Market Dispatches

Market Dispatches9/30/2008 9:20 PM ET

Dow up 485 on hopes for new rescue package

Financial and energy stocks lead markets higher a day after the Dow's worst point drop ever. The Senate will vote on a new bank rescue plan Wednesday. A new report says the housing market hasn't bottomed. Apple jumps 8% and leads a tech rally.

By Charley Blaine and Elizabeth Strott

The stock market enjoyed its biggest rally in eight years as hopes rose yet again that Congress will approve a rescue package for the banking system.

At the close, the Dow Jones industrials were up 485 points, or 4.7%, to 10,851. It was the largest gain for the blue-chip index since July 24, 2002, when the Dow jumped 489 points.

The Standard & Poor's 500 Index was up 58 points, or 5.3%, to 1,165, and the Nasdaq Composite Index was up 99 points, or 5% to 2,082.

The Nasdaq's point gain was its largest since Sept. 18, when it jumped 100 points. The percentage gain was its biggest since July 29, 2002, when the index jumped 5.8%.

Adding to the rescue hopes was news that regulators may let financial companies adjust values of some securities so that they don't have to reflect fire-sale prices. The change in "mark-to-market" valuation is seen as a way to help stabilize markets.

Some members of Congress have argued that the rules, which require companies to reduce the value of assets to current market value, can force artificially low valuations.

Critics say rescinding the rules would let companies value securities at any level they deem reasonable. "The alternative to mark-to-market accounting is mark-to-myth," Barbara Roper, director of investor protection for the Consumer Federation of America, told The Wall Street Journal.

While today's rally was big, trading volume was ordinary, suggesting that the market was attracting only short-term players. New York Stock Exchange volume came to 1.6 billion shares, a touch under normal. Nasdaq volume was 2.4 billion shares, about average.

In addition, Monday's sell-off that saw the Dow fall 778 points -- its biggest point loss ever -- was so big that a fair amount of buying was inevitable.

Stocks slumped Monday after the House of Representatives rejected a Bush administration plan to buy up to $700 billion in bad assets from financial institutions. U.S. stocks lost more than $1.1 trillion in market value in the sell-off.

In a morning address, President Bush again called for congressional approval of a bank rescue plan.

"The sooner we address the problem, the sooner we can get back on the path of growth and job creation," Bush said. "We're facing a choice between action and the real prospect of economic hardship for millions of Americans. Congress must act."

Reuters reported late today that the Senate will vote on a version of the bill Wednesday night, and it appeared that the House might take it up again Thursday or Friday.

That may explain why Asian markets opened higher. Japan's Nikkei 225 Index was up 1.8% to 11,457 at 8:40 p.m. ET. Australian and New Zealand stock markets were up 3%.

But futures trading on U.S. stock indexes indicated that the Dow, S&P 500 and Nasdaq-100 Index would open slightly lower.

Financial stocks led today's big rally. The Dow leaders were: Bank of America (BAC, news, msgs), up 15.7% $35, Citigroup (C, news, msgs), up 15.6% to $20.51, and JPMorgan Chase (JPM, news, msgs), up 13.9% to $46.70.

Wachovia (WB, news, msgs), which is selling its banking business to Citigroup, was up 90.2% to $3.50.

Energy shares were right behind financials, with ExxonMobil (XOM, news, msgs) and Chevron (CVX, news, msgs) up 4.9% to $77.66 and 6.4% to $82.48, respectively. Anadarko Petroleum (APC, news, msgs) was up 8.1% to $48.51.

The catalyst: Crude oil finished up $4.27 to $100.64 a barrel. Oil had fallen 8.9% to 96.37 on Monday on worries about weakening global demand.

In addition, tech shares were higher. Apple (AAPL, news, msgs) was up 8% to $113.66. Intel (INTC, news, msgs) jumped 8.5% to $18.73. (AMZN, news, msgs) shot up 14.9% to $72.76.

Meanwhile, the euro fell the most against the dollar since the introduction of the shared currency in 1999 after France and Belgium led a state-backed rescue of Dexia SA, a Belgian-based banking company, as the widening financial crisis forces governments to prop up financial institutions across Europe.

The Dexia rescue was the second bailout of a Belgian institution in three days, following the rescue of Belgian-Dutch banking and insurance provider Fortis over the weekend. Belgium, Luxembourg and the Netherlands together took a 49% stake in Fortis after investor confidence in the firm's capital health evaporated and its share price tanked.

A big broad rally, but 4th quarterly loss in a row

Today's rally was basically a mirror image of Monday's drubbing.

All but one of the 30 Dow stocks finished higher, led by Bank of America, with Caterpillar (CAT, news, msgs) the only loser, down 0.5% to $59.60.

