Stocks rebound from Monday's drubbing

The stock market saw a big and welcome rally today, but it's far from clear what comes next.

Thanks to the $7.5 billion Abu Dhabi investment in Citigroup (C, news, msgs), the Dow Jones industrials finished up 215 points to 12,958. The Nasdaq Composite Index added 40 points, or 1.6%, to 2,581, and the Standard & Poor's 500 Index was up 21 points to 1,428.

The rally was broad, although trading volume wasn't especially large: About 1.9 billion shares on the Nasdaq system and 1.4 billion shares on the New York Stock Exchange. Gainers were ahead of decliners by 3-to-2 on the NYSE and 1.1-to-1 on the Nasdaq.

Citigroup was up 0.7% to $30, not a huge gain considering the market's reaction to the news that the Abu Dhabi Investment Authority will buy a 4.9% stake in the largest U.S. banking company.

The announcement helped the market because it "shows someone is willing to step up and take risk, and that there's buying power on the sidelines," said James Paulsen, chief investment strategist at Wells Capital Management. "Both do wonders for our primary problem, which is fear."

While most sectors of the market were strong today, the Citigroup news gave the biggest boost to financial stocks, which had been pummeled repeatedly since last summer.

The Standard & Poor's Banking Index ($BIX.X) was up 2.4% to 273. The Amex Securities Broker/Dealer Index ($XBD.X) jumped 3.3% to 201.

JPMorgan Chase (JPM, news, msgs) jumped 4.7% to $42.94. Bank of America (BAC, news, msgs) rose 2.5% to $42.90. Lehman Bros. (LEH, news, msgs) added 4.3% to $59.90, and Merrill Lynch (MER, news, msgs) was up 3.6% to $53.07.

Today's rally couldn't answer several key questions:

• Was Monday's sell-off a bottom for the market? Maybe. The Dow, S&P 500 and Nasdaq were all down 10% or more after Monday's drubbing -- fitting the classic definition of a correction. And the market has tended to move higher as soon as 10% losses are achieved. Perhaps it's the start of a year-end rally. "Exhaustive sell-offs like this are the sort that bring great rallies, especially when they are accompanied by bearish investor sentiment," wrote Tom McClellan of the McClellan Market Report on Monday night. But, while bulls see a bottom, many other analysts don't see a true bottom until the S&P 500 tests 1,370 -- its intraday low on Aug. 16. A bounce higher from that level will be a strong bullish signal.

• Does the Citigroup deal signal the worst is over for financial stocks? Not likely. In fact, there were reports late today that Citigroup would welcome additional capital infusions, and other financial companies may also look for more capital to be able to weather the continuing stresses from the credit crisis that erupted in August.

• Will the United States slip into recession? The odds are increasing because of higher energy prices, the pressures of the housing slump and the problems facing financial institutions. Standard & Poor's said today that U.S. home prices fell 4.5% in the third quarter from a year earlier, the sharpest drop since S&P began its nationwide Case-Shiller housing index in 1987. Prices also fell 1.7% from the previous quarter, the largest consecutive quarterly decline in the index's history.

• How will the market react if the Federal Reserve doesn't cut interest rates? Probably badly. Today's rally represented the market's belief that the Fed will cut rates on Dec. 11, when its Federal Open Market Committee holds its last meeting of the year. The financial markets see the Fed cutting its federal funds rate to 4.5% or 4.25% from 4.75% now. Goldman Sachs sees the fed funds rate falling to 3% by mid-2008.

Twenty-six of the 30 Dow stocks showing gains, along with nearly 400 S&P 500 stocks. Tech stocks were among the winners, especially after JPMorgan Chase analysts boosted their earnings estimates for semiconductor giant Intel (INTC, news, msgs). Intel was up 3% to $25.11, and the Philadelphia Semiconductor Index ($SOX.X) was up 2% to 410. Personal computer maker Dell Inc. (DELL, news, msgs) was up 3.6% to $26.64.

Apple (AAPL, news, msgs) rose 1.3% to $174.81, and Google (GOOG, news, msgs) added 1.1% to $673.57.

