Dow jumps 410 on hopes for bank rescue plan

Tipo de cambio 19 de setiembre
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Dow jumps 410 on hopes for bank rescue plan

The rally erupts on reports that the government may create a vehicle to take over banks' bad debt. The SEC may ban short selling. Oracle earnings impress. Crude oil is up slightly, and gold briefly tops $900.
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A huge, comforting rally enveloped the stock market this afternoon on reports that the Treasury Department and Federal Reserve were working on a plan to take bad assets off the books of troubled financial institutions.

The Dow Jones industrials closed up 410 points, or 3.9%, to 11,020. The Standard & Poor's 500 Index jumped 50 points, or 4.3%, to 1,207, and the Nasdaq Composite Index soared 100 points, or 4.8%, to 2,199.

News of the plan was first reported by CNBC around 3 p.m., and stocks immediately shot higher.

The rally was also due in part to moves by regulators and pension funds to curb short selling against banks and brokerages.

When the day was done, all 30 stocks in the Dow were higher, along with 449 S&P 500 stocks and 88 Nasdaq-100 ($NDX.X) stocks. The Nasdaq-100, which jumped 65 points, or 4%, to 1,697, tracks the largest Nasdaq stocks. The Dow's gain from its low of the day was more than 600 points.

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Initial reports said that the government was proposing to create something like the Resolution Trust Corp., a government entity formed in 1989 to take over the assets of failed savings and loans. The RTC took over 747 savings institutions with $394 billion in assets.

But The Wall Street Journal suggested the plan would involve buying assets at a steep discount from solvent financial institutions and then eventually sell them back into the market. The ultimate disposition might be through some sort of auction facility so that the government was involved in directly negotiating the value of specific assets with different companies.

Getting such a company started would require approval from Congress. Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke were going to brief Democratic and Republican leaders about the proposal.
Another good day on Friday?
Friday's market should be higher thanks to two factors:

The Securities and Exchange Commission plans to ban short selling of stock temporarily. The SEC banned naked short selling earlier this week.

In classic short-selling, a traders borrows shares from a broker and sells them, hoping they'll move lower and certifying that he can deliver the shares. He makes his profit buying the shares back and returning them to a broker.

Naked short selling has been illegal but difficult to enforce. Basically, a trader sells shares he may not have and buys them back later. Many critics believe naked short selling has contributed to the market's recent declines.
Stock Charts (Year)
Oracle
Graphical chart for ORCL
Meanwhile, software maker Oracle (ORCL, news, msgs) reported better than expected earnings for its fiscal first quarter. The company said it earned 29 cents a share after one-time items, up from 22 cents a year ago. The earnings beat the consensus analyst estimate by 2 cents. Revenue was $5.4 billion, up 18% from a year ago.

The company said results were boosted by new sales of its flagship database software in a typically slow summer quarter.

Shares were up 5.3% to $19.75 in after-hours trading after rising 3.6% to $18.75 in regular trading.

Energy prices -- New York close Wed. Tues. Chg. Month chg. YTD chg.

Crude oil (NYMEX) (per barrel)


$97.88


$97.16


$0.72


-15.23%


1.98%

Heating oil (per gallon)


$2.7824


$2.8247


-$0.0423


-12.56%


5.02%

Natural gas (per million BTU)


$7.6210


$7.9100


-$0.2890


-4.05%


1.84%

Unleaded gasoline (per gallon)


$2.4824


$2.4630


$0.0194


-17.53%


-0.34%

A huge, very fast rally
Today's was a huge relief rally after the Dow had suffered a 504-point loss on Monday and a 449-point loss on Wednesday.

The Dow had its third-largest point gain of the year and biggest percentage gain since Oct. 11, 2002, as the market was bottoming after the dot-com bust. For the S&P 500, it was the year's second-largest point gain and largest percentage gain since October 15, 2002. The Nasdaq's gain was its largest of the year and its biggest percentage gain since March 13, 2003.

The rally involved heavy amounts of short-covering of stocks, especially financial stocks. In short-selling, traders who had sold stocks short in recent days bought them back to book profits as stocks move higher. If a rally starts, short sellers' covering can amplify the gains. This no doubt happened today.

Some of the moves were dramatic. Consider investment bank Morgan Stanley (MS, news, msgs), which was reportedly searching desperately for a merger partner. (It has been talking to Wachovia (WB, news, msgs) and others.) Morgan Stanley was at $11.70, off 46%, at 1 p.m. -- doubled in price in the next three hours to $22.55, a 3.7% gain on the day. Morgan Stanley's volume was about 320.7 million shares, more than 11 times its average daily volume.

Or how about Washington Mutual (WM, news, msgs), also in search of big-time help. TPG, which had invested $7 billion into the nation's largest savings bank in April, agreed not to demand compensation if WaMu finds a new a merger partner. The stock was up as much as 64% this afternoon before falling back to $2.99, a 48.8% gain on the day.

Nearly all of the day's gains came after the CNBC report. The Dow had been volatile all day. It had jumped more than 200 points after the open, lost all of the gain and was actually down 150 points around 1 p.m.

While financial stocks led the market, other groups participated in the rally, especially technology, industrial and consumer discretionary stocks. Apple (AAPL, news, msgs) jumped 4.9% to $134.09. Macy's (M, news, msgs) added 7.3% to $19.91. Yahoo (YHOO, news, msgs) jumped 10.6% to $20.82, its first close above $20 in about one month.
Pressure on the short sellers
Short sellers were big targets today.

