Bailout jitters hurt stocks

Stocks slipped Thursday morning as investors looked to a potential House vote on the $700 billion bank bailout plan already approved by the Senate.

Credit markets remained tight, with closely watched measures of bank fear still at elevated levels.

On the economic front, weekly jobless claims soared to a 7-year high, alarming investors ahead of Friday's big monthly report. And factory orders jumped to a 2-year low.

The Dow Jones industrial average (INDU) fell over 200 points, or almost 2%, nearly an hour into the session. The Standard & Poor's 500 (SPX) index lost 2.3% and the Nasdaq composite (COMP) lost 2.5%.

Stocks dipped Wednesday ahead of the Senate's 72-25 approval of the bailout. On Thursday, the focus turned to whether the House will also pass the sweetened version. It's expected to vote Friday, after it shot down a slightly different version on Monday.

The failure to pass the bill Monday sent the Dow down 777 points in its worst single-day point loss ever. While critics say the bill won't do much to help the ailing economy, supporters say that without it, the financial market crisis will accelerate.

The core of the bill allows the Treasury Department to buy $700 billion in bad mortgage assets from banks, to be held and eventually sold off if and when the market improves. Ideally, with cleaner balance sheets, banks would start lending to each other again, loosening up the nearly frozen credit markets.

Modifications made after the House rejection included limiting executive pay packages at participating firms and raising the FDIC insurance cap. The FDIC insures depositors in case of a bank failure. Raising the amount it can insure could make investors and businesses less anxious to withdraw money from a struggling bank. (Full story)

The bailout was concocted in the wake of a series of bank failures and mergers that stemmed from the housing market collapse and subsequent credit crunch. Frozen credit markets mean banks cling to cash, making it difficult for businesses and individuals to get needed loans.

Credit markets: Businesses depend on the credit markets to function on a daily basis, and the absence of ready capital has threatened to stall the broader financial system.

Several measures of bank nervousness remained elevated Wednesday, suggesting that banks are wary about how much impact the bailout will have.

The 3-month Libor - the rate banks charge each other to borrow for three months - rose to 4.21% from 4.15% Wednesday, and remained well above the 2.49% level of a month ago.

The TED spread, which is the difference between 3-month Libor and what the Treasury pays for a 3-month loan, rose to a more than 26-year high of 3.60%.

If banks are relatively confident, they should charge each other not much more than the U.S. government. When the spread widens, that indicates increased jitters.

The yield on the 3-month Treasury bill, seen as the safest place to park money in the short term, fell to 0.79% from 0.80% late Tuesday. On Monday, the yield fell to 0.14% as panic gripped the markets. Earlier this month, the three-month bill skidded to a 68-year low around 0%. (Full story)

Long-term government debt prices rallied and the yields slipped. The benchmark 10-year Treasury note rallied 13/32, sending the corresponding yield down to 3.69% from 3.75% Wednesday. Treasury prices and yields move in opposite directions.

Company news: General Electric (GE, Fortune 500) shares slid after the company sold $12 billion in common stock Thursday at $22.25 per share, a 9% discount to Wednesday's closing price. The stock failed to benefit from late-Wednesday news that Warren Buffett's Berkshire Hathaway will buy $3 billion in preferred stock. GE has been slumping lately amid worries about its earnings. (Full story)

Late Wednesday, freight transportation company Con-Way (CNW) cut its earnings forecast for the full year, citing the difficult business environment. Shares fell 15% Thursday. A variety of other transportation stocks slid too, including railroads CSX (CSX, Fortune 500) and Norfolk Southern (NSC, Fortune 500), both of lost around 12%.

Trucker JB Hunt (JBHT) fell after a pair of analysts issued dour forecasts on the sector amid slumping manufacturing activity and the economic slowdown.

The Dow Jones transportation (DJTA) average lost over 6.5%.

Economy: The number of Americans filing new claims for unemployment rose to 497,000 from a revised 496,000 the previous week, a seven-year high. Economists surveyed by Briefing.com thought claims would fall to 475,000, on average.

August factory orders fell 4% after rising 0.7% in the previous month. Economists surveyed by Briefing.com thought orders would fall 2.9%.

Oil and gold: Oil prices continued to retreat on bets that slower global growth will keep slowing demand for oil.

U.S. light crude oil for November delivery fell $2.33 to $96.20 per barrel on the New York Mercantile Exchange. (Full story)

Oil prices have been rising lately, along with gold and other commodities, as investors have looked for relatively safer places to park their money amid the stock market instability. Prices initially plummeted more than $55 per barrel through early September after peaking at $147.27 per barrel on July 11.

COMEX gold for December delivery fell $28.70 to $858.60 an ounce.

Other markets: In currency trading, the dollar gained against the euro and fell against the yen.

Gas prices fell for the 15th day in a row, according to a nationwide survey of credit card activity.

In global trading, European markets rallied in the afternoon. Asian markets were mixed, with the Japanese Nikkei losing 1.8%