month

The market's positive reaction -- at least until the GE incident -- came a day after the Dow had jumped 889 points in the year's second-biggest rally. Stocks have been in the throes of their worst downturn since the bear market of 1973-74.

But the move also pushed the dollar lower against major currencies and boosted interest rates. The yield on the 10-year Treasury note moved to 3.87% today from $3.82% on Tuesday.

The dollar's decline also pushed commodity prices higher. Crude oil rose $4.77, or 7.6%, to $67.50 in New York. On Tuesday, crude had fallen to $62.73, its lowest close since May 16, 2007. Oil prices have fallen by more than 50% since peaking at $147.27 in July; gasoline prices are down more than 36%.

Gold jumped $13.50 an ounce to $754.

Only 12 of the 30 Dow stocks finished higher on the day, along with 213 S&P 500 stocks.

But 52 Nasdaq-100 ($NDX.X) stocks were higher, and the index, which tracks the largest Nasdaq stocks, closed up 5 points, or 0.4%, to 1,302.

General Motors (GM, news, msgs) was the Dow leader, up 8.2% to $6.76.

Apple (AAPL, news, msgs) was probably the biggest reason the Nasdaq was higher, rising 4.6% to $104.55.

• Top Stocks blog: Should Apple start a $10 billion stock buyback?

Energy prices -- New York close

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$67.50	$62.73	$4.77	-32.93%	-29.67%
Heating oil (per gallon)	$2.0010	$1.9120	$0.0890	-30.10%	-24.47%
Natural gas (per million BTU)	$6.4690	$6.1860	$0.2830	-13.03%	-13.55%
Unleaded gasoline (per gallon)	$1.5330	$1.4555	$0.0775	-38.30%	-38.45%

Delta-Northwest deal wins US approval

The Justice Department said today that it won't block the planned merger of Delta Air Lines (DAL, news, msgs) and Northwest Airlines (NWA, news, msgs) in a deal that will create the world's largest airline by traffic.

Antitrust clearance was the last hurdle for the merger, allowing the two airlines to quickly close what essentially is Delta's acquisition of Northwest in an all-stock deal valued at about $3.1 billion at current Northwest share price.

Northwest closed up 1.3% to $9.90; Delta was down 1.1% to $7.99.

• Top Stocks blog: Delta becomes the world's largest airline

Earlier this week, the carriers settled an antitrust suit with passengers who claimed the combination would lessen airline competition.

Durable goods orders rise

Durable goods orders for September rose 0.8%, according to a new Commerce Department report out this morning. That was much better than the 1% decline economists had expected.

Excluding transportation, orders fell 1.1%. August durable goods orders were revised lower to a 5.5% decline from a previously reported 4.5% decline.

"Today's figures reduce the risk that the economy will track some of the more dire forecasts," wrote Mike Englund, chief economist for Action Economics, in a note to clients.

Thursday's report on gross domestic product for the third quarter may offer a different picture, one that will confirm that the economy is in a recession. Economists are expecting a 0.5% decline in third-quarter GDP.

Global markets follow Dow

Tuesday's monster rally in the U.S. seemed to embolden buyers around the world. In Europe, London's FTSE 100 Index gained 7.3% today, while the Paris CAC 40 Index jumped 8.2%, and the broader Dow Jones Stoxx 600 Index rose 6.6%.

In Asia, Japan's Nikkei 225 Index soared 7.7%, and the MSCI Asia Pacific Index rose 3.7%. Hong Kong's Hang Seng Index gained 0.8%.

The action in Japan was related to speculation about interest rates there. The Bank of Japan is considering lowering its benchmark interest rate from 0.5% to 0.25%, according to the Nikkei, the Japanese business daily. The country's central bank will announce its decision Friday.

The yen has been surging against other currencies in recent weeks, a trend that slammed Japan's export industries, adding to growing worry about a recession there.

The expectation of a rate cut sent the Japanese currency lower against the dollar on Tuesday. It had been trading at a 13-year-high against the dollar.