• Video: What to watch for from Wednesday's markets

There was one sizable group of losers in today's big rally: energy stocks, which were mostly lower after crude oil tumbled 3.4% to $94.42 in New York. ConocoPhillips (COP, news, msgs) was down 0.8% to $76.06, and Anadarko Petroleum (APC, news, msgs) was down 2.8% to $54.61, although ExxonMobil (XOM, news, msgs), one of the 30 Dow stocks, finished up 0.7% to $86.31.

The Amex Oil Index ($XOI.X) was down 0.7% to 1,381. The Philadelphia Oil Service Sector Index ($OSX.X) was down 1.6% to 278.

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OPEC is expected to increase production by 500,000 barrels a day.

Despite the rally, there remained some wariness in the market. The yield on the benchmark 10-year Treasury note, which had slumped Monday to 3.85%, a two-year low, as investors turned to safer government-issued securities, remained under 4% today and finished at 3.94%. (Bond yields move inversely with bond prices.)

And while the CBOE Volatility Index ($VIX.X) and the CBOE Nasdaq Volatility Index ($VXN.X) both fell today -- 9% to 26.28 and 8% to 30.76, respectively -- they're still up substantially this month. The indexes measure the ratio of put options (options to sell stocks) to call options (options to buy stocks) traded on the CBOE Options Exchange. A rising index is a signal that many investors see a growing risk that the markets will fall. The indexes have doubled this year.

Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$94.42	$97.70	-$3.28	-0.12%	54.66%
Heating oil (per gallon)	$2.6534	$2.7066	-$0.0532	5.81%	66.06%
Natural gas (per million BTU)	$7.5570	$7.7230	-$0.1660	-9.28%	19.97%
Unleaded gasoline (per gallon)	$2.3730	$2.4414	-$0.0684	1.41%	48.12%

The nuts and bolts of the Citigroup deal

Citigroup's announcement that it has sold a 4.9% stake in itself to the Abu Dhabi Investment Authority came after the stock had fallen to $29.80, its worst close since 2002 and down 47% from a peak at the end of 2006. Abu Dhabi is the largest of the seven emirates of the United Arab Emirates.

The authority will surpass Prince Alwaleed bin Talal of Saudi Arabia as Citigroup's largest shareholder.

• Video: Inside the Citigroup investment

But the deal is expensive for Citigroup, which explains why the stock's reaction, while positive, wasn't as positive as one might have expected.

The Abu Dhabi Investment Authority will get convertible stock in Citigroup yielding 11% annually. The stock has to be converted into common stock at a maximum price of $37.24 per share between March 2010 and September 2011.

Abu Dhabi's investment is expected to help the bank get back to its "tier 1" capital target levels after the company fell to 7.3% in the third quarter -- below the key 7.5% level for the first time. Tier 1 capital -- the ratio of a bank's core equity capital to its risk-based assets -- measures a bank's financial strength.

Also on Monday, Citigroup said the bank was looking for "ways in which we can be more efficient and cost-effective to position our businesses in line with economic realities." Translation: The bank is likely going to cut jobs.

• Video: RVs as an economic indicator

Citigroup has been struggling with its stock price, and Chuck Prince resigned as CEO earlier this month amid massive subprime-related write-downs. The company hasn't named a successor, leaving its path uncertain.

"Without a CEO it's kind of like a rudderless ship," Peter Kovalski, money manager at Alpine Woods Capital Investors, told Bloomberg News. "Since they don't have a spokesman who can go out and talk to the investment community, they're defenseless against the rumors that keep swirling around, whether its write-offs or layoffs."

Freddie Mac to raise more capital

In a sign of the times, Freddie Mac (FRE, news, msgs), one of the largest providers of mortgage capital, said late today that it plans a sale of preferred stock designed to raise up to $6 billion. It also slashed its dividend by 50% -- its first such cut since becoming a public company in 1989.

The sale will consist of two issues of shares with different terms. Both offerings are expected to price in the near term, Freddie Mac said.

Freddie Mac reported a third-quarter loss of $2.03 billion last week that left its capital at just $600 million above the minimum required by its regulator, the Office of Federal Housing Enterprise Oversight. The capital surplus is Freddie's lowest since 2000.

Freddie Mac's common stock closed up 2.9% to $25.20 in regular trading but fell 1.8% to $25.26 in after-hours trading.

Consumer confidence hits 2-year low

While the Citi news gave investors plenty to cheer, the average American is feeling a bit less confident about the economy.

