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. Crude oil is up slightly, and gold briefly tops $900. Morgan Stanley and Washington Mutual are reportedly seeking buyers.
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September 18, 2008 -- 16:45 ET
[BRIEFING.COM] Stocks got off to a positive start Thursday as central banks attempted to calm concerns in the banking system by infusing billions of dollars into the global financial system. The advance was countered with selling pressure that... More
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MoreBy Charley Blaine and Elizabeth Strott
A huge rally erupted in American stocks this afternoon on reports that the Treasury Department was working on a plan to take bad assets off the books of financial institutions.
News of the plan was first reported by CNBC around 3 p.m., and stocks immediately shot higher. A At the close, the Dow Jones industrials were up 410 points, or 3.9%, to 11,020. The Standard & Poor's 500 Index was up 50 points, or 4.3%, to 1,206, and the Nasdaq Composite Index was up 100 points, or 4.8%, to 2,199.
The bank rescue concept, as reported by CNBC, would involve creating a federally-chartered company that would buy the bad assets of banks, investment banks and others. The financial institutions would then be able to raise new capital and lend money and finance new ventures.
The idea is similar to the Resolution Trust Corp., a government entity formed in 1989 to take over the assets of failed savings and loans. The RTC operated from 1989 to 1995 and took over 747 savings institutions with $$394 billion in assets.
But there were few details on the idea. Getting such a company started would require approval from Congress.
The rally was mostly short-covering of positions in financial stocks. Short sellers sell shares borrowed from brokers in hopes the price will fall. They book their profit when they buy the shares back and return them to the broker.
Morgan Stanley (MS, news, msgs) was at $11.70 at 1 p.m., off 46.2%. It closed at $22.55, up 3.7% on the day. Morgan Stanley's volume was about 320.7 million shares, more than 11 times its average daily volume.
Citigroup (C, news, msgs), which had been down 8.4% at $12.85 at 1 p.m., soared to $16.65, a gain of 18.7% on the day, second best among the Dow stocks. The leader was American International Group (AIG, news, msgs), up 31.2% to $2.69.
The news came in the midst of a very volatile day that began with central banks around the world desperately working to stabilize credit markets so that banks and others will willingly lend money again and keep economies functioning.
An early rally in stocks that pushed the Dow up by 215 points soon after the open, fell apart by noon. Forty-five minutes later, the Dow was suddenly down as many as 150 points. But the situation reversed again, largely on news that the United Kingdom's securities regulator said it would ban short-selling of all financial stocks until Jan. 19.
And then the big rally erupted on this one of the crazier days for the markets.
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Twenty-nine of the 30 Dow stocks were higher, led by Citigroup (C, news, msgs), up 21% to $16.91. The winners include American International Group (AIG, news, msgs), up 24.4%, to $2.55. AIG, however, will leave the Dow starting Monday when it will be replaced by food processor Kraft (KFT, news, msgs). Kraft was up 2.6% to $33.51 thisa afternoon.
Meanwhile, 88 Nasdaq-100 ($NDX.X) stocks were higher, along with 448 S&P 500 stocks were lower.
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 $0.0194 -17.53% -0.34%
Fear rules for much of the day
For most of the day, the market did not look confident. The CBOE Volatility Index ($VIX.X), which measures the ratio of put options to call options on stocks in the S&P 100 Index ($NDX.X), had risen to 42 this morning, the highest level since October 2002. But as the market rallied, the index came back down to 33.10. The index is widely watched because it is a measure of investor fear. It's up 29% this week.
Gold, which jumped $70 an ounce on Wednesday, jumped an additional $46.50 today to $897 an ounce in New York.
"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."
Crude oil closed up 72 cents to $97.88 a barrel, in part because the dollar was firming against major currencies.
Oil has jumped in the past few sessions after falling steadily in recent weeks, in part because the dollar has fallen amid doubts about the Fed's ability to manage the turmoil in the financial markets. But the dollar gained against other currencies after the Fed's move last night, and that in turn took a bite out of oil's latest rise.
