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Mortgage Plan Props Up Stocks

Financials and homebuilders lead the rise on Wall Street.

Updated from 4:07 p.m. EST

Stocks in the U.S. closed sharply higher Thursday as investors hoped a government plan to help struggling homeowners would also allow lenders to get a handle on the damage being done to their earnings by the subprime meltdown.

The

Dow Jones Industrial Average

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rose 174.93 points, or 1.3%, to 13,619.89, and the

S&P 500

added 22.33 points, or 1.5%, to 1507.34. The

Nasdaq Composite

gained 42.67 points, or 1.6%, to 2709.03.

Breadth was strong, and on the

New York Stock Exchange

advancers topped decliners by nearly a 4-to-1 margin as 3.38 billion shares changed hands. Volume on the Nasdaq reached 1.97 billion shares, with winners beating losers 7 to 3.

The market climbed after President Bush endorsed a much-anticipated proposal to aid troubled borrowers in saving their houses from foreclosure. Treasury Secretary Henry Paulson outlined the plan, characterizing it as "not a silver bullet" or a bailout.

Countrywide

(CFC)

, the nation's biggest mortgage lender, jumped 16.1% after the proposal's official unveiling. Government-sponsored mortgage buyer

Freddie Mac

closed 7% higher, and

Fannie Mae

added 7.2%.

The plan was revealed on the same day that homebuilder

Toll Brothers

(TOL) - Get Report

posted its first quarterly loss in more than two decades and said the just-completed fiscal year was in many ways its most challenging in 40 years of business. Still, Toll Brothers rallied by $2.70, or 13%, at $23.42.

Meanwhile,

Federal Reserve

Governor Randall Kroszner gave testimony before the U.S. House of Representatives on loan modifications and foreclosure prevention, saying that he and his colleagues are actively working to respond.

"Given the substantial number of resets expected from now through the end of 2008, it is in the interest of the industry to go further than it has historically to join together and explore collaborative, creative efforts to develop prudent loan-modification programs and other assistance to help large groups of borrowers systematically," he said.

Adding to the evidence of the trouble in the sector, the Mortgage Bankers Association said 5.59% of payments were delinquent during the third quarter, the worst level in 20 years.

Merrill Lynch downgraded several financials, taking

Wells Fargo

(WFC) - Get Report

,

M&T Bank

(MTB) - Get Report

and

Old National

(ONB) - Get Report

to sell. The firm lowered

Goldman Sachs

(GS) - Get Report

and

Morgan Stanley

(MS) - Get Report

to neutral.

Even so, most stocks in the group closed higher, and the NYSE Financial Sector index was up 2.2%. The Amex Securities Broker/Dealer Index advanced 3.7%. The Philadelphia Stock Exchange Housing Sector Index soared 7.9%.

Though the bid to start righting the mortgage mess was the story of the day, investors also pored over a slew of retail same-store sales for November, which included the all-important Black Friday sales data.

Wal-Mart

(WMT) - Get Report

,

Costco Wholesale

(COST) - Get Report

and

Gap

(GPS) - Get Report

topped expectations, but

Limited

(LTD)

and

Family Dollar

(FDO)

were weaker than expected.

Target

(TGT) - Get Report

was one of the big disappointments, saying softness in the final days of November means it will need a strong December if it wants to meet its fourth-quarter profit numbers. Shares of Target lost $4.56, or 7.6%, to close at $55.57.

Outside the U.S., the Bank of England cut its key interest rate to 5.50% from 5.75%, citing slowing growth. It was the Bank of England's first rate reduction in more than two years.

However, the European Central Bank left rates unchanged after its own gathering, and ECB chief Jean-Claude Trichet ramped up the hawkish rhetoric, saying he wants to make sure rising oil prices don't cause consumer prices to climb too quickly.

Bloomberg

quoted Trichet as saying there was "strong short-term upward pressure on inflation'' and that he and his fellow policymakers are prepared to "counter upside risks to price stability."

Following Trichet's remarks, London's FTSE 100 and Germany's Xetra Dax dipped 0.1%.

"Trichet made comments that were very anti-inflationary, clearly showing that the ECB is not on board with any rate cut," said Paul Mendelsohn, chief investment strategist with Windham Financial.

The

Federal Reserve

is facing its own dilemma, and over the past few weeks, officials have offered a mixed message regarding the possibility of added cuts.

While some members appear worried that the housing and credit slump has the potential to undermine economic growth, others express concern that commodity prices are stoking inflation and that easing again will only exacerbate that. The central bank will meet next Tuesday.

Many traders are counting on a cut of at least 25 basis points.

Some analysts believe Friday's jobs report could be crucial to whether the fed funds target rate will be reduced for the third straight time. The Labor Department is expected to say that the U.S. economy added around 70,000 jobs in November. The unemployment rate probably rose to 4.8%, while average hourly earnings, a key inflation metric, should climb 0.3%.

"I'm a little surprised with today's strong finish, especially with an important report in the nonfarm payrolls due tomorrow," said Robert Pavlik, chief investment officer with Oaktree Asset Management. "I'm concerned this rally may not last, especially since the jobs report will be key in determining whether the Fed will cut rates or not."

Before the opening bell, the Labor Department posted the last weekly jobless claims report before employment report. Initial jobless claims fell by 15,000 to 338,000 last week, while the four-week moving average of claims rose by 4,750 to 340,250.

"The four-week average is now just over 340,000, its highest level since the aftermath of

Hurricane Katrina," said Ian Shepherdson, chief economist with High Frequency Economics. "We doubt claims are set to explode as they did in 2001 but they are already high enough to suggest that payroll growth will slow over the next few months, regardless of what happens in tomorrow's November report."

U.S. Treasury securities were sliding. The 10-year note was down 13/32 in price to yield 4.01%. The 30-year bond was off 14/32 in price, yielding 4.47%.

Commodities reversed early weakness and ended higher on the day. Crude oil added $2.74 to $90.23 a barrel. Gold futures ended up $3.40 an ounce at $807.10, and silver tacked on 16 cents at $14.62 an ounce.