New-Stimulus Talk Helps Buoy Stocks

Updated from 1:33 p.m. EDT

U.S. stocks were staying positive Monday afternoon as credit markets continued to thaw and Federal Reserve Chairman Ben Bernanke cautiously endorsed the idea of a new economic stimulus package.

The Dow Jones Industrial Average was up 245 points at 9097, and the S&P 500 added 27 points to 968. The Nasdaq climbed 28 points to 1741.

Helping spur the averages higher was a weekend announcement from President Bush that he would convene global leaders to continue to work on solutions to the credit crunch, according to a report by The Wall Street Journal.

On Sunday, the Dutch government said it would buy a $13.4 billion stake in ING Groep ( ING) to shore up the company's balance sheet, the Associated Press reported.

Credit markets appeared to continue to relax, as three-month dollar Libor, a measure of the rate banks charge one another for large loans, dropped 36 basis points to 4.06%. The overnight rate declined 16 basis points to 1.51%.

A downtrend in interbank lending rates remains intact, Tony Crescenzi, chief bond market strategist at Miller Tabak, wrote on his blog. Tender offers by the European Central Bank, the Bank of England and the Swiss National bank, which now provide an unlimited supply of dollars, has helped ease the market, he wrote. He also wrote that the Fed's plan to purchase commercial paper should provide additional support, as will money borrowed by the Treasury to provide banks with further capital.

Matthew Smith, vice president and portfolio manager at Smith Affiliated Capital, was less optimistic about the future of the credit markets. Even if rates have decreased, they're still high, and "the banks aren't willing to take someone else's paper in at this point," said Smith.

Part of the problem, said Smith, is that the Fed now pays interest rates on deposits. Banks now face two alternatives, he said: They can earn interest without risk by banking with the Fed, or they can earn a premium lending to other banks in a very risky environment.

"Once you establish that, there's no need for these banks to turn around and lend to each other when they're getting short-term interest from the Fed," said Smith.

Rates nonetheless remained elevated, causing wrinkles in other companies' plans. The Journal reported that General Motors ( GM) was having trouble getting funding for a purchase of fellow automaker Chrysler.

Testifying before the House Budget Committee in Washington, Fed chief Bernanke said that calming the financial markets would not immediately resolve all the problems faced by the broader economy. He said a second economic stimulus package may be necessary, but he warned Congress should plan it carefully.

Bernanke's sentiments about the economy were highlighted by headlines that indicated the pain was far from over for several big firms. Merrill Lynch ( MER). CEO John Thain said he foresaw job cuts numbering in the thousands for the brokerage, which is slated to be bought by Bank of America ( BAC)

Treasury Secretary Henry Paulson also made an appearance to discuss details of his agency's bank recapitalization program, saying that there is enough funding available for all qualified banks to take part. He also said that the capital infusion is ultimately unlikely to bring additional costs to taxpayers.

Traders were also looking at a heap of quarterly corporate earnings statements. Ericsson ( ERIC) announced a 28% decline in third-quarter earnings, but beat analyst estimates.

Oil-services firm Halliburton ( HAL) swung to a $21 million loss related to a cash settlement of convertible debt. Its income, however, reached a company record of $1 billion.

Swiss pharmaceutical company Novartis ( NVS) said its profit climbed 12% year over year on rising sales.

Electronics retailer Circuit City ( CC) was in the news after a report in the Journal said it may close 150 stores and slash its head count. The Journal also reported that Internet portal Yahoo! ( YHOO) would probably announce layoffs, perhaps as early as Tuesday's earnings report.

Meanwhile, utility services firm Exelon ( EXC) offered to buy NRG Energy ( NRG) for $6.2 billion in an all-stock deal.

In analyst actions, Goldman Sachs downgraded Intel ( INTC) to neutral from buy, predicting a decline in profit margins.

BlackBerry maker Research In Motion ( RIMM) was suffering after Morgan Keegan reduced its estimates for the company's revenue growth. Shares were down 8%.

Shifting to economic data, the Conference Board's leading indicators index for September climbed 0.3%, whereas economists had predicted a decline of 0.2%. The August reading was revised to a 0.9% drop.

As for commodities, crude oil added $2.40 to close at $70.25 a barrel. Gold climbed $2.30 to $790 an ounce.

Longer-dated U.S. Treasury securities were edging higher. The 10-year was up 10/32 to yield 3.89%, and the 30-year was gaining 26/32, yielding 4.27%. The dollar was stronger vs. its major foreign competitors.

Abroad, European exchanges including the FTSE in London and the Dax in Frankfurt traded higher. In Asian markets, Japan's Nikkei and Hong Kong's Hang Seng closed with gains.