Energy shares moved higher. The Select Sector SPDR-Energy (XLF, news, msgs) exchange-traded fund rose 3% to $66.89.
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, are 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.
"These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets," the consortium of banks said in a joint statement. "The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures."
The liquidity injection comes one day after the Fed offered an $85 billion loan to troubled AIG in exchange for 79.9% of the company. The Federal Open Market Committee met on Tuesday but decided to keep rates on hold at 2%.
The pressures have grown extreme as failures and bailouts have cast doubt on the viability of financial institutions that were seen as rock solid only a few months ago. The willingness of financial institutions to lend to each other is critical, as banks have been hoarding cash to protect themselves.
The central banks are concerned about mounting signs of extreme stress. One key indicator has been the TED spread, which compares rates on three-month U.S. Treasury bills to the rates that banks charge each other for interbank loans, as tracked in the LIBOR (or London interbank rate). When the TED spread increases, banks are nervous about lending and are likely to withhold credit. In recent days the spread has hit its highest levels since the stock crash of 1987.
The LIBOR rate fell to 3.84% this morning from 5.03% Wednesday. That is still nearly 2% higher than the Federal Reserve's federal funds rate of 2%, however. The three-month LIBOR rate rose to 3.2% from 3.06% yesterday.
More Fed action
The Fed also announced an additional $55 billion injection in overnight loans, separate from the joint move by the central banks. That is the biggest such move since the terrorist attacks in 2001.
"Right now, Uncle Sam is afraid to inject capital until after the fact," Paul McCulley, managing director of Pimco, told CNBC. "We need to see more of this. Policymakers need to get in front of the situation. One thing the Fed and Treasury could do is to buy some mortgage-backed securities to start making a market for these securities, McCulley said. "They need to recognize they have to leapfrog. I want to believe that they are at that analytical or mental tipping point."
"There's a complete lack of faith in the markets," Jim O'Neill, chief economist at Goldman Sachs, told Bloomberg News. "There's a lot of cash-hoarding and people losing trust in banks, so the central banks are acting to relieve that. This might not be the last time they have to act."
The credit and financial mess has caused some huge swings in U.S. markets this week; in fact, this week's market volatility ranks as the eighth most volatile since 1928, according to Standard & Poor's analyst Howard Silverblatt.
Asian markets reacted to yesterday's trouncing on Wall Street with losses of their own, although Hong Kong's Hang Seng Index managed to turn flat in late trading after tumbling 7.7% at one point. The MSCI Asia Pacific Index fell 3.75%, while Tokyo's Nikkei 225 Index shares were down 2.2%.
A research note from Switzerland's UBS used the phrase "Stop the Insanity." The note may have worked. In Europe, commentary on the action by central banks was generally positive. The consensus seemed to be that the crisis is being controlled.
Europe's Dow Jones Stoxx 600 Index was down 0.5%; the FTSE Eurofirst Index lost 0.6%; and London's FTSE 100 was down 0.5%.
"What we have seen is a crisis of confidence, and confidence is close to being restored," insists Lionel Zinsou, director of the Paris private equity firm PAI Partners. "The Federal Reserve's moves show that the system has been able to manage the challenges and has remained stable."
Who will get Morgan Stanley?
With financial-services companies either going under or getting poached by other companies, the fate of the two remaining investment banks, Morgan Stanley (MS, news, msgs) and Goldman Sachs (GS, news, msgs), is unclear.
Talk back: Which company will fail next?
Morgan Stanley is in talks with a number of partners, including Wachovia (WB, news, msgs) and China Investment Corp. (CIC), according to published reports.
Morgan Stanley shares fell 21% to $17.27 this afternoon.
CIC bought a 9.9% stake in Morgan Stanley in December, and Bloomberg News reported that it could increase that stake up to 49.9%.
Morgan Stanley Chief Executive Officer John Mack has reportedly also been talking with Wachovia and several other banks about a deal. A spokeswoman for the firm said Mack's preferred route to take is to stay independent: "The smartest people at this firm are focused on solutions."
