Stock Market

Return to Article

Dow Soars More Than 400 Points

Sarina Penn

Stocks in the U.S. staged a mammoth rally Tuesday after the Federal Reserve's latest attempt to stabilize the markets brought in droves of buyers and forced traders who were heavily short to run for cover.

The Dow Jones Industrial Average bolted up 416.66 points, or 3.6%, to 12,156.81, and the S&P 500 jumped 47.28 points, or 3.7%, to 1320.65. The Nasdaq climbed 86.42 points, or 4%, at 2255.76.

Breadth was positive. Some 5.25 billion shares changed hands on the New York Stock Exchange, with advancers outpacing decliners by a 4-to-1 margin. Volume on the Nasdaq reached 2.5 billion shares as winners beat losers 7 to 3.

The major indices have been taking such huge hits in recent months that all three are still down substantially for the year -- the Dow by 8.3%, the S&P by 10.1%, and the Nasdaq by 14.9%. But, for the month thus far, all three indices have pared back their losses to under 1% apiece.

Equity measures climbed after the central bank said it was putting another $200 billion of liquidity into the markets through an arrangement that will lend Treasuries to primary dealers in exchange for mortgage-related paper.

The new Term Securities Lending Facility will provide 28-day loans in exchange for collateral including debt and residential-mortgage-backed securities from government-sponsored entities Fannie Mae (FNM) and Freddie Mac (FRE), along with nonagency highly rated private-label residential mortgage-backed securities.

Additionally, the Federal Open Market Committee, the policymaking arm of the Fed, has authorized an increase in its existing currency swaps with the European Central Bank and the Swiss National Bank.

James Glassman, senior economist with JPMorgan Chase, said it was the first creative thing he has seen the Fed do since the advent of the credit crunch. "It provides a little more of a calming backdrop, and it takes pressure off those institutions," Glassman said. He also pointed to the deal's psychologically important global reach, given the Fed's collaboration with some of its foreign counterparts.

Brandon Thomas, chief investment officer with Portfolio Management Consultants, the investment arm of Envestnet Asset Management, noted that the market has become accustomed to rate cuts from the Fed, whereas this latest action is a far more targeted tool, allowing banks to borrow against illiquid issues such as mortgage-backed securities for longer periods of time.

"It's not going to be a panacea for all the ills in the economy, but it will get liquidity coursing through the system," he said. "Rate cuts can do that, but that's a much blunter instrument that the banks may or may not take advantage of, depending on whether they choose to lend more money."

The central bank's move comes on the heels of its decision last week to inject an added $140 billion in short-term credit and to take on difficult-to-sell asset-backed paper as collateral.

Since the credit crisis began in earnest last summer, the Fed has taken steps to help the banking arena regain its footing, including cutting its overnight lending rate, the fed funds target rate, by 225 basis points to 3%. However, many traders have felt Chairman Ben Bernanke and his lieutenants haven't been aggressive enough in mitigating the turmoil.

Glassman, for his part, said, "I don't really think the rate decision the Fed makes is really that critical anymore," referring to the Fed's next meeting on March 18, which is expected to result in an easing of as much as three-quarters of a point.

Futures are now pricing in only a 76% chance that the Fed will cut rates by 75 basis points, down from 100% odds on Monday.

"Figuring out how to crack through the barrier of fear is the main thing," Glassman said. "The markets are highly illiquid, and these kinds of actions are more of what's needed."

Thomas said the newest measure should give the market some time to find its footing. "But eventually investors are going to want to see some hard data, particularly improvements in employment and in the GDP," he said.

Still, given the magnitude of the rally, he expects the upturn to sustain itself for at least the remainder of the week.

The new day brought one optimistic economic indicator from the University of California at Los Angeles, whose quarterly Anderson Forecast projected that the U.S. would not enter a recession this year unless the credit crisis worsens even further.

However, a Bloomberg survey showed that economists believe the slowdown in the U.S. will be worse than previously expected and the recovery not as pronounced as had been thought.

