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Stocks Resume Their Rally

Traders Tuesday weighed news of a surprising jump in housing starts and a dividend cut from Alcoa

U.S. stocks, closed higher Tuesday with the help of better-than-expected housing starts and inflation data. Homebuilders and home improvement-related issues were among the biggest gainers. Tech issues lured bargain hunters, helping send the Nasdaq composite index up over 4%. Indexes resumed their winning ways after dipping Monday for the first time in five sessions.

On Tuesday, the 30-stock Dow Jones industrial average ended higher by 178.73 points, or 2.48%, at 7,395.70. The broad S&P 500 index was up 24.23 points, or 3.21%, at 778.12. The tech-heavy Nasdaq composite index jumped 58.09 points, or 4.14%, to 1,462.11. NYSE breadth was 24-6 positive, while Nasdaq breadth was 21-6 positive. Trading was active.

Traders also weighed news that Alcoa (AA) slashed its dividend and announced stock and note offerings. Steelmaker Nucor (NUE) warned of a first-quarter loss.

Congress debated President Obama's proposed budget and sought ways to retrieve bonus money paid out by American International Group (AIG).

Bonds fell Tuesday as Federal Reserve policymakers kicked off a two-day meeting. While the Fed is not expected to take any action on interest rates, traders will will await Wednesday's post-meeting statement on whether the Fed will buy Treasuries.

The dollar index eased. Gold futures fell. Oil futures rose.

Citigroup's (C) was up in heavy trading even though influential independent banking analyst Meredith Whitney said that "this year won't look any better than last year" for banks, expecting them to shed assets in the move to raise capital, depressing values. She also said that Citigroup's recent announcement that it had been profitable in the first two months of 2009 would come back to haunt it.

Speaking on CNBC, Whitney said that mark-to-market accounting didn't really matter now, and that without a doubt, credit had been extended too freely in previous years. She also said that subprime asset class were about to take another leg down, and that consumer credit was shrinking faster than estimates.

Senate Democratic Leader Harry Reid said Congress will force executives of AIG to pay back at least some of the $165 million in bonuses they received after the insurance giant got billions in federal bailout money. The AP reported Reid, D-Nev., said Senate Finance Committee Chairman Max Baucus will issue a proposal in the next day or so that would force AIG to return some of the money awarded to executives who oversaw its failure.

As outrage over the bonuses reached a new crescendo across the political spectrum, the Obama administration said it was trying to put strict limits on how future government bailout dollars can be used. But sharp questions have been raised about what the administration knew about the bonuses -- and when. Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, chastised the administration, saying Treasury Secretary Timothy Geithner should have blocked the payouts.

The Mexican government said it would slap tariffs on 90 U.S. industrial and agricultural products, in a trade dispute that underscored the difficulties facing President Barack Obama as he tries to assure business and global allies that he favors free trade. The WSJ reported Mexico said the tariffs were in retaliation for the cancellation of a pilot program allowing Mexican trucks to transport cargo throughout the U.S. Unions have for years fought to keep Mexican trucks off U.S. highways, despite longstanding agreements by the two countries to eventually allow their passage. Legislation killing the pilot program was included in a $410 billion spending bill Mr. Obama signed last week. The White House responded to the tariff threat with assurances that Obama would work with Congress to create a new cross-border trucking program that addresses safety concerns.

As the Fed meeting started Tuesday, the central bank's chairman, Ben Bernanke, and other committe members may have to ramp up their purchases of mortgage securities and other assets after the economy and job market deteriorated further since they last met, according to Bloomberg. The FOMC, gathering today and tomorrow, needs to redouble its efforts after the central bank's balance sheet shrank 17% from a $2.3 trillion December peak, Fed watchers said. The retreat came even as Bernanke acknowledged the chance that the unemployment rate will exceed 10% for the first time in a quarter century.

Obama economic adviser Larry Summers argued for a "resolution regime" for large financial institutions, similar to the FDIC's role with banks in an CNBC interview, outlining the administration's economic and tax policies. He said that Treasury Secretary Geithner is pursuing all legal means to rein in the "outrageous" AIG bonuses, but would not abrogate contract law in the process. The main focus is on breaking the economic down-cycle and strengthening the economy via job creation and "fast, aggressive actions," said a strident Summers. He offered few specifics, however, when pressed on Geithner's public-private partnership on toxic assets.

The Bank of Japan said it may buy subordinated loans from banks for the first time to revive lending and replenish capital depleted by falling stock prices. Bloomberg report the central bank is considering the purchase of up to 1 trillion yen ($10 billion) of the debt in an "exceptional" step, it said in a statement. The bank concludes a two-day policy meeting tomorrow.

In economic news Tuesday, U.S. housing starts rebounded 22.2% in February, to an annual rate of 583,000 from the record low of 477,000 in January. The rise was more than the 450,000 expected by the consensus. Most of the improvement was in multi-family starts, which rose 80% to 212,000. Single-family starts rose only 1.1%, to 357,000. Starts remain very weak, but not quite as bad as they looked in January. Weather tends to dominate economics during the winter months, and we don't want to reach any conclusions until we see the spring data, but for now housing looks like it may be finding a bottom. Starts rose in all regions except the West, which not coincidentally was the only region not to drop in January. The biggest rebound was in the Northeast, which just reversed the January plunge in that region. Permits were up only 3%, to 547,000. Permits dropped only 3% in January, another sign that the swings are weather-related.

U.S. producer price index inched up 0.1% in February, and the core rose 0.2%. Those follow gains of 0.8% and 0.4%, respectively, in January. This is a second consecutive rebound in the headline following six straight months of declines as commodity prices collapsed. Energy prices climbed another 1.3% following a 3.7% rebound in January. Consumer goods prices were up 0.1%, including a 8.7% increase in gas prices, and a flat reading in passenger car prices. Foods declined 1.6%.

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