After last week's rally, stocks may open lower

By Charley Blaine and Elizabeth Strott

Asian stock markets opened higher on Monday, but U.S. markets looked toward a lower open after government officials, Congress and financial executives discussed a far-reaching plan to shore up U.S. financial markets.

Stocks had finished last week with their best two days in nearly eight years after the government announced a far-reaching plan to try to stabilize financial market.

The plan included allowing the federal government buy up to $700 billion in bad assets from the nation's banks and other institutions, news reports said. In addition, the Treasury would insure money market funds, and the SEC banned for 10 days short-selling in 799 financial stocks.

Futures trading suggested that the Dow Jones industrials would open up to 70 points or so lower to about 11,318 on Monday. The Standard & Poor’s 500 Index was looking at a decline of six points to around 1,249. Trading in the Nasdaq-100 Index ($NDX.X), which tracks the largest Nasdaq stocks, showed the index falling about nine points to around 1,736.

Meanwhile, stocks in Australia, Japan, Hong Kong, Taiwan, Shanghai and Korea were mostly 1% to 3% higher on hopes that the U.S. rescue efforts would be successful. Japan's Nikkei 225 Index ($N225) closed up 170 points, or 1.4%, to 12,091.

In an historic move late Sunday, the Federal Reserve changed the status of Goldman Sachs (GS, news, msgs) and Morgan Stanley (MS, news, msgs) to bank-holding companies. The move would place the last two Wall Street titans under the close supervision of national bank regulators. It would also subject them to new capital requirements and additional oversight.

As important, it would allow the two companies to take deposits for the first time, like a commercial bank. That would help relieve stresses on financing their daily operations. Investment banks sell commercial paper -- short-term IOUs -- to ensure they have enough cash on hand every day.

The move would finally end the separation of banks and investment banks that was instituted in the 1930s to minimize conflicts of interest.

The Dow closed Friday up 369 points, or 3.4%, to 11,388. The S&P 500 was up 49 points, or 4%, to 1,255, and the Nasdaq Composite Index was up 75 points, or 3.4%, to 2,274.

• Get free, real-time stock quotes on MSN Money

Friday's rally was the biggest two-day point gain for the Dow and the S&P 500 since March 2000. From Thursday's low to Friday's close, the Dow jumped more than 930 points.

As important, the rally seemed to shore up the stocks of major financial stocks. The best proxy for financial stocks, the Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund, finished the day up 12.9% to $22.38. The ETF tracks the financial sector of the S&P 500.

Morgan Stanley, whose future seemed to be teetering on Wednesday, finished up 20.7% to $27.21. The close represented a gain of more than 130% from its bottom on Thursday.

It's not clear how markets will behave next week. The short-selling ban is expected to give some relief to financial stocks.

But the situation described to members of Congress late Thursday by Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke was so dire, The New York Times said, that the country was "literally maybe days away from a complete meltdown of our financial system."

The government will issue important reports on durable goods orders on Tuesday. The National Association of Realtors will report on existing-home sales for August on Wednesday, and the Commerce Department will report new-home sales on Thursday.

And traders may start to contemplate the implications of crude oil's 6.6% rise on Friday to $104.55 a barrel. Crude had dropped to as low as $90.51 on Tuesday before rebounding 15.5%. The three-day rally was the biggest for crude since December 1998. The reason for the gain seems to have been the possibility that, if a financial recovery boosts the domestic economy, gasoline demand would rise.

Lastly, it is not clear how markets will react to General Motors' (GM, news, msgs) announcement that it will draw down $3.5 billion from an existing credit line. GM said Friday it would tap into the credit line, arranged in 2006 with JPMorgan Chase (JPM, news, msgs) and Citigroup (C, news, msgs).

The Wall Street Journal said GM is tapping into the credit line because it is concerned about the health of its banks. But the automaker is also concerned about having enough cash to meet its own obligations.