For now though, financial stocks were rising virtually across the board. Citigroup (C) jumped 9.1%, and Bank of America (BAC) rose 6.8%. Wells Fargo (WFC) was up 10.5%.

Washington Mutual (WM) spiked 18.3%, meanwhile, as rumors swirled that it might receive investments from Warren Buffett or Goldman Sachs (GS).

Goldman itself, along with fellow investment banks JPMorgan Chase (JPM) and Morgan Stanley (MS), were advancing between 5% and 11%.

Elsewhere in the financial space, bond insurers MBIA (MBI) and Ambac (ABK) climbed 12.7% and 6%, respectively, while Freddie and Fannie gained 15.9% and 11.1%, respectively.

Jumping on the bandwagon was Thornburg Mortgage (TMA), whose shares more than doubled. The mortgage lender restated year-ago earnings far downward to reflect the shrunken value of mortgage-backed assets, but also said it was working with its lenders to meet margin calls, news of which had pounded its stock last week. Shares vaulted 120% to $1.56.

Separately, Citi is putting $1 billion in six of its municipal bond funds in order to protect them from margin calls, according to a report in The New York Times. The funds, the report said, have $15 billion in assets, and have already received roughly $600 million.

Also leaping was Hovnanian Enterprises (HOV) even though the struggling homebuilder widened its fiscal first-quarter loss from a year earlier and missed estimates. Then, CEO Ara Hovnanian told CNBC that he couldn't call a bottom in the housing contraction just yet. Still, shares were better by 16.4%.

Over in the tech sector, Google (GOOG) has closed its deal to buy Web ad-services firm DoubleClick on the heels of approval from the European Commission, which said the merger wouldn't unfairly hurt competitors. Google shares added 6.3% to $439.84.

As most parts of the market rallied, however, health insurers struggled mightily. WellPoint (WLP) was one of the hardest hit, slumping more than 28% to $47.26 after it downwardly revised its profit forecast.

At the same time, Aetna (AET) sank 8.3% to $42.65 after it repeated its projection that full-year operating earnings would be $4 a share and first-quarter profits would be 92 cents. While Aetna said the same thing before, both are below estimates.

UnitedHealth (UNH), Humana (HUM) Coventry Health (CVH) lost between 13% and 24%.

Shares of Texas Instruments (TXN) fell 3% to $28.76 after the chipmaker whittled down its current-quarter forecast for both income and revenue, saying that an unidentified cell-phone maker has cut down on orders.

Boeing (BA) said it will file a formal protest after losing a $40 billion Air Force contract to Northrop Grumman (NOC) and European Aeronautic Defence & Space. Shares of Boeing shed 1.3%.

Following the last close, Bear Stearns (BSC) CEO Alan Schwartz echoed Ace Greenberg, chairman of the company's executive committee, in brushing off speculation that the firm has liquidity problems. In a statement, he said "Bear Stearns' balance sheet, liquidity and capital remain strong." Bear's shares saw action on both sides of the flat line, and finished up 1.1%.

On the economic front, the sole government release revealed a February trade deficit that, at $58.2 billion, was slightly better than the expected $59 billion. That figure, issued by the Census Bureau, represents the value by which imports into the U.S. outweighed exports last month.

As for commodities, crude oil resumed its red-hot surge into prices never before seen, bouncing to $109.72, another record, before deflating to a gain of 85 cents at $108.75. Also, unleaded gas prices at the pump picked up slightly to a new U.S. record -- $3.227 a gallon, on average, according to AAA. Gold futures tacked on $4.30 to $974.20.

Treasury prices were pulling back. The 10-year bond tumbled 1-9/32 in price to yield 3.61%, and the 30-year note slid 27/32 in price, yielding 4.52%.

Overseas markets were mostly higher. The Nikkei 225 added 1% to 12,658.28, and Hong Kong's Hang Seng Index rose 1.3% to 22,995. As for Europe, the FTSE 100 Index of London gained 1.1%, and Germany's Xetra Dax was up 1.2%.