In addition, 454 S&P500 stocks had gains, along with 92 stocks in the Nasdaq-100 Index ($NDX.X). The Nasdaq-100 was up 88 points, or 5.9%, to 1,584.60, with Akamai Technogies (AKAM, news, msgs) the leader, up 17.2% to $17.44. Apple's 8% jump was good for 12 points of the gain for the index.

The Dow finished September with a 6% loss, its worst performance since June, when it fell 9.4%. The S&P 500 closed the month with a 9.2% loss, its worst month since September 2002. The Nasdaq closed down 12.1%, its worst loss since September 2001.

The Dow lost 4.4% for the quarter, with the S&P 500 off 9%. For both indexes, the declines were their fourth consecutive quarterly losses.

The Nasdaq's 9.23% loss for the quarter was its third loss in the last four quarters.

For the year, the Dow is down 18.2%. The S&P 500 is down 20.7%, and the Nasdaq is off 21.5%.

Energy prices -- New York close
 Tues.Mon.Chg.Month chg.YTD chg.
Crude oil (NYMEX) (per barrel)$100.64$96.37$4.27-12.84%4.86%
Heating oil (per gallon)$2.8625$2.7604$0.1021-10.04%8.04%
Natural gas (per million BTU)$7.4380$7.2210$0.2170-6.36%-0.60%
Unleaded gasoline (per gallon)$2.4847$2.3970$0.0877-17.45%-0.24%

Bush approves aid for automakers

President Bush on Tuesday signed into law a low-interest loan package to aid U.S. automakers.

But don't expect cash to flow toward Detroit for a while. The companies will still have to wait months to find out how and when they can tap the $25 billion designated to smooth their transition to building more fuel-efficient vehicles.

The loan package was approved last year as a way to help auto makers and their suppliers meet fuel-economy standards set by the federal government. But the funding for the package wasn't passed by Congress until this year. One estimate put the total cost to auto makers at $100 billion to meet stricter efficiency standards that require vehicles to reach 35 miles per gallon by 2020, The Wall Street Journal said.

General Motors (GM, news, msgs), Ford Motor (F, news, msgs) and Chrysler Group have argued it was essential to get the loan help as soon as possible to rejigger plants to build smaller cars and infuse money into programs for gas-electric hybrids and other vehicles relying on alternative fuels.

GM finished up 11.1% to $9.45. Ford was up 24.7% to $5.20.

Home prices still falling

While legislators started work on a revision of the bill, there will be plenty of other news to digest today.

The Standard & Poor's/Case-Shiller Home Price Index showed a record decline in home prices in July. The 20-city index fell 16.3% from July 2007, and the 10-city index fell 17.5%.

The data add to worries about when, and if, the housing market will recover. The housing slump has been the crux of the mortgage-market meltdown and credit crunch over the past year.

"While some cities did show some marginal improvement over last month's data, there is still very little evidence of any particular region experiencing an absolute turnaround," David Blitzer, chairman of the index committee at S&P, said in a statement.

Despite the news, home building stocks were mostly higher. Ryland (RYL, news, msgs) was up 4.5% to $26.52. Pulte Homes (PHM, news, msgs) rose 0.6% to $13.97.

Meanwhile, business activity in the Chicago region is hanging in there. The Chicago Purchasing Managers Index fell to a reading of 56.7 in September from a reading of 57.9 in August. Economists had expected a worse decline to 53 for September.

The index hit a low of 40.5 in February.

In addition, the Conference Board's report on consumer confidence showed an improvement in September. The index came in at 59.8, up from a revised reading of 58.5 in August. Economists had expected a reading of 55.

On Friday, the September jobs report will likely show a ninth monthly decline in jobs.

Larger limits on FDIC insurance?

Congress and the Bush administration are working on an agreement to raise the level of consumers' bank deposits guaranteed by the government, an idea they hope might bring enough support to revive President Bush's rescue package for financial markets.

The idea already has the support of presidential candidates John McCain and Barack Obama.

Under the plan, the Federal Deposit Insurance Corp. would insure $250,000 in deposits, up from the current $100,000. The limit was set in the early 1980s.

The FDIC currently insures up to $250,000 in retirement accounts.

Raising the deposit-insurance limits could require that the FDIC levy higher fees to fund the program, The Wall Street Journal noted tonight. That might have to come from the struggling banking industry.

One idea is to waive the premiums that banks pay to the FDIC temporarily, with the Treasury liable for covering losses.

Genworth to spin off mortgage unit

Shares of Genworth Financial (GNW, news, msgs) shot up 72.2% to $8.61 today after the company said it is reviewing strategic alternatives, including the possibility of a spin-off of its mortgage insurance business.

"Progress in our international, wealth management, retirement, life and long-term care insurance businesses has been overshadowed by concerns about the future of U.S. Mortgage Insurance," Chief Executive Officer Michael Fraizer said in a statement.

