Dow jumps 360 on Fed rate moves

By Charley Blaine and Elizabeth Strott

Interest rates -- especially mortgage rates -- are headed lower after the Federal Reserve said this afternoon that it would set its key interest rate at 0% to 0.25% -- the lowest level ever.

Wall Street cheered, and, in a big, broad rally, stocks enjoyed their biggest gains since Nov. 24.

At the close, the Dow Jones industrials were up 360 points, or 4.2%, at 8,924. The Standard & Poor's 500 Index was up 45 points, or 5.1%, to 913, and the Nasdaq Composite Index was up 82 points, or 5.4%, to 1,590.

Many analysts see the rally pushing ahead for the next few weeks. But they cautioned that there will be big losses along with big gains. Futures trading this evening suggests a modestly higher open on Wednesday.

What the Fed did was historic -- and not just because it brought its key federal funds rate to a record low of 0% to 0.25%, down from 1%. The fed funds rate is the foundation for everything from business loans to credit card rates.

The Fed also cut its discount rate -- the rate it charges qualified institutions -- for short-term loans to 0.5%; it had been 1.25%.

The central bank also said it would pump more cash into the sagging economy in an attempt to stimulate growth, with a focus on trying to rejuvenate the housing market.

"Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," it told consumers and businesses.

"They shot the bazooka this time -- I just hope it works," John Rocket Spinello, Treasury bond strategist at Jefferies & Co., told Marketwatch.

Bond yields tumbled -- and bond prices jumped -- on the Fed news. The yield on the 10-year Treasury note fell to a record low of 2.36% from 2.53% on Monday. The yield was 4% a year ago. The dollar, however, dropped 2.6% lower against the euro, 1.8% against the British pound and 1.7% against the Japanese yen. The dollar has fallen 10% against the euro this month. It rose more than 25% against the euro between June 30 and Nov. 30.

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A bit of cheer on Wall Street

The Fed decision is starting to brighten Wall Street's mood. The rate cuts and efforts to push mortgage rates lower may unleash a round of mortgage refinancings and help mortage lenders get rid of their inventories of foreclosed homes.

That will boost the economy. So will an expected stimulus package of perhaps $500 billion expected when the Obama administration takes office in January. That would suggest a recovery beginning in the latter half of 2009 or early 2010.

The Fed moved, it said, because the economy is sinking. "Consumer spending, business investment, and industrial production have declined," the Fed statement said. "Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further."

The Fed's actions acknowledge how falling energy prices and other inflationary pressures have basically disappeared -- and a big bet that inflation will not be a problem anytime soon. Crude oil has fallen more than $100 since peaking in mid-July.

Along with the rate cuts, the Fed signaled plans to channel credit to businesses and consumers.

It will target the housing market by purchasing large quantities of mortgage-backed securities. It may also buy private-sector debt that investors have shunned, and the Fed said it is studying "the potential benefits of purchasing longer-term Treasury securities."

Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$43.60	$44.51	-$0.91	-19.91%	-54.57%
Heating oil (per gallon)	$1.4603	$1.4601	$0.0002	-12.75%	-44.88%
Natural gas (per million BTU)	$5.7510	$5.6450	$0.1060	-11.66%	-23.15%
Unleaded gasoline (per gallon)	$1.0400	$1.0369	$0.0031	-9.27%	-58.25%

Financial stocks lead the rally

Financial stocks, ranging from banks to insurance companies to real estate investment trusts, led the market with gains of 10% or more, in expectation of lower rates and more Fed moves to stimulate the economy.

JPMorgan Chase (JPM, news, msgs) was the top performer of the 30 Dow stocks, up 13% to $32.35. Right behind was Citigroup (C, news, msgs), up 11.2% to $8.23. Since the government moved to rescue Citigroup on Nov. 21, the stock is up 172%.

Goldman Sachs (GS, news, msgs) shares soared 14.4% to $76. The investment bank reported a $2.1 billion loss during its fourth quarter, its first quarterly loss since becoming a public company in 1999. Not all investors and analysts were dismayed by the report. Ladenburg Thalmann's Dick Bove raised his target price from $70 to $77, and the stock blew past that level this afternoon.

Electronics retailer Best Buy (BBY, news, msgs) climbed 17.9% to $27.68 despite a 77% drop in third-quarter profit to $52 million. The company said it would offer buyout packages to nearly all corporate employees and may have layoffs later.