The Conference Board's consumer confidence index fell to a reading of 87.3 in November from a reading of 95.2 in October -- the biggest one-month decline since October 2005, after Hurricane Katrina slammed the Gulf Coast.

Consumers were hit in November by rising energy prices, a slumping stock market and continued problems in the housing sector.

"It's clear the consumer is becoming more aware of the pressures being put on them," Lindsey Piegza, analyst at FTN Financial, said to Bloomberg News. "Heating bills are going to take a big bite out of disposable incomes that otherwise would have gone toward holiday shopping."

Pulte Homes: We're on track

Don't throw the baby out with the bath water: That's essentially what Pulte Homes (PHM, news, msgs) said late Monday when the home builder reaffirmed its fourth-quarter forecast.

The housing market has been in a slump for months now, and every day seems to bring more bad news about the industry.

• Video: How to avoid foreclosure

But Pulte Homes said that while things aren't pretty for the sector as a whole, it still expects to break even or earn up to 10 cents per share this quarter.

"While demand for new housing is weak and supply levels continue to be elevated, we remain committed to our previous guidance," Pulte CEO Richard Dugas Jr. said in a statement. Shares of Pulte closed down 0.9% to $9.08 today.

Pulte Homes made the comments ahead of today's Homebuilding and Building Products conference hosted by JPMorgan Chase.

Activision rocks 'n' rolls all night

Video-game maker Activision (ATVI, news, msgs) is cheering good old rock 'n' roll.

Citing strong sales of its "Guitar Hero III: Legends of Rock" video game, the company boosted its fiscal-year forecast to 75 cents per share on revenue of $2.3 billion -- up from a previous forecast of 55 cents per share on $2.07 billion in revenue.

Activision shares were up 13.8% today to $21.54; the gain was the biggest among Nasdaq-100 ($NDX.X) stocks.

A stellar 'Cyber Monday'

As the holiday shopping season kicks into gear, online retailers scored on Cyber Monday. Internet marketing research firm comScore estimated that online spending would reach $700 million on Cyber Monday -- a one-day record and a 15% jump from last year, but slower than the 26% surge from 2005 to 2006.

By midafternoon Monday, more than 300 online retailers had drawn 4.6 million people each minute, CNNMoney.com reported, citing Akamai Technologies' (AKAM, news, msgs) Net Usage Index.

Nearly 73% of online retailers offered discounts Monday, according to BIGresearch, up from nearly 43% last year.

Electronics retailers like Circuit City (CC, news, msgs) and Best Buy (BBY, news, msgs) targeted buyers of high-definition televisions, while Wal-Mart Stores' (WMT, news, msgs) Web site kicked off a five-day sale Monday.

Short hits from the markets -- 4 p.m. ET

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	3.075%	3.055%	0.020	-19.50%	-37.05%
5-year Treasury note yield	3.366%	3.245%	0.121	-19.22%	-28.40%
10-year Treasury note yield	3.944%	3.847%	0.097	-11.87%	-16.26%
30-year Treasury bond yield	4.355%	4.280%	0.075	-8.34%	-9.61%
Currencies
U.S. Dollar Index	75.36	74.98	0.38	-1.50%	-10.13%
British pound in U.S. dollars	$2.0695	$2.0708	-0.0013	-0.54%	5.61%
U.S. dollar in British pounds	£0.4832	£0.4829	0.0003	0.54%	-5.31%
Euro in U.S. dollars	1.4843	1.4872	-0.0029	2.54%	12.45%
U.S. dollar in euros	€ 0.6737	€ 0.6724	0.0013	-2.48%	-11.07%
U.S. dollar in yen	108.62	107.35	1.27	-5.88%	-8.74%
U.S. dollar in Canadian dollars	$1.00	$0.99	0.01	5.84%	-14.24%
Canadian dollar in U.S. dollars	$1.00	$1.01	-0.01	-5.40%	16.76%
Commodities
Gold	$814.00	$826.50	-$12.50	2.35%	27.59%
Copper	$2.9650	$3.0505	-$0.086	-14.63%	3.27%
Silver	$14.6830	$14.6830	-$0.35	1.70%	16.20%
Crude oil (NYMEX) (per barrel)	$94.42	$97.70	-$3.28	-0.12%	54.66%

By Charley Blaine and Elizabeth Strott