A wild, difficult historic week

Friday's big rally capped an historic week that began with the collapse of Lehman Bros. (LEH, news, msgs), a major Wall Street investment bank; the sale of Merrill Lynch (MER, news, msgs) to Bank of America (BAC, news, msgs); the government-led rescue of American International Group (AIG, news, msgs), the world's largest insurance company; and then, finally, a big proposal aimed at stabilizing the U.S. financial system.

In between, the Dow dropped 812 points in three days, and the global credit system seemed on verge of seizing up for the first time since the subprime mortgage crisis erupted a year ago. Gold had its biggest one-day jump -- $70 an ounce to $850.50 -- on Wednesday. Some investors were willing to accept virtually no return at all for the right to buy one of the world's safest securities, U.S. treasury bills.

Gold went up again Thursday but closed Friday at $862.70, down $32.30. The 13-week Treasury was yielding 0.96% on Friday, up from 0.2% on Thursday.

For many investors and traders, it was as scary a week as any had seen in their careers, and many experts said the crisis was the most serious since the Great Depression.

For short sellers, who have made fortunes this year betting against financial stocks, however, it was a deeply maddening end to the week. Many were forced to cover positions quickly, often seeing big profits vanish quickly.

UltraShort Financials ProShares (SKF, news, msgs), an exchange-traded fund that shorts financial stocks, was down 15.8% Friday before trading was halted for two hours. After trading resumed, it ended down 13.4% to $100, with 19 million shares changing hands.

The great irony for the week: When the markets closed on Friday, the Dow was down just 0.7%. The S&P 500 was off 0.6%, and the Nasdaq lost 0.6%. For the year, the Dow is still down 14.5%, with the S&P off 15.3% and the Nasdaq off 15.2%.

The markets for the week

	Close for week	Wk. ago close	% chg.	YTD. chg.
Dow Jones industrials	11,339.51	11,421.99	-0.72%	-14.51%
S&P 500	1,243.71	1,251.70	-0.64%	-15.30%
Nasdaq Composite	2,248.19	2,261.27	-0.58%	-15.24%
Russell 2000	743.30	720.26	3.20%	-2.97%
Crude oil per barrel	$104.55	$101.18	3.33%	8.93%
10-yr. Treasury yield	3.77%	3.73%	1.05%	-6.59%
Gold per troy ounce	$864.70	$764.50	13.11%	3.19%

Why the government moved

The government's move came as the financial system was undergoing its most severe stress in generations.

The problem, as Treasury Secretary Hank Paulson said Friday, is that irresponsible lending and irresponsible borrowing put too many people in homes they couldn't afford. Foreclosures are driving home values down and clogging up the banking system. Plus, the banking system took on excessive risk in creating securities backed by the mortgages.

"Americans' personal savings are threatened," Paulson added. "And the ability of consumers and businesses to borrow and finance spending, investment and job creation has been disrupted."

The plans announced Friday included:

• A temporary guarantee for money market funds. The Treasury said Thursday it would guarantee money market funds until September 2009. "Money funds are safe. People can relax," Don Putnam, Grail Partners Managing partner, told CNBC. "The run (on banks), which hadn't developed but which could have come next week, is stopped in its tracks."

• A plan to off-load the toxic mortgage-backed securities that have weighed on the books of U.S. financial companies. This requires congressional approval.

• The temporary ban on short-selling of shares of 799 financial companies by the Securities and Exchange Commission. The ban is for 10 days; technically, it expires at 11:59 p.m. ET on Oct. 2. It could also be extended for up to 30 days. There has apparently been discussion of extending the ban to General Electric (GE, news, msgs), whose financial businesses would make it the fifth-largest financial company in the country.

The latest moves came with the endorsement of President Bush. "In the long run, Americans have good reason to be confident in our economic strength," he said Friday morning. While the measures will put a significant amount of taxpayer money "on the line," the president said he expects those funds to be paid back.