"We believe that there has been a dramatic and potentially long-lasting change in consumer behavior as people adjust to the new realities of the marketplace," Chief Executive Brad Anderson said in a statement.

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General Electric (GE, news, msgs) jumped 5.7% to $17.92 after reaffirming its outlook for the fourth-quarter and full-year earnings: 50 cents to 52 cents for the quarter and $1.78 to $1.84 for the year. The company also said its dividend is secure. But GE CEO Jeff Immelt said the company will no longer offer earnings guidance.

It was difficult to find sectors that actually fell back. Energy shares were higher, even as oil fell ahead of Wednesday's output decision by the Organization of Petroleum Exporting Countries.

Transportation stocks moved higher: JetBlue (JBLU, news, msgs) led the Dow Jones Transportation Average ($DJT) with a 10.5% gain to $5.92. The index was up 5.5% to 3,381.

Tech shares generally had a big day. Qualcomm (QCOM, news, msgs) rose 6.7% to $36.06. Microsoft (MSFT, news, msgs) added 5.6% to $20.11. Research In Motion (RIMM, news, msgs) jumped 8.4% to $39.94. Amazon.com (AMZN, news, msgs) jumped 7.7% to $52.63. (Microsoft is the publisher of MSN Money.)

• Top Stocks blog: Have Google, Apple and Amazon hit bottom?

All 30 Dow stocks were higher, along with 484 S&P 500 stocks and 95 stocks in the Nasdaq-100 Index ($NDX.X). The Nasdaq-100 was up 62 points, or 5.2%, to 1,243.

Crude oil in New York, meanwhile, was down 3.4% to $42.98 just before the close after peaking at $46.53.

Why the Fed moved

The goal of today's rate decision is to help jump-start an economy that's now suffering one of the worst recessions since World War II.

However, the practical effect of the rate move is problematic. The Fed has cut its fed funds rate nine times since September 2007, when the rate was at 5.25%. It has poured trillions of dollars of cash into the economy and started buying up assets from financial institutions.

Yet the recession continues to worsen.

The latest indication was reports today that housing starts and building permits in November plunged to their lowest levels since records started being kept in 1947 and are expected to show equally large drops in coming months.

At the same time, consumer prices, which had started to fall in October, accelerated their decline to a record 1.7% in November, as energy costs declined sharply across the board.

"This is scary stuff," said Mike Schenk, an economist for Credit Union National Association, told MarketWatch. "We are teetering on the brink of a massive downward spiral. Deflation is a threat."

Home prices have been falling for more than a year and the major stock market indexes are off at least 40% from peaks in the fall of 2007. The S&P 500 financial sector index has fallen 69% since spring 2007 and absorbed the collapses of Bear Stearns, Lehman Bros. and Washington Mutual.

Jobs' non-appearance raises health questions

Apple (AAPL, news, msgs) was just a bit player in the rally, up 0.7% to $95.43. But its shares fell more than 5% after hours when the company said CEO Steve Jobs won't deliver the keynote address at the Macworld show in January.

In fact, Apple won't participate in the show after 2009, where Apple has unveiled a host of snazzy new products, after 2009, saying it has to be more prudent in its marketing spending.

The announcement immediately prompted questions on whether the decision is related to Jobs' health problems. He has had a form of pancreatic cancer and looked decidedly gaunt at a number of events in the spring.

Apple did not comment on the question.

Another theory was that Apple doesn't have any blockbuster products to introduce this year, and its Macintosh computer sales are being pressured by discounts offered by Hewlett-Packard (HPQ, news, msgs) and Dell (DELL, news, msgs).

Apple finished at $92.80, down 2.8% in after-hours trading. The shares are down more than 50% this year.

Inflation? What inflation?

The 1.7% decline in consumer prices in November was the biggest monthly decline since the Commerce Department first started tracking the data in 1947. That gives the Fed freedom to move aggressively to stimulate lending and, ultimately, demand.

The Consumer Price Index fell 1.4% last month, a bigger decline than the 1.3% drop economists had expected. Core prices, which exclude volatile food and energy prices, were flat last month. The consensus estimate was for an increase of 0.1%.

Energy prices plummeted 17% in November from October, and gasoline prices slumped 29.5% last month -- a record decline.

The CPI fell 1% in October, and the core CPI declined 0.1%.

