Stocks rallied Monday after JPMorgan Chase (JPM) raised its take-over offer for Bear Stearns (BSC), and regulators discussed steps to ease the financial crisis.
JPMorgan Chase offered the rock bottom price of $2 per share for Bear Stearns a week ago after the brokerage firm ran out of cash. On Mar. 24, JPMorgan increased its bid from $2 to $10 to satisfy angry Bear Stearns shareholders.
Also, Bear Stearns will issue 95 million shares of stock, which JPMorgan will buy to give it 39.5% of the shares outstanding, close to the majority it would need to win approval for the buyout.
Also Monday, regulators announced they would allow the Federal Home Loan Bank to buy up $100 billion in mortgage-backed securities, a measure designed to ease the housing and mortgage crisis.
The Federal Reserve and Bank of England denied reports over the weekend that they were planning a mass purchase of mortgage-backed securities to ease the global credit crisis. But Reuters reports the Bank of England is considering other options to fight financial turmoil.
On Monday, the Dow Jones industrial average gained 187.32 points, or 1.52%, to 12,548.64. The S&P 500 index added 20.37 points, or 1.53%, to 1,349.88. The Nasdaq composite index jumped 68.64 points, or 3.04%, to 2,326.75.
On the New York Stock Exchange, 26 stocks moved higher for every six in negative territory. On the Nasdaq, the ratio was 22 to 8 positive.
The strong performance from the Nasdaq on Monday was a surprise, because it had lagged the other indexes, especially the Dow, recently. One reason is that semiconductor stocks rallied Monday, up 3.3%, as Pericom Semiconductor (PSEM) said it now expects higher revenue this quarter.
Stocks have had a good week, ever since the collapse of Bear Stearns and deep Federal Reserve interest rate cuts were announced. On Mar. 18 and Mar. 20, major indexes also posted solid gains, and the S&P 500 is up 4.37% in the past five trading sessions. That strong performance raises the question of whether stocks have already hit bottom and are now recovering from the worst of the damage from the credit crunch and weak economy.
"More and more, the odds are going up that we've seen the low in the market for right now," says John Wilson, chief technical strategist at Morgan Keegan. But Phil Roth of Miller Tabak warned that, though recent stock performance has been impressive, this might be just a temporary rally, lasting up to a month or two or less.
"We would have to see several more strong days to suggest the upturn is more than another bear market rally," Roth said.
Over in the energy markets, oil prices were falling. May WTI crude-oil futures fell $1.24 to $100.60 per barrel.
In economic news Monday, U.S. existing home sales rose 2.9% to an annual rate of 5.03 million in February after falling 0.4% in January. "That's better than expected and suggest some flattening out in the beleaguered housing market," Action Economics says. There is now a 9.6 month supply of homes on the market, down from 10.2 months in January. The median sales prices fell to $195,900 from $199,700 a month ago.
Homebuilding stocks, battered by the housing slowdown and mortgage crisis, jumped 5.34% on Monday in response to the news. However, economists were skeptical the end is near for housing woes. "While this report offers some support for the notion that activity may be near a bottom, we do not expect to see a meaningful sustained improvement in the sales pace until prices fall further and affordability improves," said Ted Weissman of Morgan Stanley.
"The winter reports often tell us more about the weather than the economy," said David Wyss of Standard & Poor's. "We still expect some further declines in sales and prices."
Analysts on Wall Street are rapidly lowering their estimates for company earnings in the first quarter of 2008. According to Reuters Estimates, which compiles analyst predictions, earnings are now expected to fall 5.5% this quarter. That compares to a 2.7% drop analysts were predicting a week before and a positive 4.7% on Jan. 1.
Among stocks in the news Monday, Tiffany & Co. (TIF) surprised Wall Street with a strong profit report. The luxury retailer posted earnings of $1.27 per share, vs. $1.07 a year ago, as worldwide same-store sales rose 1% and total sales jumped 10%. For the next year Tiffany & Co. expects sales growth of about 10%. Tiffany shares rose 10.5%.
CIT Group (CIT) was upgraded to buy from hold as the financial firm, stung by losses on subprime mortgages and student loans, reportedly is hoping for a rescue from an overseas bank with a strong balance sheet. "Since we view CIT's problems as mostly capital markets related, we see CIT as an attractive acquisition candidate," Stifel analyst Chris Brendler wrote. Shares rose 35%, making up most of a sharp sell-off on Mar. 20.
Palm (PALM) posted a loss of 16 cents per share, vs. earnings of 16 cents a year ago, as revenue fell 24%. Standard & Poor's Ratings Services placed Palm's bonds on CreditWatch with negative implications.
Lehman Brothers (LEH) was reportedly downgraded by an Oppenheimer analyst from outperform to perform. Standard & Poor's Ratings Service revised its outlook for both Lehman and Goldman Sachs (GS), changing the Wall Street firms' ratings from stable to negative.
Walgreen (WAG) reported earnings of 69 cents per share, vs. 65 cents a year ago. Same-store sales were 4.7% higher, and total sales were up 11%. Walgreen reached a deal to be the exclusive specialty pharmacy for Prime Therapeutics, which has health plans with 20 million members.
TierOne (TONE) and CapitalSource (CSE) have ended plans to merge. No termination fee will be paid. Also, TierOne announced it would buy back 10% of its shares.
Sherwin-Williams (SHW) lowered expectations by projecting earnings in the first quarter of 56 to 61 cents per share, and predicting sales will rise in the low-to-middle single-digit range. The firm attributed the gloomier outlook to lower domestic sales and higher raw material costs.
Many overseas markets were closed on Monday. In Japan, the Nikkei 225 index fell 0.02% to 12,480.09.
Treasury prices fell on Monday as investors poured money into equities. The ten-year note tumbled 55/32 to 99-20/32 for a yield of 3.54, while the 30-year bond plunged 93/32 to 100-22/32 for a yield of 4.33%.
Since the Federal Reserve cut the federal funds rate to 2.25% a week ago, "panic over the possibility of a financial system meltdown appears to have subsided, at least for now, wrote Jan Hatzius of Goldman Sachs. The Fed is likely to cut one more time, to 2%, and then "pause for several months to assess the impact of its actions," Hatzius said.