Genworth, a mortgage insurer, covers losses and pays banks back when borrowers default and lenders can't recover losses. The company has been slammed by the mortgage mess, and its troubles were highlighted last week when the government lent billions to American International Group (AIG, news, msgs) to prevent it from collapsing.

Worries spread beyond Wall Street

While Main Street might think the rescue plan is all about Wall Street, executives from companies across America and outside the financial-services business are worried about the impact on Main Street businesses and on jobs.

"I think one has to anticipate that no company is immune to these issues," Microsoft (MSFT, news, msgs) CEO Steve Ballmer told reporters in Norway this morning. "I trust that before the end of the week we have some resolution, at least in the U.S. Congress, that will help to stabilize the situation. We need that. I hope we get that." (Microsoft is the publisher of MSN Money.)

"I absolutely cannot believe it," David Cosper, chief financial officer of auto retailer Sonic Automotive (SAH, news, msgs), told Bloomberg News. "I don't think the House knows what they're doing. We need this, the markets are frozen, banks are being taken over -- it's a crisis. I think they're leaving it in the lurch and going on a break."

It wasn't just American companies that were upset about the failed plan. European Union Commission spokesman Johannes Laitenberger said the U.S. needs to show "statesmanship" in devising a solution.

U.S. turmoil creates global turmoil

Markets around the world were also affected by Monday's stock plunge in the U.S.

Asian stocks plunged, with Japan's Nikkei 225 Index shedding 4.1% to 11,260, its lowest close since June 2005. Japan's broader Topix Index was down 3.6%, to close at 1,087.

But Hong Kong's Hang Seng Index managed to close up 0.8% at 18,016 after falling for most of the session. After the market closed, the Hong Kong central bank said it was adding more liquidity to the system.

In Europe, stocks started the session on a down note but turned around. London's FTSE 100 Index was up 1.7% to 4,902, and the Dow Jones Stoxx 600 Index was up 1.8% at 256.

What if there's no rescue plan?

The fallout of a failed rescue plan would mean "an economic 9/11," Terry Connelly, dean of Golden Gate University's Ageno School of Business, told The Associated Press.

The potential for widespread damage arises from a general lack of confidence in the credit markets. In the face of uncertainty, banks have been less willing to make loans, holding on to their cash or demanding high interest rates.

The Federal Reserve's federal funds rate -- the rate banks are charged to lend to each other -- is currently at 2%, but many banks have been charging much higher rates to those borrowing money.

The London Interbank Offered Rate, an interest rate widely viewed as a key indicator of anxiety in credit markets, jumped to a record 6.88% this morning, up from 2.57% Monday. Meantime, the three-month Treasury bill, which is often considered to be the safest short-term investment, was at 0.9% today, up from 0.45% on Monday.

The TED spread -- widely viewed as the best measure of fear in the capital markets -- measures the difference between the three-month Libor and the three-month Treasury bill. It was at 3.31% this morning after hitting a record 3.55% Monday. Higher TED spread readings indicate a higher likelihood of default risk and, in turn, heightened risk aversion in the markets.

Fed rate cut coming?

The Treasury and Federal Reserve toolboxes may be limited, but many observers are betting that the Fed will remain determined and will likely cut its key federal funds rate to 1.5% soon. The rate, which is what the Fed wants banks to charge each other for overnight loans, is now 2%.

"Unemployment is likely to continue rising, I think the inflation pressures are dissipating very quickly, and you've got turmoil in the financial markets," Keith Hembre, chief economist at FAF Advisors, told Bloomberg News.

Analysts at Societe Generale agreed. "The rate option is now very much in play, and Fed officials could cut or signal their intention to do so." They expect a half-percentage-point cut.

The next Federal Open Market Committee meeting is scheduled for Oct. 28-29.

Andy Rosenbaum contributed to this report.

Short hits from the markets -- 4 p.m.
 Tues.Mon.Chg.Month chg.YTD chg.
13-week Treasury bill0.900%0.450%0.450-46.75%-71.34%
5-year Treasury note yield2.986%2.723%0.263-3.33%-13.57%
10-year Treasury note yield3.827%3.632%0.1950.37%-5.15%
30-year Treasury bond yield4.305%4.161%0.144-2.43%-3.45%
U.S. Dollar Index79.36077.5301.8302.40%3.47%
British pound in dollars$1.7841$1.7844-0.0003-2.05%-10.31%
Dollar in British pounds £0.5605£0.56040.00012.09%11.50%
Euro in dollars$1.4124$1.4132-0.0008-3.74%-3.36%
Dollar in euros€ 0.7080€ 0.70760.00043.89%3.48%
Dollar in yen 106.00105.980.02-2.55%-5.23%
Canadian dollar in U.S. dollars$0.941$0.941$0.00000.06%-5.23%
U.S. dollar in Canadian dollars$1.063$1.063$0.0003-0.05%5.53%
Crude oil (NYMEX) (per barrel)$100.64$96.37$4.27-12.84%4.86%

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