The plans are "very good news, generally speaking," Haag Sherman, co-founder and managing director of Salient Partners, told Reuters. "I think it will start to provide a floor to asset values and allow institutions to work through this in a systematic manner. They won't have to rush into the arms of suitors to avoid collapsing."

But all the activity was not without controversy. The government is "punch drunk" with bailout proposals, John Bogle, the legendary founder of the Vanguard Group and one of the investors of the index fund, told Bloomberg News. "We're playing a game of casino capitalism, interfering with the way the market is working."

Many traders were horrified by the short-selling ban, which mirrors a similar move by Britain's securities regulator on Thursday.

MSN Money columnist Jon Markman said Friday the move deprives "short sellers of free-market rights that once seemed inviolate." He thinks the move ultimately will prove to be a gimmick -- and won't work.

• Top Stocks blog: SEC shooting itself in the shorts?

The rally affects the entire market

With the with 23 of 30 Dow stocks showing gains, led by the financial components in the index. In addition, 437 S&P 500 stocks were higher, again led by financials, along with 86 stocks in the Nasdaq-100 Index ($NDX.X), which tracks the largest Nasdaq stocks. The index was up 2.8% to 1,745.

The biggest Dow winner: AIG, up 43.1% to $3.85 on its last day as a Dow component. It wil be replaced Monday by food company Kraft (KFT, news, msgs). Behind AIG: Citigroup, up 24% to $20.65.

The biggest Dow losers: Wal-Mart Stores (WMT, news, msgs), down 2.9% to $59.70 and Procter & Gamble (PG, news, msgs) fell 1.3% to $70.36.

Genworth Financial (GNW, news, msgs), the former insurance arm of General Electric (GE, news, msgs) was the leading S&P 500 stock, up 66.7% to $15.25. Nineteen of the top 20 S&P 500 performers on Friday were financial stocks.

Among tech stocks, Research In Motion (RIMM, news, msgs) jumped 5.4% to $103.44. Apple (AAPL, news, msgs) added 5.1% to $140.91. Joy Global (JOYG, news, msgs), maker of mining equipment, rose 6.3% to $54.78.

• Analysis: A credit-crisis fix for banks and homeowners

Asian markets responded with rallies Friday. The MSCI Asia Pacific Index closed up 4.8%, the Nikkei jumped 3.8%, and Hong Kong's Hang Seng Index surged 9.6%.

"Investors around the world are regaining confidence thanks to the various government moves, and there seems to be a coherent belief that this could actually be sufficient to draw a line under what has been a tumultuous 18 months for the markets," said Matt Buckland, an analyst with CMC markets in London.

In Europe, stocks also rallied as the FTSE Eurofirst rose 8.9%, the Dow Jones Stoxx 600 Index climbed 8.3% and London's FTSE 100 climbed 8.8%.

Energy prices -- New York close

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$104.55	$97.88	$6.67	-9.45%	8.93%
Heating oil (per gallon)	$2.8978	$2.7824	$0.1154	-8.93%	9.38%
Natural gas (per million BTU)	$7.5310	$7.6210	-$0.0900	-5.19%	0.64%
Unleaded gasoline (per gallon)	$2.5997	$2.4824	$0.1173	-13.63%	4.37%

SEC bans short-selling for 10 days, maybe more

The SEC, after weeks of criticism, especially by banks and investment banks whose stocks were shrinking, agreed to ban the short-selling of 799 financial companies, effective immediately and running through Oct. 2.

"The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets," SEC Chairman Christopher Cox said in a statement.

The list of companies involved does not include GE, Capital One Financial (COF, news, msgs) or CIT Group (CIT, news, msgs).

But it forced big changes in the market.

"The shorting rules gave investors the belief the world is not coming to an end," Phil Orlando, chief equity strategist at Federated Investors, told Bloomberg News. "You had a lot of the hedge funds ganging up on these financial companies and putting them out of business."

