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Stocks Remain in Rally Mode

The stock market holds to early gains as investors digest new Fed support for the markets and more M&A talk in the financials space.
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Updated from 9:44 a.m. EDT

Stocks in New York were climbing Thursday as traders brushed aside the previous day's heavy losses and focused on potential mergers in the financial sector and the

Federal Reserve's

new effort to add liquidity to the money markets.


Dow Jones Industrial Average

climbed 156 points to 10,766, and the

S&P 500

tacked on 20 points to 1177. The


jumped 33 points to 2132.

On Wednesday, stocks took a severe beating following the government bailout of insurance firm


(AIG) - Get Free Report

, which reminded investors of the severity and scope of the credit crisis. Pessimism on Wall Street was ramping in the wake of the AIG bailout, a bankruptcy for

Lehman Brothers


and a last-minute merger between

Merrill Lynch



Bank of America

(BAC) - Get Free Report


Ahead of Thursday's trading, more news emerged from the struggling financials space.

Washington Mutual

(WM) - Get Free Report


Goldman Sachs

(GS) - Get Free Report

to help it prepare for a sale, while private equity firm TPG had helped clear the way for a merger by waiving an anti-dilution clause that would make WaMu pay for any dilution related to a capital raise or buyout.

Dow Jones replaced AIG with



on its 30-stock Industrial Average index, and Lehman Brothers ceased trading on the

New York Stock Exchange

and instead took residence on the pink sheets under the ticker LEHMQ.PK.


The New York Times

and other news outlets reported that

Morgan Stanley

(MS) - Get Free Report

was in discussions to merge with


(WB) - Get Free Report

. The Government of Singapore Investment Corp. said it would take a stake in Morgan if approached, and


reported that HSBC and China's CITIC Group were also interested. On Wednesday, Morgan Stanley and Goldman Sachs shares both faced pressure as investors speculated about which financial firm would be the next to fall.


Federal Reserve

and other central banks, including the Bank of England, announced Thursday they would coordinate efforts to mitigate damage from the credit crisis. The Fed said it would provide an additional $180 billion for its temporary reciprocal currency arrangements. This added support would provide dollar funding for both term and overnight liquidity operations by other central banks.

Although it's hard to gauge the long-term impact of the Fed's overnight operations, the short-term impact has been relief, followed by a return to credit stresses, said Mike Feroli, economist at JPMorgan. "So far, we're at least getting the first half of that proposition," he said. He said that the Bank of England's involvement may provide additional support, because London money markets show high demand for dollar funding.

As for earnings, shipping firm


(FDX) - Get Free Report

before the opening bell reported first-quarter earnings of $384 million, or $1.23 a share, vs. $494 million, or $1.58 a share, a year ago. Despite the drop in EPS, the results met Thomson Reuters analyst estimates.

In the commodities space, crude oil was rising 74 cents at $97.90. Gold was up $15.50 at $866 an ounce, after settling up $70 an ounce on Wednesday, the biggest one-day price jump ever.

Shifting to economic data, the Department of Labor's reported a surprise rise in initial jobless claims to a seasonally adjusted 455,000 for the week ended Sept. 13, up 10,000 from the prior week. Analysts had expected the figure to dip to 440,000, but the report reflects job losses associated with Hurricane Gustav.

Traders got an added boost in confidence from the Philadelphia Federal Reserve's September manufacturing report. The survey showed an reading of 3.8, beating expectations and improving dramatically from -12.7 in August.

Longer-dated Treasury securities were falling in price. The 10-year note was down 11/32, yielding 3.45%. The 30-year was 17/32 lower to yield 4.1%.

Overseas, European indices including the FTSE in London and the DAX in Frankfurt were gaining ground. Asian markets, such as the Nikkei in Tokyo and Hong Kong's Hang Seng, finished in the red.