Obviously, the SEC move is a big deal. It comes after heavy criticism from Morgan Stanley CEO John Mack and others who believe the most recent market downturn has been in large part the result of short-sellers who could push stocks lower with impunity -- and make huge profits in the process.

Sen. John McCain, the Republican presidential nominee, even said SEC Chairman Christopher Cox should resign.

Meanwhile, the United Kingdom's security regulator banned all short-selling of financial stocks until Jan. 19.

New York Attorney General Andrew Cuomo said he would use the state's Martin Act to pursue criminal fraud charges against short-sellers found to be manipulating shares in major financial institutions like Lehman Bros. (LEH, news, msgs) His office opened a broad investigation of trading in shares of those companies, which have been badly beaten in the last 10 days.

The California Public Employees' Retirement System and the New York State Common Retirement Fund joined the California State Teachers Retirement System in deciding to stop lending its shares of Morgan Stanley and Goldman Sachs (GS, news, msgs).

The decisions curb the supply of shares available to short-sellers.

Plus the Securities and Exchange Commission's new rules now force traders to borrow shares before selling them short and make it a fraud for investors to lie to their broker about locating stock to close positions. The SEC may also require hedge funds to disclose their short-sale positions and plans to subpoena the funds' communication records.
Is this the bottom for the market?
Probably not. A big question is whether the bank plan flies in Congress. Many Republican members are deeply disturbed by the government's aggressive moves to try to shore up the financial system.

"Enough is enough," Rep. Jeb Hensarling, R-Texas, told Bloomberg News. "It's time to bail out the American taxpayers from bailout mania."

Even if the GOP comes around to supporting the idea, it will take time to craft legislation and get it to President Bush or his successor.

And for all the gaudy drama that the rally provided today, the U.S. market is still at bear-market levels. The Dow and S&P 500 ended the day roughly off 22% from their closing highs on Oct. 9, 2007. The Nasdaq is still off 23% from its Oct. 31, 2007 high.
Fear and more fear
Plus investor worries about the markets have not gone away.

Monday's and Wednesday's sell-offs were a reflection of the growing fear that the crisis that has gripped financial markets around the world was getting much worse. The Wall Street Journal said flatly that the financial crisis was the worst since the 1930s.

Investment bank Lehman Bros. was forced to file for bankruptcy on Monday; the government agreed to lend up to $85 billion to keep insurance giant American International Group (AIG, news, msgs) afloat while sells assets to raise capital.

Wednesday's sell-off came because banks wouldn't lend each other money, and companies that fund their operations with commercial paper, which are short-term IOUs, had troubles find buyers for their paper.

Investors were in hot pursuit of one thing: safety. On Wednesday, gold jumped $70 an ounce to $850.50, its biggest one-day gain ever. Yields on short-term Treasury bills fell basically to zero.

The safety concerns weren't resolved by today's rally. The 13-week Treasury bill yield was still 0.07%, down from 1.46% on Friday and 3.1% on Dec. 31. In other words, investors are so desperate for safety that they're foregoing any return.

Gold was up an additional $46.50 to $897 an ounce. "There's a big mess going on out there and no sure investment as such, except for the safe haven that is gold," said Afshin Nabavi, a senior vice president at a Swiss refiner. "Take possession of it and keep it under your mattress."
AIG leads the Dow, maybe for the last time
AIG was the Dow's leader today with a 31.2% gain to $2.69.

There was a cost to the rescue of the world's largest insurance company. Dow Jones & Co. is kicking the company out of the Dow. It will be replaced on Monday by food company Kraft (KFT, news, msgs). Kraft closed up 3.3% to $33.74.

The other financial components of the Dow -- Citigroup (C, news, msgs), American Express (AXP, news, msgs), JPMorgan Chase (JPM, news, msgs) and Bank of America (BAC, news, msgs) -- had gains of 18.7%, 14.2%, 12.7% and 12.4%, respectively. They produced about 124 points of the Dow's gain today.
Central banks pour cash into the credit markets
The market opened sharply higher after news that key central banks around the world were pouring dollars into the financial system.

The Federal Reserve was adding $180 billion to the pool of dollars available to foreign central banks; they, in turn, were adding to the pools available to member banks in need of dollars. The cash infusion is designed to help meet loan and collateral demands associated with the mortgage crisis in the U.S. and stem losses in the stock markets.

The new measures have active support from the European Central Bank, the Bank of England, the Bank of Canada, the Bank of Japan and the Swiss National Bank.
Jobless claims rise, but so does manufacturing
The number of Americans filing for initial jobless benefits rose by 10,000 last week, the Labor Department reported this morning, to 455,000.

The number rose as a result of Hurricane Gustav and its impact on Louisiana.

The four-week moving average of initial claims rose by 5,000 to 445,000.

Continuing claims looked pretty bad: The four-week average of continuing claims rose by 29,750 to 3.46 million.

Manufacturing in the Philadelphia region unexpectedly rose in the beginning part of September, the Federal Reserve Bank of Philadelphia said in a report this morning.

The Philly Fed index rose to a reading of 3.8 in September, a huge increase from the reading of negative 12.7 in August. Economists had expected an improvement to a reading of negative 10.



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