U.S. Stocks Rally Most in Six Years on Plan to Shore Up Banks
Sept. 18 (Bloomberg) -- U.S. stocks rallied the most in six years on prospects the government will formulate a ``permanent'' plan to shore up financial markets, while regulators and pension funds took steps to curb bets against banks and brokerages.
Traders erupted into cheers on the floor of the New York Stock Exchange as the Dow Jones Industrial Average jumped 617 points from its low of the day after Senator Charles Schumer proposed a new agency to pump capital into financial companies. The Standard & Poor's 500 Index climbed 4.3 percent as 68 companies in the gauge rose more than 10 percent.
Wachovia Corp. soared 59 percent, Citigroup Inc. added 19 percent and Bank of America Corp. jumped 12 percent, sending the KBW Bank Index to its biggest gain since July. Morgan Stanley erased a 46 percent tumble and Goldman Sachs Group Inc. recovered most of a 25 percent slide after the nation's three largest pension funds stopped loaning shares of the brokerages to investors betting on their declines.
``Any actions regulators or other entities or players take to try to slow down the bear raids will be received positively,'' said David Katz, chief investment officer of Matrix Asset Advisors in New York, which manages $1.4 billion. ``There's no reason a Goldman Sachs or a Morgan Stanley should be forced to sell themselves in a shotgun wedding if they've got economic models that work, and they do.''
The S&P 500 advanced 50.12 points to 1,206.51, recovering most of yesterday's 4.7 percent tumble. The Dow surged 410.03, or 3.9 percent, to 11,019.69. Both the S&P 500 and Dow posted their biggest percentage gains since October 2002. The Nasdaq Composite Index jumped 100.25, or 4.8 percent, to 2,199.1. Seven stocks climbed for each that fell on the NYSE, its broadest rally since April.
The S&P 500, which fell 4.7 percent twice this week, rebounded from its lowest level since May 2005. Stocks opened higher after the Federal Reserve said it authorized global central banks to auction funds ``to address the continued elevated pressures in U.S. dollar short-term funding markets.''
The benchmark index for U.S. equities then swung between gains and losses as concern over the health of Morgan Stanley and Goldman dragged on financial shares, before Schumer's proposal spurred a rally in the last hour of trading.
Russell 2000 Rally
The Russell 2000 Index of small-company stocks surged 7 percent, the most since two days after the stock market crash in October 1987. Financial shares in the measure jumped 12 percent, led by a 88 percent gain in Newcastle Investment Corp., a real- estate investment trust.
About $3.6 trillion of market value was erased from global stocks this week before today, triggered by the bankruptcy filing by Lehman Brothers Holdings Inc., once the fourth-largest U.S. securities firm. Today's rally restored more than $600 billion in value to U.S. stocks, according to Bloomberg data.
Wachovia, the fourth-largest U.S. bank, rallied $5.38 to $14.50, its steepest advance since at least 1983. Citigroup, the biggest, jumped $2.62 to $16.65, its largest gain in 10 years. Bank of America, the No. 2, added $3.38 to $30.58. MGIC Investment Corp., the biggest U.S. mortgage insurer, rose 75 percent for its best rally since July.
The KBW Bank Index added 14 percent as 22 of its 24 companies advanced. The S&P 500 Financials Index climbed 12 percent, with 79 of its 86 companies rising.
Schumer urged forming an agency to inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages and make them more affordable. His remarks indicate momentum is building for some wider plan after the Fed and Treasury's takeovers of Fannie Mae, Freddie Mac and American International Group Inc. this month.
``The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution,'' Schumer, a Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington. ``I've been talking to them about it.''
Morgan Stanley rose 3.7 percent to $22.55, snapping a seven-day retreat, and Goldman Sachs slipped 5.7 percent to $108. They are the two remaining independent Wall Street brokerages after this week's bankruptcy of Lehman and takeover of Merrill Lynch & Co. Yesterday both fell the most ever on speculation rising financing costs will force them out of business.
Morgan Stanley and Goldman began erasing their declines after 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 the two companies. The decisions curb the supply of shares available to short-sellers.
Morgan Stanley is down almost 45 percent in September. Chief Executive Officer John Mack, in a memo to employees yesterday, blamed short sellers for driving down the price of his company's shares. Morgan may sell a new stake to China Investment Corp., which owns a 9.9 percent position, and is in talks about a possible merger with Wachovia, a person familiar with the matter said.
The Securities and Exchange Commission's new rules 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.
``Things have been pretty brutal the last few weeks, as bad as I've seen it 30 years in the business,'' said Phil Orlando, the New York-based chief equity market strategist at Federated Investors Inc., which manages $334 billion. ``Shorting had a lot to do with contributing to this near collapse in the market.''
In the U.K., the Financial Services Authority banned short sales of financial shares for the rest of the year after HBOS Plc, the country's biggest mortgage lender, lost 37 percent of its market value over three days. In a short sale, investors borrow stock and sell it. The sellers profit if the shares go down and they can repay the loan with cheaper stock.
Washington Mutual Speculation
Washington Mutual Inc., the largest U.S. thrift, rallied 98 cents, or 49 percent, to $2.99. JPMorgan Chase & Co., Citigroup, Bank of America and Wells Fargo & Co. may be interested in buying pieces of WaMu, said three people with knowledge of the discussions, who asked not to be identified because the talks are private.
The S&P 500 erased a drop of 2 percent led by asset management companies after Putnam Investments LLC closed a $12.3 billion money-market fund following a surge of investor withdrawals. Putnam Prime Money Market Fund will liquidate and return cash to investors.
`Breaking the Buck'
A money-market fund run by Reserve Management Corp. this week became the first in 14 years to expose investors to losses by ``breaking the buck'' after writing off investments in Lehman debt. Money-market funds strive to maintain a share price of $1 and are intended for capital preservation.
State Street Corp., the world's biggest money manager for institutions, fell 8.9 percent to $59, paring a drop of as much as 55 percent. Federated Investors Inc., the fourth-largest money-fund manager, fell 11 percent to $27.10 after earlier retreating as much as 44 percent. State Street and Federated issued statements saying that none of their money-market funds had fallen below $1 a share.
Kraft Foods Inc., the biggest U.S. foodmaker, jumped 3.3 percent to $33.74 after being named as the replacement for AIG in the Dow Jones Industrial Average. AIG, the biggest U.S. insurance company, was taken over by the government this week after mortgage-related losses led to credit-rating downgrades that drove the company to the brink of bankruptcy.
New York Times Co. surged 12 percent to $15.25, its biggest gain since 1980, after reporting a smaller revenue decline for August than the previous two months.
Almost 2.45 billion shares traded on the NYSE, the most since March 20 and 77 percent higher than the three-month daily average.
U.S. stocks tumbled yesterday as bank lending seized up in the wake of the government's takeover of AIG, raising concern that more of the nation's biggest financial companies will fail.
The 26 percent drop in the S&P 500 since its October peak through yesterday erased half its gain from the five-year bull market that began in 2002.
The S&P 500 is poised to post its first yearly retreat since 2002 after global banks racked up $518 billion in credit losses and asset writedowns stemming from the first nationwide decline in home prices since the 1930s.