Stocks fluctuate after Buffett-Goldman deal

NEW YORK – Financial markets were tense Wednesday, with stocks fluctuating following investor Warren Buffett’s decision to invest $5 billion in Goldman Sachs Group Inc. The credit markets showed added strain as investors await news about the government’s plan to rescue banks from crippling debt.

Buffett’s Berkshire Hathaway Inc. said Tuesday it was investing at least $5 billion in Goldman — a move Wall Street took as a sign of support for the independent investment bank model. Besides buying $5 billion in preferred stock, Berkshire also got warrants to buy another $5 billion in Goldman’s common stock.

Goldman Sachs also said it will sell $5 billion worth of common stock to the public; the company and Morgan Stanley earlier this week were granted approval to become bank holding companies, which would help them strengthen their balance sheets.

Though Buffett’s move appeared to soothe some investors, it didn’t alleviate concerns about the effectiveness of any government bailout and about the health of the broader economy. It could also lead to new questions from lawmakers for Treasury Secretary Henry Paulson, a former co-CEO of Goldman Sachs. He and Federal Reserve Chairman Ben Bernanke are appearing before Congress for a second day Wednesday to brief lawmakers on a $700 billion bailout measure for financial services firms.

Their appearance on Capitol Hill Tuesday unnerved investors, who questioned whether lawmakers were beginning to doubt the necessity and form of the government bailout.

The waiting was clearly wearing on the credit markets, raising concern again about liquidity.

Demand for short-term government Treasuries increased as investors again sought safe places to keep cash. The yield on the 3-month Treasury bill, considered the safest short-term financial asset, was at 0.44 percent Wednesday afternoon, down from 0.79 percent late Tuesday. Last week, demand spiked so high that the yield briefly dipped into negative territory; investors were so focused on putting their money in safe assets that they have been willing to accept very little or even negative returns.

In other Treasury trading, the yield on the benchmark 10-year Treasury note was unchanged at 3.80 percent from late Tuesday.

“I think you’re seeing a lot of tough talk from politicians who don’t want to seem like they’re rolling over for Wall Street and normally, people would see that for what it is. But right now investors are exceptionally nervous,” said Stephen Massocca, co-chief executive of Pacific Growth Equities in San Francisco.

In early afternoon trading, the Dow Jones industrial average rose 23.41, or 0.22 percent, to 10,877.58 after moving in and out of positive territory. The Dow is down more than 500 points, or about 4.7 percent, for the week.

Broader stock indicators also rose. The Standard & Poor’s 500 index advanced 3.63, or 0.31 percent, to 1,191.85, and the Nasdaq composite index rose 15.01, or 0.70 percent, to 2,168.34.

The dollar, whose struggles earlier this week contributed to extreme volatility in other markets, was mixed. Meanwhile, gold prices rose.

Light, sweet crude for November delivery fell 37 cents to $106.24 a barrel on the New York Mercantile Exchange.

“The market essentially is break-even today and we’re starting to see these troubling spreads in short-term interest rates again and I think it’s doubts creeping in about what is coming out in this legislation,” Massocca said.

Investors appeared unfazed by a larger-than-expected drop in sales of existing homes in August; their focus remained on the bailout. The National Association of Realtors said sales fell by 2.2 percent; sales had been expected to fall by 1.6 percent, according to economists surveyed by Thomson/IFR. The number of unsold homes on the market dropped by 7 percent from a record set in July. It marked the steepest drop in inventory since December 2006.

Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where volume came to 519.7 million shares.

The Russell 2000 index of smaller companies fell 4.27, or 0.60 percent, to 704.92.

Overseas, Japan’s Nikkei stock average rose 0.20 percent. Britain’s FTSE 100 fell 0.79 percent, Germany’s DAX index fell 0.26 percent, and France’s CAC-40 fell 0.61 percent.

Share