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Bernanke, Bush Boost Stocks

Robert Holmes

Stocks in the U.S. rallied Friday after Federal Reserve Chairman Ben Bernanke addressed the current subprime mess and President Bush moved to offer federal help to mortgage borrowers.

The Dow Jones Industrial Average jumped 119.01 points, or 0.9%, to 13,357.74, led by a 3.4% jump in shares of Home Depot (HD Quote). The S&P 500 added 16.35 points, or 1.12%, at 1473.99, and the Nasdaq Composite rose 31.06 points, or 1.21%, to 2596.36.

While the major averages finished the week nearly unchanged, the market logged its first winning month since May. The Dow added 1.1% in August, the S&P 500 climbed 1.2%, and the Nasdaq jumped 2%.

The gains came after a speech from Bernanke on housing and monetary policy in Jackson Hole, Wyo., and remarks from President Bush encouraging the use of Federal Housing Administration insurance.

In his speech, Bush noted that the subprime crisis is relatively modest compared with the entire U.S. economy, but he urged mortgage holders to refinance and count on the FHA if they become delinquent on adjustable-rate loans.

The president, however, emphasized that it is not the government's position to provide a wholesale bailout to all borrowers. He also promised to penalize predatory lenders.

"That's not really the answer to the subprime issue that's out there," said Robert Pavlik, chief investment officer with Oaktree Asset Management. "Too many people have bought homes that they can't afford. It's hard to protect people from themselves forever. There's a strong reaction to this proposal, but this isn't the answer."

While the president's plan took some of the heat off the central bank's chairman, Bernanke's testimony drove home the point that the Fed is still ready and willing to act if needed.

The speech didn't provide any indication of an interest rate cut at the bank's Sept. 18 meeting, but Bernanke reiterated that the Fed stands ready to "take additional actions as needed to provide liquidity and promote the orderly functioning of markets."

Bernanke also warned that "if current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the broader economy."

Additionally, he said that because of the recent developments in the financial markets, the Fed considers economic data from the past few months to be less useful in gauging economic activity and inflation.

"Consequently, we will pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts around the country," he said. "Inevitably, the uncertainty surrounding the outlook will be greater than normal, presenting a challenge to policymakers to manage the risks to their growth and price stability objectives."

Like President Bush, Bernanke also stressed that a widespread bailout won't be coming. "It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions," he said.

Paul Mendelsohn, chief investment strategist with Windham Financial, said that traders didn't get exactly what they wanted from Bernanke's speech in terms of policy.

"He isn't making any commitments to any move, which is what the market was really looking for," said Mendelsohn. "He did say we could see this spread further into the economy, which was unsettling to the market. Bernanke views this crisis as worrisome, and he basically said the Fed is not sure how big this problem will grow."

Breadth was strong for a second straight session. On the New York Stock Exchange 2.74 billion shares changed hands, as advancers topped decliners by a 4-to-1 margin. Volume on the Nasdaq reached 1.58 billion shares, with winners outpacing losers nearly 3 to 1.

Several economic reports were also in the spotlight. The Commerce Department said personal income rose a better-than-expected 0.5% last month, compared with a 0.4% rise in June. The core deflator -- a key Fed inflation gauge -- increased a mere 0.1%, and the year-over-year rate remained at 1.9% for the second straight month.

Elsewhere on the economic docket, the Chicago Purchasing Managers' index unexpectedly rose to a reading of 53.8 from 53.4, slightly higher than the consensus. The University of Michigan's consumer sentiment index, on the other hand, fell to a worse-than-expected reading of 83.4 in August from 90.4 last month.

U.S. Treasuries pared losses following the economic releases and the speeches from Bush and Bernanke. The 10-year bond was off 4/32 in price, pushing the yield to 4.53%. The 30-year note rebounded as well and was unchanged in price, yielding 4.83%.

After the prior session's close, Dell (DELL Quote) posted earnings that topped Wall Street's estimates. However, the stock was off 21 cents, or 0.7%, closing at $28.25.

Several credit and mortgage-related names finished higher. Accredited Home Lenders (LEND Quote) surged 43.4% to $9.05 after it got a revised, but reduced, buyout offer from Lone Star.

Countrywide (CFC Quote), Lehman Brothers (LEH Quote), and Bear Stearns (BSC Quote) also rose.

Elsewhere, the October front-month crude contract rose 68 cents to finish at $74.04 a barrel.

Overseas markets were higher. Japan's Nikkei 225 jumped 2.6%, and Hong Kong's Hang Seng rallied 2.1% overnight. In Europe, London's FTSE 100 and Germany's Xetra Dax both ended up 1.5%.