Dow up 420 as Fed cuts key rate to 2.25%

By Charley Blaine and Elizabeth Strott

Maybe the Federal Reserve's rate cut today wasn't as big as some on Wall Street had hoped. But it still produced the stock market's best performance of the year.

And tomorrow could also be a strong day after credit card company Visa priced its initial public offering of shares at $44 today, raising $17.9 billion in the richest IPO ever.

The price was above an expected range of $37 to $42 a share. The shares will begin trading on Wednesday under the ticker "V."

The Visa news came on top of the Fed's decision to cut its key federal funds rate -- the rate banks charge each other for overnight loans -- to 2.25% from 3%. That was the fifth rate cut since September, when the Fed began trying to stave off recession and loosen frozen credit markets.

Wall Street was initially unhappy that the Fed's 2:15 p.m. ET announcement didn't cut rates further. Then cooler heads prevailed, and the Dow Jones industrials, already rallying from the open, powered to a 420-point gain, or 3.5%, to nearly 12,393.

The Standard & Poor's 500 Index jumped 54 points, or 4.2%, to 1,331, and the Nasdaq Composite Index was up 91 points, or 4.2%, to 2,268.

The point gains were the best this year for the three indexes, exceeding gains recorded on March 11, a day that saw the Dow rise 416 points. The percentage gains for the S&P 500 and the Nasdaq also were the year's biggest. The Dow's March 11 gain was 3.55%.

Much of the rally was powered by gains in financial stocks, which pushed higher on news of better-than-expected earnings from investment banks Lehman Bros. (LEH, news, msgs) and Goldman Sachs (GS, news, msgs). Lehman Bros. closed up 46% to $46.49 today; Goldman Sachs was up 16% to $175.59.

The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund, which mirrors the financial component of the S&P 500, was up 8% to $25.42. The Dow's leader on the day was troubled banking giant Citigroup (C, news, msgs), up 11% to $20.71. And the top 10 performers among S&P 500 stocks were all financial issues, led by Lehman Bros., followed by Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs), up 27% to $28.22 and 26% to $26.02, respectively.

The Wall Street Journal reported late today that the regulator for Fannie Mae and Freddie Mac is expected to announce a plan Wednesday that will give the companies more scope to prop up the home-mortgage market. Fannie Mae and Freddie Mac buy mortgages from lenders, replenishing their cash to make more loans.

But after all that, today's was a big, broad rally. Only Pfizer (PFE, news, msgs) showed a decline among the 30 Dow stocks, falling 0.7% to $20.42. A total of 489 S&P 500 stocks showed gains, along with 96 stocks in the Nasdaq-100 Index ($NDX.X).

Nearly 2 billion shares changed hands on the New York Stock Exchange, along with 2.4 billion Nasdaq shares. Both were about 20% higher than average.

• Vote: Did the Fed do the right thing?

But there was also quite of bit of short-covering as well as short sellers, who had borrowed stock and sold the shares short, betting the market would move lower, bought the shares back to cover their positions. The short-covering was so powerful that combined with the Visa IPO, the market could rally higher Wednesday.

Also coming tomorrow: first-quarter earnings from investment bank Morgan Stanley (MS, news, msgs), whose shares jumped 18.6% to $43.15 today.

The company is expected to report earnings of $1.03 a share, Reuters says, down from $2.40 a year ago because of losses from mortgage-related securities.

Many market bulls have predicted a big rally in the past few weeks, arguing that the waves of selling that have hit the U.S. market had pushed stocks down too far.

Fed brings rates to 2004 levels

The central bank's move today brought the fed funds rate to its lowest level since December 2004.

"Financial markets remain under considerable stress," the Fed's statement on the rate cut said, "and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters."

The Fed also cut its discount rate -- what it charges member banks for short-term loans -- to 2.5% from 3.25%, a level set only on Sunday.

If there was any negativity in the announcement it came with two notes. First, the Fed statement said the members of the Federal Open Market Committee, the central bank's rate-making body, were increasingly worried about rising inflationary pressures.

The second was that the Fed's decision wasn't unanimous. Two voting members of the FOMC thought the rate cut was too big.

The inflation concerns are real. Since the Fed started cutting rates in September, the U.S. dollar has fallen badly against the euro and other currencies, and prices for crude oil, gold and many commodities have soared.

The Fed and, increasingly, the Bush administration have been fighting a crisis that has proved worse than anyone expected. Even former Fed Chairman Alan Greenspan believes the crisis could be the most serious since the end of World War II.

• Jon Markman: Why the Fed's rate cuts won't help you

Even with today's close, the Dow has fallen more than 12.5% since peaking on Oct. 9. The collapse of investment bank Bear Stearns (BSC, news, msgs) over the weekend was a direct result of the crisis. The S&P 500 is down 15% from its Oct. 98 peak; the Nasdaq is off nearly 21% from its peak on Oct. 31.

Ironically, Bear Stearns, which agreed Sunday to be sold to JPMorgan Chase (JPM, news, msgs) at $2 a share, was up 23% to $5.91, fifth best among S&P 500 companies, as criticism and lawsuits over the deal mount.