More weak news on housing

Housing starts plunged 18.9% in November to an annual pace of 625,000, the lowest rate since 1959 when the Commerce Department started to keep record in their current form. Other sources suggest the level was the worst since 1947. Economists had expected a drop to 736,000 last month.

Building permits, a key gauge of future activity for the housing market, slumped 15.6% in November, to a seasonally adjusted annual rate of 616,000. Economists had expected a pace of 700,000 last month.

The housing slump has been at the center of the economic downturn. On Monday, the National Association of Home Builders said their monthly survey on builder sentiment remained at a record low of 9.

"It is going to be a very cold winter indeed for homebuilders," MFR analyst Joshua Shapiro told The Wall Street Journal.

But homebuilding stocks rallied on the Fed decision. Ryland (RYL, news, msgs) was up 12.1% to $19.54. Lennar (LEN, news, msgs) jumped 11.4% to $9.81.

Goldman posts first loss ever

Goldman Sachs' fourth-quarter loss was the financial giant's first since going public in 1999.

On a per-share basis, Goldman lost $4.97, worse than the $3.73 consensus estimate. The company blamed "extraordinarily difficult operating conditions."

Goldman earned a record $7.01 per share a year ago.

"The fear in the market was (that) the results would be much worse, so the stock is rallying," Walter Todd, portfolio manager at Greenwood Capital Associates in Greenwood, S.C., told The Associated Press.

Revenue from Goldman's investment banking division fell by half to $1.03 billion, and asset management revenue fell 19% to $945 million.

Before the start of trading today, Goldman Sachs shares had fallen 69% on the year. Today's gain trimmed the loss to just under 65%.

Morgan Stanley (MS, news, msgs) will report its fourth-quarter results Wednesday morning. Analysts expect a loss of 37 cents per share.

Morgan Stanley shares were up 18.3% to $16.13.

SEC sees failures in Madoff case

Late today, SEC Chairman Christopher Cox said initial findings of an investigation into the commission's handling of the Bernard Madoff case are "deeply troubling."

In a statement, Cox said the investigation has discovered that Madoff "kept several sets of books and false documents, and provided false information involving his advisory activities to investors and to regulators."
Cox said the SEC had "credible and specific allegations" going back to at least 1999 that were not aggressively pursued by the staff. The agency relied only on Madoff's voluntary production of statements and reports and never carried out subpoenas of other information, in what he described as "multiple failures."

Cox asked the agency's inspector general to investigate the SEC's handling of complaints about Mr. Madoff, including contacts between the SEC staff and Madoff and his family.

Late Monday, a federal judge ordered the liquidation of Bernard L. Madoff Investment Securities, and the Securities Investor Protection Corp. designated Irving Picard as trustee.

The SIPC was created by Congress in 1970 to protect investors when brokerages fail.

Andrew Rosenbaum contributed to this report.

Short hits from the markets -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	0.025%	0.005%	0.020	25.00%	-99.20%
5-year Treasury note yield	1.347%	1.488%	-0.141	-30.71%	-61.01%
10-year Treasury note yield	2.363%	2.533%	-0.170	-20.09%	-41.44%
30-year Treasury bond yield	2.874%	3.001%	-0.127	-17.58%	-35.55%
Currencies
U.S. Dollar Index	81.595	83.085	-1.490	-5.89%	6.39%
British pound in dollars	$1.5603	$1.5321	0.0282	1.42%	-21.56%
Dollar in British pounds	£0.6409	£0.6527	-0.0118	-1.40%	27.49%
Euro in dollars	$1.4079	$1.3710	0.0369	10.91%	-3.67%
Dollar in euros	€ 0.7103	€ 0.7294	-0.0191	-9.84%	3.81%
Dollar in yen	89.00	90.58	-1.58	-6.89%	-20.43%
Canadian dollar in U.S. dollars	$0.829	$0.812	$0.0176	2.64%	-16.49%
U.S. dollar in Canadian dollars	$1.207	$1.232	-$0.0253	-2.57%	19.74%
Commodities
Gold	$842.70	$836.50	$6.20	2.89%	0.56%
Copper	$1.3785	$1.4050	-$0.03	-16.43%	-54.67%
Silver	$10.7050	$10.6200	$0.09	4.64%	-28.25%
Corn	$3.9075	$3.7525	$0.16	11.80%	-14.22%
Crude oil (NYMEX) (per barrel)	$43.60	$44.51	-$0.91	-19.91%	-54.57%