Fear of a deep recession in Japan drove the Nikkei index below 7,000 earlier this week, its lowest close since 1982.

Procter & Gamble profit rises; Kraft boosts forecast

Dow component Procter & Gamble (PG, news, msgs) this morning reported fiscal first-quarter net income of $3.35 billion, or $1.03 per share. That's a 9% increase from the $3.08 billion, or 92 cents per share, that the conglomerate earned in the same period last year. The results topped Wall Street's estimate of 99 cents per share.

Sales rose 9% to $22 billion.

Procter & Gamble said it expects $4.15 to $4.25 per share in earnings for fiscal 2009; analysts are looking for $4.17 per share for the year.

Shares were down 3.5% to $60.99.

Meanwhile, Kraft Foods (KFT, news, msgs), a new Dow component, also had some good news on the earnings front. The food giant said it earned $1.4 billion, or 93 cents per share, more than double the $596 million, or 38 cents per share, the company earned a year ago.

Adjusted earnings were 44 cents per share, in line with the consensus estimate.

Kraft boosted its 2008 forecast to at least $1.96 per share, ahead of a previous estimate of $1.54 per share.

Kraft shares were down 1.4% to $28.47.

GM's sales plunge

General Motors said global sales plunged 11.4% in the third quarter as market demand dropped.

The year-over-year drop was far worse than the 2.9% slump during the first half. GM's sales in North America fell 18.9%.

For the first nine months of the year, GM's global sales fell 5.8% to 6.66 million in vehicle sales – less than Toyota Motor's (TM, news, msgs) 7.05 million.

GM was up 8.2% to $6.76 today. Toyota was up 1% to $71.67 in trading in New York.

A report from Japan's Kyodo News this afternoon said that GM may turn to Toyota for help.

Rescue plan may be expanded for private banks

Privately held banks may be the next group to get help from the government's $700 billion financial rescue plan, The Wall Street Journal reported.

The nation's 6,500 family-owned and private banks are not eligible for participation in the plan today; they cannot issue stock in exchange for infusions of government cash, as the program now requires. But Treasury Department officials have met with representatives of the banking community to discuss other options for private banks, such as the issuance of senior debt obligations by the banks.

"Most of these privately held banks . . . are probably healthier than the industry as a whole," Wayne Abernathy, executive vice president of regulatory affairs at the American Bankers Association, told the paper.

Andy Rosenbaum contributed to this report.

Short hits from the markets -- New York close

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	0.565%	0.750%	-0.185	-37.22%	-82.01%
5-year Treasury note yield	2.745%	2.729%	0.016	-8.07%	-20.55%
10-year Treasury note yield	3.874%	3.820%	0.054	1.23%	-3.99%
30-year Treasury bond yield	4.238%	4.172%	0.066	-1.56%	-4.96%
Currencies
U.S. Dollar Index	85.635	87.600	-1.965	7.91%	11.66%
British pound in dollars	$1.6412	$1.5982	0.0430	-7.93%	-17.50%
Dollar in British pounds	£0.6093	£0.6257	-0.0164	8.61%	21.21%
Euro in dollars	$1.2865	$1.2768	0.0097	-8.76%	-11.98%
Dollar in euros	€ 0.7773	€ 0.7832	-0.0059	9.60%	13.61%
Dollar in yen	97.60	99.35	-1.75	-7.95%	-12.74%
Canadian dollar in U.S. dollars	$0.822	$0.787	$0.0342	-12.66%	-17.26%
U.S. dollar in Canadian dollars	$1.218	$1.270	-$0.0518	14.52%	20.88%
Commodities
Gold	$754.00	$740.50	$13.50	-14.40%	-10.02%
Copper	$2.0880	$1.8585	$0.23	-27.47%	-31.34%
Silver	$9.8050	$8.7900	$1.02	-20.12%	-34.28%
Corn	$4.2075	$3.9075	$0.30	-13.69%	-7.63%
Crude oil (NYMEX) (per barrel)	$67.50	$62.73	$4.77	-32.93%	-29.67%