Stocks Tack on Gains as Bailout Hope Builds

Updated from 9:42 a.m. EDT

Stocks in New York were climbing sharply Thursday as the prospect of a quick bailout for financial firms trumped a gloomy earnings forecast from General Electric ( GE) and discouraging economic data.

The Dow Jones Industrial Average was up 217 points at 11,042, and the S&P 500 climbed 22 points to 1208. The Nasdaq added 33 points to 2189.

On Wednesday, the three major indices finished narrowly mixed after a day of erratic trading. Investors were focused on Treasury Secretary Henry Paulson's $700 billion bailout plan for the financial sector.

Speaking Wednesday evening in Washington, D.C., President Bush called for a quick approval of the Treasury's plan and warned the economy would face a recession if the package were not approved. Bush called an emergency meeting with presidential candidates John McCain and Barack Obama, as well as certain members of Congress, to work out a plan to pass the bill.

After Bush's speech, Rep. Barney Frank, chairman of the House Financial Services Committee, told CNBC that he believed the bill would pass.

"This crisis could result in a deflationary period, and that obviously would mean a prolonged, serious -- not recession, but depression," said Peter Cardillo, chief market economist at Avalon Partners. However, the plan is not without a price tag, he said. "It means the printing presses at Treasury will be running on full cylinders," said Cardillo, which means inflation remains a concern, "but it's the lesser of the two evils."

Cardillo said that if the Treasury buys back troubled assets, it's a step toward returning confidence to the financial system. The $700 billion price tag, he said, indicates that the Treasury "themselves don't know how much is out there, so they're going to the higher end of what they believe will do the trick." He said that it's possible the plan could end up costing $300 billion or $400 billion, but the ultimate price is uncertain.

For the system to function properly, the market needs to unwind derivatives and mortgage-backed assets, said Marc Pado, U.S. market strategist at Cantor Fitzgerald. "They're not going to take the risk of lending unless they know they can sell their toxic assets and the government is going to buy them." In the meantime, he said, institutions are holding on to their capital tightly.

Pado said the government's management of the most troubled mortgage-backed assets remains a concern. "They really haven't addressed that other than Paulson has said that some of this is going to have to be spun off to management agencies," he said.

Back on Wall Street, harried bank Washington Mutual ( WM) was approaching private equity companies, including Carlyle Group and Blackstone ( BX), about a potential takeover, according to a report in The Wall Street Journal Thursday.

Industrial conglomerate General Electric lowered its third-quarter profit forecast and suspended its stock-buyback program, citing weakness in the financial markets.

Cardillo said that ahead of earnings season, the market is expecting many corporations to lower their estimates, and he expects trading to remain defensive, without many drastic moves to the upside or to the downside.

Elsewhere, shareholders in Delta ( DAL) and Northwest ( NWA) are scheduled to vote on a merger between the two airlines, according to a report by the Associated Press.

As for corporate earnings, athletic apparel maker Nike ( NKE) reported first-quarter profit that increased year over year and bested the Street's estimates.

In analyst actions, Stifel Nicolaus initiated coverage of the airlines, assigning buy ratings to United parent UAL ( UAL), Delta ( DAL), Continental ( CAL) and American parent AMR ( AMR). Southwest ( LUV) garnered a hold rating from Stifel.

Looking at the day's economic data, the Census Bureau reported August durable-goods orders fell by 4.5%, a far wider decline than the 1.3% drop expected by economists and down from a 0.8% increase in July.

The Department of Labor reported that jobless claims for the week ended Sept. 20 came in at 493,000, ahead of analyst forecast of 450,000 and up from 455,000 in July.

Cardillo said that the economy looks to remain at a standstill for now, but said that the spike in unemployment claims could be related to the damage wreaked by Hurricane Gustav.

A bit later, the Census Bureau announced that new-home sales for August came in at an annual rate of 460,000, below economists' forecast of 518,000 units.

The question now, said Pado of Cantor Fitzgerald, is whether the housing market can reach a level where prices stabilize and lenders regain confidence that they can issue mortgages. He said that the rate of decline in home prices is declining, but he doesn't foresee an end to declines in housing prices until the second quarter of 2009.

The price of crude oil was down 79 cents to $104.94 a barrel. Gold was down $16.20 to $878.80 an ounce.

Longer-term U.S. Treasury securities were mixed. The 10-year was down 6/32 to yield 3.83%, and the 30-year was gaining 4/32, yielding 4.4%. The dollar was gaining on its major foreign competitors.

Overseas, European exchanges such as the FTSE in London and the DAX in Frankfurt were gaining ground. In Asia, Japan's Nikkei and Hong Kong's Hang Seng finished with losses.

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