Updated from 4:14 p.m. EST
After a Tuesday marked with choppy trading, blue-chip stocks eked out a third straight day of gains, after the
announced $800 billion in new federal programs to help fix frozen credit markets. Technology stocks, on the other hand, lost ground following weak earnings results from sector giant
Dow Jones Industrial Average
, at one point up some 164 points and at another down 161 points, ended the session with a gain of 36.47 points, or 0.4%, at 8479.86. The
added 5.6 points, or 0.7%, to 857.41, but the
dropped 7.29 points, or 0.5%, to 1464.73.
An opening rally by the major averages followed the Fed's announcement that it would use $600 billion to buy direct obligations and
tied to the Federal Home Loan Banks and
The Fed said it would dedicate $100 billion to the outstanding debt of the government-sponsored entities and another $500 billion to purchases of their mortgage-backed securities.
To put such a move in perspective, $500 billion is a year's worth of new issuance of mortgage-backed securities, said David Ader, bond strategist at RBS Greenwich Captial. "It's had a very very dramatic and impressive effect," he said.
Brian Bethune, director of financial economics at Global Insight Economics, said that the Fed is trying to reduce spreads on the value of Fannie and Freddie securities relative to Treasuries. Bethune said that reducing those spreads, which are at unusually high levels, would in turn translate to lower mortgage rates.
Ader of RBS Greenwich said that in addition to removing some of the agency paper from the market, the Fed's move also has a psychological impact by removing blockage in the credit markets. "This may open up the way for other people to say 'they're involved in this stuff; I'm going to buy mortgages too.'" He said that although flooding the market with money runs a longer-term risk of inflation, "This is a crisis we need to deal with."
"The growth of mortgage credit has literally collapsed," said Bethune of Global Insight, as mortgage lenders have been hesitant to originate loans because the prices of homes continue to fall. In addition, he said, Fannie and Freddie themselves reduced the amount of credit they were generating as they ran into capital constraints earlier this year. "It really is a very difficult situation," he said.
The Fed also announced the creation of a $200 billion facility for holders of triple-A rated asset-backed securities tied to loans related to education, autos, credit cards and small businesses.
Speaking at a press conference about the Fed programs and the $700 billion Troubled Asset Relief Program, Treasury Secretary Henry Paulson said that stabilization of the mortgage-backed securities market and stimulation of consumer-lending markets are crucial. He said that Americans need to continue to be able to finance everyday purchases and stressed that no single piece of legislation was likely to resolve the credit crisis.
An early rally on the news of government assistance quickly gave rise to profit-taking, however, as investors remained skittish about the financial crisis' continued impact on the economy.
"Volatility is the norm here and not the exception," said Art Hogan, chief market analyst at Jefferies, of the market's reaction to the new government programs. Hogan said the announcement of the new TARP initiatives were already telegraphed to the market and the previous two-day rally had been in part a reaction to additional intervention. "We may have celebrated this news already," he said.
Bill Stone, chief investment strategist for PNC Wealth Management, said that aid for asset-backed commercial paper is a continuation of recent efforts to unfreeze credit markets. By facilitating the securitization of asset-backed bonds, the government is encouraging additional lending for consumer purchases, he said. When lending is too tight, said Stone, "Even if the deals are good, it doesn't make any difference. Not many of us can pay in cash."
Stone said that the Fed's intervention is bullish for the markets, as it helps stocks price in a time frame for the length of a recession. "The longer the credit crunch goes on, the longer we have to assume the recession goes on," he said.
Hogan of Jefferies said that the government has made a good public-relations move by shifting its focus to the needs of the consumer. Intervention in the mortgage-backed securities market, credit cards, and student loans are all directed at the Main Street as opposed to Wall Street, he said.
As trading got underway, several financial firms appeared to be getting government help as well.
sold $5 billion in government-guaranteed securities maturing in June 2012.
are expected to stage similar government-assisted bond sales. Goldman shares rose 6.5% to $71.78.
Meanwhile, staggering insurance firm
American International Group
announced voluntary restrictions on executive compensation and said that CEO Edward Liddy would receive a base salary $1 a year for 2008 and 2009. AIG has received hundreds of billions of dollars in government investments and aid this year. Shares ended the day flat at $1.77.
As financial firms continued to weave their way through the credit crisis, the
announced that its count of troubled banks climbed from 117 in the second quarter to 171 in the third quarter. The agency also said that the total assets controlled by problem banks increased from $78.3 billion to $115.6 billion in the same period.
FDIC head Sheila Bair said in a press conference that the increase in the number of problem banks reflects ongoing troubles in the U.S. economy and the seizure in the credit markets.
"I don't think there's any great surprises," said Hogan of Jefferies. "Unfortunately we know that there are a lot of banks that have issues, and a lot of them will be folded into other banks by the end of the year."
President-elect Barack Obama
announced his selection of Peter Orszag to direct the Office of Management and Budget. Orszag is currently the director of the Congressional Budget Office. Obama also named majority staff director of the House Appropriations Committee Robert Nabors as deputy director of the OBM.
Obama also said that the current financial crisis will warrant careful watchfulness of government spending and targeted initiatives to help stimulate growth.
The day's economic data were less than rosy. The Bureau of Economic Analysis revised its read of the third-quarter
decline in GDP
to 0.5% from 0.3%.
Separately, the Conference Board's November
consumer confidence index
gave a reading of 44.9, up from 38 in October and ahead of economists' forecasts.
The Standard & Poor's Case Shiller home price index, meanwhile, showed a third-quarter decline of 16.6% year over year, the worst decline on record.
In Europe, the
Organization for Economic Cooperation and Development
said that the developed world may face the worst recession it has seen since the early 1980s.
Looking at earnings news, computer systems maker and Dow component
delivered earnings that beat estimates on the top line but saw profit decline slightly year over year. Shares dropped 5.9% to $33.60.
In the merger space, mining concern
dropped a hostile takeover bid for
on a sharp decline in commodity prices and tough credit conditions. BHP gained 15% to $38.27, and Rio Tinto fell 27% to $106.09.
Moving on to commodities, crude oil lost$3.73 to settle at $50.77 a barrel. Gold was down $1 to close at $818.50 an ounce.
Longer-dated U.S. Treasury securities were soaring in price. The 10-year was up 2-4/32, yielding 3.08%. The 30-year was gaining 3-16/32 to yield 3.60%. The dollar was falling vs. its major foreign competitors.
Overseas, European exchanges, such as the FTSE in London and the Dax in Frankfurt, were eking out gains. Asian markets, including Japan's Nikkei and Hong Kong's Hang Seng, finished on the upside.