(Source: Bloomberg)
By Lynn Thomasson
U.S. stocks rose after a closing rally in banks and securities firms helped restore about $369 billion to the Standard & Poor's 500 Index and $105 billion to the Dow Jones Industrial Average.
Bear Stearns Cos., the second-largest U.S. underwriter of mortgage bonds, climbed the most since 1998 on speculation it may get an infusion of capital. Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., the three biggest U.S. banks, provided the best gains in a week for financial shares on expectations the Federal Reserve may lower interest rates this year.
``There are rumors around that there is rescue financing coming in for some of the financials, particularly for Bear Stearns,'' Barton Biggs, a former Morgan Stanley strategist who now runs the $1.5 billion hedge fund Traxis Partners LLC, said in an interview.
The S&P 500 advanced 4.57, or 0.3 percent, to 1,411.27. The Dow average lost 15.69, or 0.1 percent, to 12,845.78 after earlier falling 344 points. The Nasdaq Composite Index slipped 7.76, or 0.3 percent, to 2,451.07.
Financial shares in the S&P 500 climbed 3.5 percent, their first advance in six days, after earlier dropping 1.5 percent. Stocks recovered after the average price-earnings ratio on the S&P 500 slipped to its lowest since January 1991.
U.S. stocks tumbled for most of the day after Countrywide Financial Corp., the biggest U.S. mortgage lender, said it borrowed the entire $11.5 billion available in a bank credit line as the global financial crisis curbed access to short-term financing. A record 2.98 billion shares changed hands on the New York Stock Exchange.
Global Retreat
Equity markets around the world tumbled, sending benchmark indexes in Europe and Asia to the lowest levels in five months. Developing nations led the tumble, with the Morgan Stanley Capital International Emerging Market Index dropping 5.6 percent, its biggest decline since 2000. Turkey's Istanbul Stock Exchange National 100 Index sank 9.7 percent in dollar terms, the biggest decliner among 89 indices tracked by Bloomberg.
Europe's Dow Jones Stoxx 600 Index fell 3.6 percent, while Asian stocks posted their biggest two-day decline in a year as the MSCI Asia-Pacific Index retreated 2.3 percent.
Bear Stearns
Bear Stearns, the fifth-largest U.S. securities firm and manager of two hedge funds that collapsed in July, increased $13.29, or 13 percent, to $116.44 for the best performance in the S&P 500.
``If the firm is successful in bringing in a `deep pocket' partner, it will stop all rumors concerning potentially more adverse results,'' Punk Ziegel & Co. analyst Richard Bove wrote in a note to investors.
Citigroup, the largest U.S. bank, climbed $1.94 to $47.55. Bank of America, the second biggest, added $1.62 to $49.85. JPMorgan, the No. 3, rose $2.47, or 5.7 percent, to $45.47 for its biggest gain in a year.
The Fed should reduce interest rates ``pretty soon'' because mortgage market losses have created a ``credit crunch,'' Barton Biggs said.
`Losing Faith'
``People are losing faith in credit, so the economy is seizing up,'' said Biggs, 74. ``That's why it's important that the Fed cut rates and get confidence back in the system.''
Biggs predicted in April that the Dow average will rise 19 percent this year. The 30-stock gauge has risen 3.1 percent so far and has dropped 8.2 percent since reaching a record July 19.
Other investors and traders said speculation of a rate cut spurred the rally in financial shares.
``There's a rumor of an emergency Fed meeting,'' said Thomas Garcia, head of trading at Thornburg Investment Management, which oversees about $45 billion in Santa Fe, New Mexico. ``You've got a major credit crunch right now and these guys need to get it together and do something about it.''
No meeting was scheduled for the rate-setting Federal Open Market Committee today, according to the Fed's Web site. Any unscheduled meetings of the FOMC would be ``confidential,'' St. Louis Fed President William Poole said in an interview yesterday.
The Fed added a total of $17 billion in temporary funds to the banking system today to meet banks' demand for cash. It ``stands ready'' to conduct more operations as needed to ``facilitate trading at rates around the operating objective'' of 5.25 percent, the New York Fed said in a statement.
Fannie Mae
Fannie Mae increased $3.83, or 6.2 percent, to $65.28. Chief Executive Daniel Mudd said on a conference call that the company continues to seek permission from the U.S. government to increase the amount of mortgages it is allowed to purchase.
``We're having a constructive and respectful conversation but a conversation all the same,'' Mudd said on a conference call. ``We think that this is what our company was built for.''
The main measure of U.S. stock volatility climbed to the highest since March 2003.
The Chicago Board Options Exchange Volatility Index, known as the VIX, increased 0.5 percent to 30.83 and rose as high as 37.50. Higher readings in the gauge, derived from prices paid for S&P 500 options, indicate traders expect bigger share-price swings in the next 30 days.
Countrywide
Countrywide lost $2.34, or 11 percent, to $18.95, a four- year low. David Sambol, the lender's president and chief operating officer, said liquidity in the mortgage industry has ``become constrained.'' Countrywide said today it drew down an $11.5 billion bank credit line as the global credit crunch curbed access to short-term financing from debt markets.
Moody's Investors Service cut its rating on the company's debt three levels to Baa3, the lowest investment-grade level, from A3.
Concerns that credit-market losses were spreading were also spurred when First Magnus Financial Corp., the second-largest privately held U.S. mortgage company, said it would stop funding new loans, adding that the secondary mortgage market has collapsed.
More than 70 U.S. mortgage companies have closed operations or sought buyers since the start of 2006 as investors became concerned about rising late payments.
About nine stocks rose for every eight that fell on the New York Stock Exchange.
In other markets, yields on 10-year Treasury notes declined 0.06 percentage point to 4.66 percent. Crude oil for September delivery fell $2.33 to $71 barrel in New York, the lowest price since June 29.
The Russell 2000 Index, a benchmark for companies with a median mark value of $639 million, gained 2.3 percent to 768.83. The Dow Jones Wilshire Index, the broadest measure of U.S. shares, increased 0.3 percent to 14,190.36.
Bank of America Corp. (BAC US)
Bear Stearns Cos. (BSC US)
Citigroup Inc. (C US)
Countrywide Financial Corp. (CFC US)
Fannie Mae (FNM US)
JPMorgan Chase & Co. (JPM US)
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