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Stocks open sharply higher on plan to aid banks

March 24, 2009|Martin Zimmerman and Walter Hamilton

LOS ANGELES AND NEW YORK — Stocks staged their biggest rally in nearly five months Monday as investors embraced the government's plan to dispose of the toxic assets clogging the nation's banking system and as the beleaguered housing market showed signs of life.

The nearly 500-point gain in the Dow Jones industrial average of 30 blue-chip stocks had some analysts speculating that the worst bear market since the 1930s might be ending. At the very least, others said, the tone has improved markedly from two weeks ago, when major stock averages fell to their lowest levels since the 1990s.

"At the bottom earlier this month, pessimism was about as thick as it ever gets," said Bruce Bittles, chief investment strategist for Robert W. Baird & Co. in Milwaukee. "And pessimism is always at its worst at the bottom of the market."

The plan unveiled by the Treasury Department would use money from the federal bailout effort to entice private investors to buy troubled assets.

Details of the plan sparked a powerful rally in financial stocks that carried over to other sectors and helped extend the market's recent rally.

The Dow rocketed 497.48 points, or 6.8%, to 7,775.86. The Standard & Poor's 500 index rallied 54.38 points, or 7.1%, to 822.92, while the technology-heavy Nasdaq composite index advanced 98.50 points, or 6.8%, to 1,555.77.

The gain pushed the Dow to its highest level since Feb. 13 and marked its biggest one-day percentage gain since Oct. 28, when it rose almost 11%.

The gains were broadly based. All 30 of the Dow stocks rose, and winners swamped losers 10 to 1 on the New York Stock Exchange.

The KBW bank-stocks index soared more than 18%, with all 24 members gaining ground. Wells Fargo & Co. rose $3.34, or 24%, to $17.33; Bank of America Corp. jumped $1.61, or 26%, to $7.80; and Citigroup Inc. climbed 51 cents, or almost 20%, to $3.13.

Financial stocks, hammered by the credit freeze that has gripped global credit markets since last fall, have been a major drag on the market for months. Even with Monday's gains, financial shares are the biggest losers in the S&P 500 this year, down 23.5%.

The Treasury's plan eventually could wipe as much as $1 trillion in troubled assets off bank balance sheets. There is widespread belief that helping banks get out from under their mountain of troubled assets -- many of them related to the housing market -- and freeing up their lending capacity is essential for a lasting economic recovery.

Monday's rally stands in sharp contrast to the Treasury's initial stab at launching a bad-asset plan earlier this year. Investors then decried the proposal's lack of details and sent stocks down sharply.

"The fact that it's something rather than nothing and that at least it points in the direction of some kind of solution" is driving stocks higher, said Nancy Bush, an analyst at NAB Research in Annandale, N.J.

"Nobody thinks this is the silver bullet," she said, "particularly when you combine it with the very adversarial actions that were taken by Congress last week regarding taxing the AIG bonuses. There's hope that the Senate will provide some adult supervision on this bonus issue."

After the market closed, New York Atty. Gen Andrew Cuomo announced that nine of the 10 top AIG bonus recipients were giving back their bonuses.

Adding to the encouraging news was word from the National Assn. of Realtors that resales of homes rose 5.1% last month, the best showing since July 2003.

That followed a report last week that housing starts rose 22% in February -- the first gain in seven months and the biggest monthly increase since 1990. Many of those starts came in multi-family units, but analysts noted that construction permits for single-family homes -- an indicator of future building activity -- rose for the first time since April 2008.

An index of 18 home builder stocks gained more than 14% on Monday. DR Horton Inc. rose $1.52, or 18%, to $9.89; Pulte Homes Inc. added $1.28, or 13%, to $11.08; and Toll Bros. Inc. climbed $1.84, or almost 11%, to $18.84.

The Dow is up almost 19% from its recent bear-market low March 9. The S&P 500 is up 22% from the 12-year low it hit the same day. According to Bloomberg News, that is the biggest 10-day gain for the S&P 500 since 1938.

The S&P 500's close above 800 was seen by some analysts as an important benchmark. In addition, holding above its recent intra-day low of 666 was seen as a hopeful sign that the market may have touched bottom -- at least for the time being.

Mark Mobius, executive chairman of Templeton Asset Management in San Mateo, Calif., told Bloomberg TV that a new bull market had begun, though other analysts said they were still waiting for more evidence that this isn't just a "bear market rally" -- a substantial rise in stock prices that eventually succumbs to another steep slide.

"It's too soon to know for sure if this is the big turn that everybody has been waiting for," said Kevin Marder of Marder Investment Advisors Corp. in Los Angeles.

Others analysts noted that much of the recent rally might have been driven in part by short-covering, especially in financial shares. This occurs when short sellers, who are betting that stock prices will fall, have to buy shares to cover their bets.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.65% from 2.62% late Friday.

Oil rose $1.73 to settle at $53.80 a barrel, and the dollar was mixed against other major currencies. The price of gold, which has risen in recent weeks as investors have worried about the faltering economy and a weaker dollar, fell $3.70 to $952.10 an ounce.

Overseas, Britain's FTSE 100 rose 2.9%, Germany's DAX index rose 2.7% and France's CAC-40 rose 2.8%. Japan's Nikkei stock average rose 3.4%.

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