Session volatile over bond, credit fears

NEW YORK – Wall Street ended a volatile session mixed on Wednesday as investors wrestled with a troubling outlook for bond insurers, a $9.4 billion writedown at Morgan Stanley and concerns that the economy is headed for recession.

Not all of Wednesday’s news was bad. Morgan Stanley managed to get a $5 billion investment from an arm of the Chinese government, 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 just seven 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.

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.

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.