Stocks Reverse Wednesday's Drop On Rumors Of Bad Debt Entity - U.S. Commentary

Thu. September 18, 2008; Posted: 04:42 PM

(RTTNews) - The markets staged a late day rally on Thursday, sending the Dow up more than 400 points. A report that the government may create a repository for bank's bad debt prompted investors to take back nearly all of the losses posted in the previous session, when the Dow closed down more than 450 points.

The markets got an earlier boost when the U.S. Federal Reserve along with five other central banks in Europe enacted plans to deal with the elevated pressures in U.S. dollar short-term funding markets.

Among the efforts, the Fed provided an extra $180 billion to the other central banks involved via its temporary reciprocal currency arrangements or swap lines, valid through January 30, 2009. This increased capacity is intended to provide dollar funding for both term and overnight liquidity operations by the other central banks.

Fueling the speculation with WaMu, a major investor waived a provision of its agreement that would have required a potential buyer or other major investor to pay the firm hundreds of millions of dollars in addition to whatever money was injected into WaMu.

In an interview with RTT News, Robert Loest, senior portfolio manager at Integrity Mutual Funds, said the "government isn't fixing the underlying problem," which he considers a "broken regulatory system." Loest said that without some "fundamental solutions" to the "larger, regulatory" issues, we will not see a "turnaround in the markets or economy or credit availability or interest rate spreads."

Loest also stated that the issues surrounding the big brokerage houses and investment banks were "easy to see coming," but he called AIG a "game changer." He said the insurance company is the "last domino that lights the fuse" and worries that if AIG is in trouble, every major insurance company in the world "can't cover their assets."

Nonetheless, the late day rally followed a CNBC report that suggested the Federal government might create a repository for banks' bad debt, similar to the Resolution Trust Corporation that was formed in the 1980s after the failure of the savings and loan banks.

Peter Cardillo, chief market economist at Avalon Partners spoke to RTT News late in the day. He discussed the late day rally on rumors of the Treasury putting the Resolution Trust Corp. back into place, which he said "certainly would be a positive going forward" Cardillo said that the speculation is "getting the shorts to cover" but says he needs to see "some real follow through with increased volume" before he belives the worst is over.

When asked if he thinks the rally will follow though, Cardillo noted, "I kind of think soâ€¦.there's too much doom and gloom, and a plan right now strengthens the notion that you can't fight Uncle Sam when they want to do something."

Meanwhile, there were several economic reports released earlier in the day. Among the various reports, the Federal Reserve Bank of Philadelphia released its report on activity in the Philadelphia-area manufacturing sector. In the report, the Philly Fed said that the sector unexpectedly expanded in the month of September, with the Philly Fed Index climbing into positive territory.

The Philly Fed said its index of current activity rose to a positive 3.8 in September from a negative 12.7 in August, with a positive reading indicating growth in the sector. Economists had expected the index to come in at a negative 10.0.

The major averages moved sharply higher in the final hour of trading, ended the day just off of their session highs. The Dow closed up 410.03 points or 3.9 percent at 11,019.69, the Nasdaq closed up 100.25 points or 4.8 percent at 2,199.10 and the S&P 500 closed up 50.12 points or 4.3 percent at 1,206.51.

Sector News

The financial sector led the broader markets higher in late day trading, with the focus seen mostly in bank stocks. The S&P Bank Index ended the session 16 percent higher, breaking out of a six-week trading range. With the gain, the index set a three-month closing high.

MGIC Investment (MTG | Quote | Chart | News | PowerRating), Wachovia and Washington Mutual were among the biggest gainers in the bank sector. MGIC closed up 74.6 percent, compared to a 59 percent gain by Wachovia. Washington Mutual ended the session 31.2 percent higher.

Elsewhere in the financial sector, brokerage stocks saw significant buying interest as well, led higher by a 22.7 percent gain by E-Trade Financial (ETFC | Quote | Chart | News | PowerRating). While Morgan Stanley showed considerable weakness earlier in the day, it closed up 3.7 percent on the late day rally. The Amex Securities Broker/Dealer Index closed up 8.2 percent.

Real estate stocks also showed notable strength as well. The Morgan Stanley REIT Index closed up 11 percent, reversing recent losses. Housing, internet and steel stocks also posted notable gains.

On the other hand, gold stocks ended the session with modest losses, dragging the Amex Gold Bugs Index down 0.1 percent. While the price of gold closed up more than $46 an ounce, it fell sharply in after hours trading.

Dow Components

After showing a lack of direction throughout most of the day, the Dow components ended the session with substantial gains, pushing the blue chip index sharply higher. With the rally, none of the Dow components ended the day on the downside.

Citigroup was one of the biggest gainers on the Dow, boosted by the strength seen in the financial sector. Shares of the financial services giant closed up 18.7 percent, reversing some of its recent losses. With the gain, the stock climbed off of an eleven-year closing low set in the previous session. Earlier in the day, Citigroup announced that it is appointing Mark Shafir as head of its Global Mergers and Acquisitions department.

AIG also showed considerable strength, up 31.2 percent. Shares of the insurer have been in free fall for the past two weeks amid concerns over its liquidity. Late Tuesday, the Federal Reserve announced that it would issue AIG a 24-month emergency loan for $85 million.

Earlier in the day, the Dow announced that Kraft Foods Inc. (KFT | Quote | Chart | News | PowerRating) would replace AIG in the Dow Jones Industrial Average, effective with the opening of trading on September 22. Kraft posted a 3.3 percent gain.

General Motors (MG | Quote | Chart | News | PowerRating) saw significant buying interest as well. Shares of the automaker closed 14.8 percent higher, reversing losses posted in the previous two sessions. On Wednesday, the stock set a monthly closing low.

Other Markets

Stock markets across the Asia-Pacific region closed mostly lower on Thursday after Wall Street plunged overnight. Japan's Nikkei 225 average closed down 2.2 percent, well off of its worst level of the session.

Meanwhile, the major European averages ended the day mixed after seeing earlier strength. The German DAX Index closed slightly higher, while the French CAC 40 Index closed down 1.1 percent and the U.K.'s FTSE 100 Index ended the day 0.7 percent lower.

Meanwhile, treasuries ended the day with modest losses following a choppy trading session. The benchmark ten-year note started the day sharply lower, but it pared its losses soon after and then traded on either side of the unchanged line for most of the afternoon. Subsequently, the yield on the ten-year note closed up 2.7 basis points at 3.437 percent.

Looking Ahead

The economic calendar is very light on Friday, with the highlight being a Fed speech. Chicago Federal Reserve Bank President Charles Evans will be in Zurich, Switzerland to speak about the U.S. economic outlook. The speech will be closed to the media.

On the earnings front, Oracle (ORCL | Quote | Chart | News | PowerRating) is expected to report first quarter results after the closing bell on Thursday. Analysts expect Oracle to post earnings of $0.27 per share, up from a profit of $0.22 per share in the previous year.

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