Stocks Surge in Late-Afternoon Rally

Updated from 1:56 p.m. EDT

Stocks in New York were rallying sharply Tuesday afternoon, as traders geared up for a Federal Reserve meeting and took in a series of corporate earnings reports.

The Dow Jones Industrial Average was gaining 405 points to 8581, and the S&P 500 added 40 points to 889. The Nasdaq jumped 60 points to 1566.

As Tuesday began, the Fed was set to begin deliberations on its interest-rate policy. Many investors expect the Federal Open Market Committee to reduce its target interest rate 50 basis points to 1%. Such a move would signal interest in providing the markets with capital to alleviate the ongoing credit crisis.

"Often times you see the market move, and you try to back into reasons the market moves," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research. Sparks said he's inclined to believe that today's rally is a bounce within a downtrend and is not based on cheap valuations or speculation about a Fed rate cut. "Unless the rally sustains itself for a significant period ... I don't see it as being meaningful."

"The hope is we've washed out," said Chip Hanlon, president at Delta Global Advisors. "The reason the market can't rally for any lasting period is investors can't trust that that's true." He said the credit crisis could reemerge in a collapse of the commercial real estate market that historically has followed declines in residential housing.

On the other hand, said Hanlon, stocks are dramatically oversold at these levels. "They could rally at any time and the rally could be really significant. ... However, I think it's fair that investors don't trust any rally," he said. "We're not done yet."

Meanwhile, the Treasury Department is facing difficulties implementing its $700 billion program to purchase troubled assets from banks, according to a report in The Wall Street Journal. The report indicated that the plan faces delays in hiring managers for the assets.

As for earnings, BP, Europe's second-largest oil company, reported third-quarter earnings that increased 83% on high oil and natural gas prices. Occidental Petroleum ( OXY), another oil-patch denizen, also reported a rise in earnings.

German software firm SAP ( SAP) said its third-quarter profit slipped 5% and said it would not issue a revenue forecast for the remainder of this year.

U.S. Steel ( X) also announced an encouraging third quarter, saying profit more than tripled. However, the company offered softer guidance for the fourth quarter.

Whirlpool ( WHR) reported a 7% decline in third-quarter earnings and said it plans to slash 5,000 jobs.

In other company news, aircraft maker Boeing ( BA) came to a tentative agreement with the International Association of Machinists and Aerospace Workers union. The union had been on strike since Sept. 6.

As for automakers, the Journal reported that General Motors ( GM) may secure a $5 billion government loan -- part of $25 billion in funding recently authorized by Congress -- to finance a purchase of fellow troubled automaker Chrysler.

Elsewhere on the merger front, Huntsman ( HUN) and Hexion Specialty Chemicals faced a setback in their planned deal. The companies announced that they were willing to complete a merger, but have received notice from counsel to affiliates of Credit Suisse ( CS) and Deutsche Bank ( DB). The banks said they do not want to fund the deal today.

In the financial space, shares of Morgan Stanley ( MS) and Goldman Sachs ( GS) were falling, hindering stocks' rally amid rumors that a rally by Volkswagen had brought losses to the two banks.

Retail titan Wal-Mart ( WMT) provided a forecast for its capital expenditure at its annual investor meeting, predicting capital expenditures of $13 billion through the end of its current fiscal year, down from $14.9 billion a year ago. The company said it will open fewer stores this year than last year in the U.S. and focus on additional expansion into emerging markets.

Discouraging economic data accompanied stocks' pullback from their highs. The Conference Board's read of October consumer confidence registered at an all-time low of 38, down from 61.4 in September and well below economists' predictions of 52.

In housing, the S&P Case-Shiller 20-city home price index declined 17% year over year in August. The 10-city index dropped 18%. The declines in both indices are the largest on record.

As for commodities, crude oil was shedding 51 cents to $62.71 a barrel. Gold was climbing $1.90 to $742.40 an ounce.

Longer-dated U.S. Treasury securities were declining in price. The 10-year was down 32/32 to yield 3.82%, and the 30-year was losing 2-10/32, yielding 4.18%. The Treasury announced a sale of $34 billion in two-year Treasury bills to raise money to continue to bolster the banking system. It plans to raise another $24 billion on Oct. 30.

Credit markets were loosening, as three-month dollar Libor, a measure of the rate banks charge one another for large loans, declined to 3.47% from 3.51% on Monday. The overnight Libor rate declined 2 basis points to 1.24%.

The dollar was rallying vs. its major foreign competitors, marking a 2.9% gain on the yen and lesser improvement against the euro and pound.

Overseas, European exchanges, including London's FTSE and Frankfurt's DAX, were mostly trading higher. Asian stocks had a mixed session, as the Nikkei in Japan and the Hang Seng in Hong Kong closed with gains.

( Photo gallery: Trading Faces)

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