This morning, however, The New York Times reported that Mack knocked on Citigroup's (C, news, msgs) door, but the company said it was not interested.
Last night, CNBC said China's state-owned investment company Citic was interested in Morgan Stanley; in October, Citic and Bear Stearns announced plans to swap stakes in each other. Five months later, in March, Citic canceled the deal as Bear spiraled into oblivion. Bear was bought by JPMorgan Chase (JPM, news, msgs), with backing from the Federal Reserve Bank of New York.
A deal wouldn't surprise the Street. Morgan Stanley and Goldman Sachs are "fish in a barrel," William Smith, money manager at Smith Asset Management, told Bloomberg News. He added, "Morgan Stanley's probably going to wind up doing a deal. It's really a matter of survival."
Goldman Sachs shares were down an additional 7.8% to $105.59 this afternoon, after plunging 13.9% Wednesday.
Others were skeptical that a deal between Morgan Stanley and Wachovia made sense: "Two wrongs don't make a right," James Ellman, a fund manager and president of SeaCliff Capital, told Reuters. "Hasn't Mr. Market been saying both companies possibly are going to fail? If you put them together, how does that make a better company?"
Stock Charts (Year)
Morgan Stanley
Goldman Sachs
Washington Mutual
Morgan Stanley pre-announced better-than-expected earnings late Tuesday, but the stock took its biggest dive ever, closing down 24.2% at $21.75.
Wachovia (WB, news, msgs) shares were up 38% to $12.59 on talk of a deal.
Washington Mutual next?
Washington Mutual (WM, news, msgs) has been rumored to be shopping itself all week, and it seems to be progressing toward a deal. On Wednesday, private-equity firm TPG, WaMu's biggest shareholder, said it would waive its right to be compensated if WaMu sold shares to raise capital or sold itself within 18 months of TPG's $7 billion injection into the bank. With the TPG commitment in place, WaMu would have had to buy out the private-equity firm at $8.75 per share, the price TPG paid for the stake in April.
WaMu hired Goldman Sachs to help advise the company earlier this week; Goldman set an auction in motion a few days ago, The New York Times has reported. Interested parties reportedly include JPMorgan, HSBC (HBC, news, msgs), Citigroup and Wells Fargo (WFC, news, msgs).
WaMu is one of the companies hit hardest by the subprime-mortgage crisis, with shares tumbling 94% over the past year. Shares were up 20.5% to $2.42 this afternoon.
"WaMu drank too heavily from the trough during the mortgage boom, and there's a lot of sludge left at the bottom," Len Blum, managing director at investment bank Westwood Capital, told Bloomberg News. "They're sitting with a lot of bad exposure."
Earlier this week, Lehman Bros. (LEH, news, msgs) was forced to file for bankruptcy after Barclays (BCS, news, msgs) and Bank of America (BAC, news, msgs) bailed on talks to buy it. Bank of America instead picked up Merrill Lynch (MER, news, msgs) for $29 per share. And Barclays bought elements of the Lehman operation at a fire-sale price.
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.
Constellation Energy agrees to takeover
Electricity company Constellation Energy Group (CEG, news, msgs), which put itself on the market earlier this week, found a buyer in Warren Buffett's Berkshire Hathaway (BRK.A, news, msgs).
The deal values Constellation at $4.7 billion, or $26.50 per share.
The stock was up 1.1% to $25.03 this afternoon; it had been trading in the $50 range last week. The offer reflected the troubles Constellation has been facing this week about its commodities-trading business. Shares slumped Wednesday after a regulatory filing stated that several of the company's subsidiaries had relationships with Lehman Bros. Those jitters caused the stock to tank 19.5% in the session, forcing Constellation to reaffirm a $2 billion line of credit with its banks.
That wasn't enough, however, to prevent ratings company Standard & Poor's from putting its ratings on CreditWatch later in the day.
Electricité de France (EDF), which owns a 9.5% stake in the company, had been rumored to be a bidder earlier this week.
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