Tuesday, October 14, 2008

Stocks Rally on Rescue Plan - Dow Up 936 - Largest Increase Since 1930's

U.S. stocks staged the biggest rally in seven decades on a government plan to buy stakes in banks and a Federal Reserve-led push to flood the global financial system with dollars.

The S&P 500 Index rebounded from its worst week in 75 years with an 11.6% advance, its steepest since 1939, and the Dow more than 936 points. Morgan Stanley soared 87% after sealing a $9 billion investment from Japan's Mitsubishi UFJ Financial Group Inc. Alcoa, Johnson & Johnson, Chevron, and Prudential Financial posted their biggest gains since they have been tracked as all 10 industries in the S&P 500 added more than 7%.

The S&P 500 rose 104.13 points. The Dow increased 936.42 (11%) eclipsing its previous record 499-point gain in March 2000 and posting its best percentage advance since 1933. The Nasdaq climbed 194.74 (12%). Sixteen stocks gained for each that fell on the NYSE.

The S&P 500 halted an eight-day losing streak, its longest since 1996. Last week's 18% declines pushed both the S&P 500 and Dow down more than 40% from their peaks last October. The S&P 500 ended last week trading for 17 times reported earnings of its companies, the cheapest valuation in more than a year. Today's rally boosted the index's price-to-earnings ratio to 19.2. The S&P 500 is still down 32% in 2008, poised for its worst yearly loss since 1937.

Europe's benchmark index climbed 10%, its best gain ever, and Asia's added 3.1% to help the MSCI World Index rebound from its worst week on record.

Some 1.5 billion shares changed hands on the floor of the NYSE, less than 1% more than the three-month daily average. The bond market was closed for the Columbus Day holiday. The dollar fell the most in three weeks against the euro.

Neel Kashkari, the U.S. Treasury official overseeing the $700 billion rescue of the financial system, said government equity injections will be aimed at "healthy" firms, will be voluntary and have attractive terms to encourage participation. As part of the Fed-led plan, the European Central Bank (ECB), the Bank of England and the Swiss central bank will auction unlimited dollar funds. Previous swap arrangements between the Fed and other central banks were capped.


Morgan Stanley, the investment bank that last month turned itself into a bank holding company after investors lost confidence in firms that depend on the bond market for financing, rose $8.42 to $18.10. Morgan Stanley agreed to change the terms of its $9 billion investment from Misubishi UFJ, providing the Japanese bank with preferred stock that pays a 10% dividend instead of common stock.

Mitsubishi UFJ, Japan's biggest lender, will get 21% of Morgan Stanley as previously agreed, the two firms said today in a joint statement. The terms were renegotiated after the tumble in Morgan Stanley's shares last week.

The S&P 500 Financials Index added 10 percent after the gauge of banks, insurers and investment firms sank 22 percent last week, paced by Morgan Stanley's 60 percent plunge after Moody's Investors Service said it may reduce the company's credit rating on concern the financial crisis threatens earnings and investor confidence.

Goldman Sachs Group Inc. rallied 25% today to $111 after dropping 31% to $88.80 last week. Bank of America Corp. climbed 9.2%, while Citigroup Inc. added 12%.

Government Ownership

The Treasury Department will take equity stakes in banks using authority it was granted under the $700 billion bank rescue plan enacted two weeks ago, Treasury Secretary Henry Paulson said over the weekend.

Government actions this year to prevent bankruptcies at investment bank Bear Stearns Cos., mortgage lenders Fannie Mae and Freddie Mac and insurer American International Group Inc. resulted in near-total losses for the firms' shareholders.

The collapse of New York-based Lehman Brothers Holdings Inc. on Sept. 15 precipitated the latest chapter of the 14 month-old credit crisis, causing banks to stop lending to each other out of concern they may not get their money back.

Insurance companies in the S&P 500, which slumped 28% last week as a group on concern the credit crisis will reduce the value of their investments, rebounded 18% today for their biggest advance since S&P created the group in 1989. Genworth Financial Inc. rallied a record 81% to $6.32 and Prudential Financial added 38% to $49.95.

XL Capital Ltd., the Bermuda-based business insurer whose stock is down 85% this year, jumped 37% to $7.43 after an analyst at Fox-Pitt Kelton Cochran Caronia Waller said the company may have to consider a sale.

Energy Stocks Jump

Exxon Mobil, the world's largest oil company, climbed 17% to $73.08 after a 20% tumble last week, helping to lead the S&P 500 Energy Index to a record 18% rally. Chevron, the second-largest U.S. oil producer after Exxon, rose $12.06, or 21%, to $69.89. Crude oil gained 4.5% to $81.19 a barrel today, rebounding from a 13-month low.

General Motors jumped 33% to $6.51, the biggest gain in the Dow average, and Ford Motor Co. added 20% to $2.39. GM, the largest U.S. automaker, is in talks with Cerberus Capital Management LP's Chrysler LLC about a merger or partnership, five people with direct knowledge of the discussions said. Ford, the second-largest, is considering selling its controlling stake in Japan's Mazda Motor Corp., a person familiar with the matter said.

Freeport-McMoRan Copper & Gold Inc. added 25% to $45.37 as copper on the London Metal Exchange rebounded from a 33-month low. Alcoa, the largest U.S. aluminum producer, gained $2.57, or 23%, to $13.82.

Once in a Lifetime Opportunities

Apple jumped 14% to $110.26, its biggest gain in nine years. Abbott Laboratories rose 9.6% to $54.21. The maker of drug-coated heart stents said it will spend as much as $5 billion to buy back shares. Johnson & Johnson, the world's largest maker of health-care products, increased $6.83, or 12%, to $62.68.

General Electric was the only member of the Dow average to decline, after JPMorgan Chase & Co. analyst C. Stephen Tusa said his forecast for profit of $1.80 a share next year may be too high.

Europe's Stoxx 600 advanced a record 9.9%, clawing back more than a third of last week's 22% slump.

Billionaire investor George Soros said the European agreement is a "positive" step that may help stabilize global financial markets.

"In the last 72 hours, I think the European governments got religion and realized that this is a serious problem," Soros said in Washington. "People are looking for some leadership and finally they are getting it," suggesting there's "a good chance" the worst investor panic is over.

Sources: Bloomberg, Reuters, AP

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