'Bernanke Rally' Lifts Banks, Indices

Updated from 3:28 p.m. EST

Financials led stocks in New York to a rebound session on Tuesday after Fed chairman Ben Bernanke allayed some concerns about bank nationalization and said the U.S. could see an economic recovery in 2010 if government is successful in restoring financial stability.

The Dow Jones Industrial Average rose 231.54, or 3.3%, to 7346.32. The S&P 500 was bettered by 29 points, or 3.9%, to 772.33. The Nasdaq tacked on 51.26, or 3.7%, to 1438.98.

Tech held up and banks rallied, with Citigroup ( C) and Bank of America ( BAC) rising 20% and 16%, respectively, and the KBW Banking index up some 13%, with financials outperforming the market. General Motors ( GM)led the Dow with a 22% increase.

Investors were tuned to Washington, as Federal Reserve Chief Ben Bernanke gave a testimony on monetary policy.

Among other things, the Fed chief elaborated a bit on the so-called "stress test," an aspect of the Treasury's financial stability plan, which will look at the balance sheets and capital needs of the largest 19 banks over the next few years under the consensus economic forecast and also an alternative, meaning worse, situation.

The stress test will establish how much capital a bank will need to lend and support the economy, so that even if the bad scenario occurs, it will have enough equity to meet its obligations, said Bernanke. Key was that Bernanke said the capital will be provided in convertible preferred shares, so that the bank can convert the preferred to common only if losses warrant it.

"It seems like he gave some guidance that seemed to take away some concern about nationalization of the banks, in the sense that a lot of those concerns were around those 'stress tests' -- concern that the government might force capital on them and dilute shares," says Bill Stone, Chief investment strategist, PNC Wealth Management.

"But he seemed to say that the government would provide capital, but it wouldn't count as a government ownership implication unless the bank needed to draw on it -- it would only convert if those losses occurred," says Stone. "I think a lot of people thought that it would simply dilute shareholders."

Bernanke also bolstered some optimism early in his testimony, saying, "If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability -- and only if that is the case, in my view -- there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery."

President Obama will address a joint session of Congress later Tuesday, where perhaps more details on the financial and housing stability plans will be divulged.

In a bit of economic data, the New York-based Conference Board reported that consumer confidence for February has fallen to a historic low reading of 25, 10 points below expectations, and vs. 37.76 in January.

Earlier Tuesday morning, Wall Street learned that the fall in prices of single-family homes accelerated, according to Standard & Poor's/Case-Shiller home price index, down 2.5% between November and December, vs. 2.3% the prior period . Prices fell 18.5% in December from a year earlier, a record drop for the 21-year old index.

As housing prices fall, more homeowners with adjustable-rate-mortgages cannot refinance when their rates reset, and others, simply discouraged, default, says Peter Morici, a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

As losses have mounted, so has Treasury's equity stake and involvement at Bank of America, Citigroup and several other banks, notes Morici. "Many investors fear sweeping nationalization is inevitable, and have become even more reluctant to purchase bank stocks."

Those same investors cheered on Monday after reports that while the government might substantially up its stake in struggling bank Citigroup the institution is not being fully nationalized.

Speaking of government bailouts, AIG ( AIG), set to air its year-end results next week, said Monday that it's discussing "alternative options" with regulators to stay afloat in the wake of the financial crisis. The government already holds nearly an 80% stake in the struggling firm , after extending it $150 billion in taxpayer loans.

Looking away from Washington for a moment, Microsoft ( MSFT), gave up more than 3% on heavy volume Tuesday after Chief Executive Officer Steve Ballmer reaffirmed expectations for the economic downturn, and its damaging effects to sales, to last through the year and said he expects the economy to be "relatively weak for a relatively long time."

But other tech stocks saw a bounce. Apple ( AAPL) added 3.2%; Research in Motion ( RIMM) ticked up 6.2%; and Google ( GOOG) tacked on 4.9%.

Wall Street also received a variety of retail earnings early Tuesday: Macy's ( M) reported fourth-quarter sales in line with expectations, but said profit toppled 59% as it suffered weak sales and one-time costs. Target's ( TGT) fourth-quarter profit also declined, some 41%, amid anemic consumer spending.

Office Depot ( ODP) said it lost $1.54 billion, on charges and a 15% drop in sales in the fourth quarter.

In a bit of relief, Home Depot delivered a less-severe-than-expected quarterly loss. But the top home-improvement retailer, which is cutting 7,000 jobs as it shutters its Expo Design Center chain and trims corporate costs, also said per-share operating profit would fall in 2009. Home Depot shares added 7% on Tuesday.

In commodities, oil rallied $1.52, to settle at $39.96, while gold was retracting $25.50 to settle at $969.50 an ounce.

Longer-dated Treasuries were recently rising; the 10-year note was recently lower by 11.5/32 to yield 2.8%, the 30-year was rising 9.5/32, yielding 3.5%.

The dollar was recently flat against the yen and stronger against the pound and euro.

Stocks abroad were widely lower. The FTSE in London and the DAX in Frankfurt lost 0.9% and 1%, respectively, after Japan's Nikkei and Hong Kong's Hang Seng both ended with losses.

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