Goldman Sachs shares rose 20.2% to $129.80; Goldman lost 30% in the first four trading days of the week.

Merrill Lynch was up 33.7% to $29.50, Washington Mutual (WM, news, msgs) soared 42.1% to $4.25, and Wachovia (WB, news, msgs) jumped 29.3% to $18.75.

Earlier this week, the SEC banned naked short-selling, which has been widely blamed for driving down many financial stocks -- some to oblivion. Naked short-selling occurs when a trader sells shares he may not have and buys them back later. It differs from classic short-selling, in which a trader borrows shares from a broker and sells them, hoping they'll move lower and certifying that he can deliver the shares. He profits by buying shares back at that lower price and then returning them to the broker.

A different type of bailout coming

Just six weeks from the presidential election, Democrats and Republicans are joining forces to try to curtail the turmoil that has shaken the markets.

Federal Reserve Chairman Ben Bernanke and Paulson met Thursday night with congressional leaders to discuss their initiatives.

"We have bicameral, bipartisan leadership . . . hoping that we can work together, realizing that we must have a solution," House Speaker Nancy Pelosi (D-Calif.) said Thursday. "Time is of the essence."

Talk of a government plan came Thursday afternoon, with speculation that the effort could be similar to the Resolution Trust Corp. (RTC), which was created after the savings and loan crisis in the late 1980s.

Interestingly, many people on Capitol Hill have also been hit by the market's meltdown. Speaker Pelosi's husband owned between $250,000 and $500,000 in AIG, according to her most recent disclosure form. Sen. John Kerry's wife, Teresa Heinz Kerry, owned more than $2 million in the insurance giant's stock at the end of 2007.

Oracle profit rises

Here's something you haven't heard from the financials lately: a rise in quarterly profit.

Software giant Oracle (ORCL, news, msgs) reported just that late Thursday, sending its shares up 7% to $20.07. Oracle earned $1.1 billion in its fiscal first quarter, or 21 cents per share, up from $840 million, or 16 cents per share, last year.

Excluding items, Oracle earned 29 cents, topping Wall Street's estimate by 2 cents.

Sales rose 18% to $5.42 billion.

"Oracle's consistent strategy of consolidating, getting economies of scale and deriving better margins continues to work even in tough times," Cowen analyst Peter Goldmacher told Bloomberg News.

Andy Rosenbaum contributed to this report.

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

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	0.920%	0.070%	0.850	-45.56%	-70.70%
5-year Treasury note yield	2.993%	2.507%	0.486	-3.11%	-13.37%
10-year Treasury note yield	3.769%	3.437%	0.332	-1.15%	-6.59%
30-year Treasury bond yield	4.366%	4.113%	0.253	-1.04%	-2.09%
Currencies
U.S. Dollar Index	77.940	78.065	-0.125	0.57%	1.62%
British pound in dollars	$1.8365	$1.8162	0.0203	0.83%	-7.68%
Dollar in British pounds	£0.5445	£0.5506	-0.0061	-0.82%	8.32%
Euro in dollars	$1.4478	$1.4331	0.0147	-1.33%	-0.94%
Dollar in euros	€ 0.6907	€ 0.6978	-0.0071	1.35%	0.95%
Dollar in yen	106.95	105.54	1.41	-1.67%	-4.38%
Canadian dollar in U.S. dollars	$0.953	$0.945	$0.0080	1.38%	-3.98%
U.S. dollar in Canadian dollars	$1.049	$1.058	-$0.0089	-1.43%	4.07%
Commodities
Gold	$864.70	$897.00	-$32.30	3.53%	3.19%
Copper	$3.1765	$3.0655	$0.11	-6.21%	4.46%
Silver	$12.4750	$12.7000	-$0.23	-8.99%	-16.39%
Corn	$5.4250	$5.4250	$0.15	-4.53%	19.10%
Crude oil (NYMEX) (per barrel)	$104.55	$97.88	$6.67	-9.45%	8.93%