The Fed has resorted to additional strategies, including lending money to troubled investment banks like Bear Stearns and Lehman Bros. The investment banks have been allowed to put up some of their mortgage-backed securities as collateral.

• Talk back: What's your view of the Fed's rate cut?

At the same time, the Commerce Department reported that housing starts in February were down 28% from February 2007 but up slightly from January. But building permits were off more than 36% from a year ago. Nonetheless, housing stocks were jumping today. Pulte Homes (PHM, news, msgs) was up 11% to $12.96, and Centex (CTX, news, msgs) was up nearly 15% to $22.27. The Philadelphia Housing Sector Index ($HGX.X) was up 6.6% to 137.

Crude oil in New York closed up 3.5% to $109.42 a barrel today. Gold moved up $1.70 an ounce to $1004.30 in New York. The U.S. dollar index, which measures the dollar against a basket of currencies, was up 0.7% to 72.455. But the dollar was lower against the euro and the pound.

Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$109.42	$105.68	$3.74	7.44%	14.00%
Heating oil (per gallon)	$3.1379	$3.0684	$0.0695	10.50%	18.44%
Natural gas (per million BTU)	$9.4140	$9.1000	$0.3140	0.35%	25.81%
Unleaded gasoline (per gallon)	$2.6600	$2.5042	$0.1558	5.88%	6.79%

Good news for Goldman, Lehman

With financials at the center of the recent market turmoil, some good news from Wall Street this morning could help lift the mood a bit. Goldman Sachs said today that it had earned $1.51 billion, or $3.23 per share -- well above the estimate of $2.58 per share. Goldman earned $6.67 per share in the same quarter a year ago. Goldman said net losses on residential mortgages were $1 billion.

• Video: A financial sigh of relief

"Market conditions are clearly very difficult," said Goldman Chief Executive Officer Lloyd Blankfein in a statement. "But we saw strong customer activity across many of our franchise businesses in the first quarter. Although market conditions present many challenges at the moment, they also offer considerable opportunities."

In separate news, Goldman said that David Kostin is replacing Abby Joseph Cohen as the company's chief investment strategist. Cohen has been considered one of the most bullish forecasters on Wall Street.

Meanwhile, Lehman Bros., which has been struggling to keep its head above water after Bear Stearns' downfall, reported first-quarter earnings of $481 million, or 81 cents per share -- beating the consensus estimate of 72 cents per share.

Profit fell 57% from the $1.15 billion Lehman earned in the same period a year ago.

The "challenging operating environment" and "difficult and volatile markets" hurt Lehman this quarter, CEO Richard Fuld said in a press release.

Like Bear, Lehman has been a big mortgage-market player, and its stock has plunged 31% in the past week.

Other financials bounced on the news. In addition to Morgan Stanley's big gain, Merrill Lynch (MER, news, msgs) was up nearly 13% to $46.43 today.

Yahoo confirms guidance

Yahoo (YHOO, news, msgs) reaffirmed its first-quarter sales guidance this morning, stating that it still expects revenue of $1.28 billion to $1.38 billion, excluding some costs.

Yahoo expects full-year revenue of up to $5.95 billion. The Internet company also said that it expects sales of $8.8 billion by 2010.

• Video: Yahoo and Microsoft

Yahoo's investor presentation this morning "supports the unanimous determination by the Company's board of directors that Microsoft's (MSFT, news, msgs) Jan. 31 takeover bid substantially undervalues Yahoo," the company said in a statement.

Microsoft offered $44.6 billion for Yahoo on Feb. 1, but Yahoo rejected the bid as too low. Microsoft has not increased its bid, nor have any other suitors entered the picture. (Microsoft is the publisher of MSN Money.)

"This is one more push by them to get a higher bid," said Clayton Moran, an analyst at Stanford Group, to Bloomberg News. "This is reflective of Yahoo's alternatives dwindling."

Yahoo shares rose 7% to $27.66 on the day; Microsoft shares were up 4% to $29.42.

Bear's breakdown

Bear Stearns collapsed in less than a week, sending waves of fear around the world over the weekend, but shares of the stock have been trading above the $2-per-share offer price.

Some have been calling the JPMorgan deal a bailout, but to many employees and shareholders, $2 per share for stock that had been trading at $114 in September and $145 a year ago is ridiculously low. (By way of comparison: The $236 million total price for Bear Stearns was lower than what the New York Yankees paid for Alex Rodriguez.)

• Analysis: High price for Bear's big mistake

On Monday, Bear closed at $4.81, an indication that shareholders could reject the deal as too cheap.

Treasury Secretary Hank Paulson said today that the U.S. economy is in a "sharp down climb."

"The economy has turned down sharply," Paulson said on CNBC this morning, noting the "turbulence in our capital markets."

Paulson wasn't all gloom and doom, however, saying that he has "great confidence" in the U.S. markets.

Continued: Here come the lawsuits over Bear Stearns

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