Bustling Bank Stocks Lift Market

UBS and Lehman are among the names climbing in New York, and the major averages begin the second quarter with hefty gains. Frank Curzio reviews the action in The Real Story (above).
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Updated from 4:07 pm. EDT

Stocks in the U.S. blasted higher Tuesday as investors bet that the world's biggest banks are finally nearing the end of the mammoth writedowns that have plagued financial markets since last year.

The

Dow Jones Industrial Average

barely let up today, surging 393.91 points, or 3.2%, to finish at 12,656.80 -- only 3 points off the day's high. The

S&P 500

vaulted by 47.48 points, or 3.6%, to 1370.18, and the

Nasdaq Composite

jumped 83.65 points, or 3.7%, to 2362.75.

Breadth was positive. Around 4.75 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 roughly 2.16 billion as winners beat losers 7 to 2.

"What better way to start a new quarter after two lousy ones?" said Steven Sheldon, CFA and principal with SMS Capital Capital Management. "I think there's probably some hopeful buying going on today, that maybe we're finally due for a decent run here, or at least that the worst is behind us."

Owen Fitzpatrick, head of equity strategy with Deutsche Bank Private Wealth Management, pointed out that money managers could be positioning themselves ahead of an expected recovery. "Whether today is a head-fake or not, we will see, but at some point it'll become real. There are a lot of reasons why equities should recover from their lows at year-end," he said.

The beginning of the second quarter saw more financial names predicting they will write down large swaths of bad assets.

UBS

(UBS) - Get Report

announced that it will write off $19 billion for the first quarter and take a loss of $11.94 billion. The Swiss bank also said it will raise money by selling $15.1 billion in new shares and that Chairman Marcel Ospel will step down and be replaced by Peter Kurer.

Still, said Fitzpatrick, "I think people are getting comfortable that maybe the peak of the writeoffs is approaching, that maybe this is the quarter where we see the proverbial kitchen sink thrown in."

Richard Yamarone, chief economist with Argus Research, remained cautious. "It would be great if that comes true," he said. "It's almost, 'Ding dong, the witch is dead, nothing but blue skies ahead.' And I hope that's the case. But hope is an emotion; it's not a strategy, so I would be cautious here. I would accept it as a potential turning point."

As investors nursed those hopes, UBS shares ramped up 14.6%. The stock also got an upgrade to buy from hold at Deutsche Bank, and a JPMorgan analyst suggested that the company is trying to leave its subprime woes behind in order to focus on core operations.

Deutsche Bank

(DB) - Get Report

itself, meanwhile, rose 4.2% despite pegging its first-quarter writedowns at $4 billion.

Similarly, both

Citigroup

(C) - Get Report

and

Merrill Lynch

(MER)

spiked even though Goldman Sachs cut bottom-line estimates on each for the first quarter, predicting that more writedowns will force the firms into quarterly losses, according to

Bloomberg

. Shares added 11.3% and 13%, respectively.

At the same time,

Lehman Brothers

(LEH)

set plans to offer up to 3.45 million shares of convertible preferred stock, after which shares bounced 17.8% in very heavy trading.

That helped boost the Amex Securities Broker-Dealer Index, which soared 8.6%. The

NYSE

Financial Sector Index rocketed 6.1%, and the KBW Bank Index was up 7.1%.

"It's interesting to see things rallying in the face of two pretty good-sized writedowns," said Bill Stone, chief investment strategist with PNC Wealth Management. "I think it's come to where people are able to take some of the worst-case off the table because

financial firms are raising capital ahead of when they need it," he added, referring particularly to Lehman.

Sheldon noted that it's probably premature to proclaim an end to the writedowns, and Fitzgerald concurred, saying that these will "definitely" linger for at least a couple more quarters. He added, however, that the year-over-year comparisons will get much better in the third quarter, the anniversary of when financials began taking massive hits. "The market always seems to react to that even though everyone already knows about it," he said.

Elsewhere,

Thornburg Mortgage

(TMA)

, climbed 19.8% on word the beleaguered mortgage lender has succeeded in raising $1.35 billion in bonds, warrants and a "participation in certain mortgage-related assets." Thornburg said it will use the $1.15 billion in proceeds to pay off margin calls that had threatened its continued existence last month.

Also brightening the mood were positive nationwide manufacturing data from the Institute for Supply Management. The ISM index came in at a better-than-expected 48.6 in March, indicating a somewhat less severe contraction than the prior month's reading of 48.3. Economists were looking for 47.5.

"Any time you get any slightly better-than-expected news, it's the same as the writeoffs," said Stone. "There's a sigh of relief: 'the world's not ending today.'"

Home-construction spending, meanwhile, slowed its decline to just 0.3% in February, compared with the prior month's slide of 1.7%, according to the Commerce Department. The consensus had called for negative 0.9%.

As traders piled into equities, Treasury prices plummeted. The 10-year note was sinking 1-10/32 in price to yield 3.57%, and the 30-year bond was off 1-31/32 in price, yielding 4.41%.

Commodities also lost ground. Crude oil shed 60 cents to settle at $100.98 a barrel, and gold futures gave up $33.70 to $887.80 as the front-month contract turned over to June.

The U.S. dollar was strengthening significantly earlier in the day but dropped back to $1.5600 against the euro, a fraction worse than yesterday. The greenback erased its gains against the yen, as well, dipping 0.1% to 101.92.

Back on the corporate front,

The Wall Street Journal

reported that

Microsoft

(MSFT) - Get Report

probably won't sweeten its $44.6 billion takeout bid for

Yahoo!

(YHOO)

, according to people close to the company. Microsoft shares rose 4%, while Yahoo! dropped 1.5%.

Fellow tech name

Dell

(DELL) - Get Report

tacked on 2% after saying it will close its Texas desktop-manufacturing plant as part of a three-year push ultimately to save $3 billion a year. The plan also includes more layoffs, as previously announced, which should in the end total at least 8,800.

In notable analyst actions,

VMWare

(VMW) - Get Report

was simultaneously upgraded to outperform at Wachovia and cut to underperform at Credit Suisse. Shares of the software company ended up 6.8%.

Home-furnishing retailer

Pier 1 Imports

(PIR) - Get Report

was upped to buy from hold at Deutsche Bank, bringing shares higher by 9.9%. Wachovia began coverage of

Level 3

(LVLT)

with an underperform rating, and

NYSE Euronext

(NYX)

had its price target cut at Jefferies. Level 3 stock closed off 0.5%, but shares of NYSE were better by 7%.

The major overseas markets were climbing. In Asia, Tokyo's Nikkei 225 rose 1%, and Hong Kong's Hang Seng Index added 1.3%. European exchanges, meanwhile, revved up their gains amid the surge in U.S. shares. London's FTSE leapt 2.6%, Germany's Xetra Dax gained 2.8%, and the Paris Cac advanced 3.4%.