The U.S. government decided to haul out some powerful -- and expensive -- weapons Friday to combat the financial crisis that has shaken Wall Street and the U.S. financial system.
U.S. stock indexes finished sharply higher Friday, one day after a dramatic market rally spurred by late news of government efforts to address the crisis that has gripped financial markets around the world. Indexes were off session highs as some traders took profits before the weekend, but the S&P 500 still erased its decline for the week.
On Wall Street, the financial sector led the way as the government announced a giant multi-billion dollar plan to resolve the nation's financial crisis, protect investors in money market funds, and absorb some bad real estate debt.
Bonds fell in price, while the dollar index was slightly lower. Gold futures were lower. Oil futures were higher.
On Friday, the blue-chip Dow Jones industrial average climbed 368.75 points, or 3.35%, to finish a remarkable week at 11,388.44. The broader S&P 500 index gained 48.57 points, or 4.03%, to end at 1,255.08. The tech-heavy Nasdaq composite index jumped 74.80 points, or 3.40%, to close the session at 2,273.90.
Action in the broader market was strongly positive. On the New York Stock Exchange, 28 stocks gained in price for every three that fell. The ratio on the Nasdaq was 17-7 positive. Trading was heavy, reports S&P MarketScope, amid quadruple witching expiration of options and futures.
The VIX equity volatility index, which hit a six-year high of 42.16 on Thursday, bounced from opening lows of 27.95 to the 31.0 area as the widely followed market "fear gauge" attempted to find fresh equilibrium. "The systemic financial crisis of 2007-08 reached an extreme yesterday according to this price action, as that level of panic was matched by the overwhelming use of force by the government to quell the run on the U.S. banking system," says Action Economics.
"We think evidence of a climax bottom this week, and an initial low for the bear market, were overwhelming," says S&P chief technical strategist Mark Arbeter.
Major indexes in Europe vaulted sharply higher. In London, the FTSE 100 index jumped 8.84% to 5,311.30. In Paris, the CAC 40 index climbed 9.27% to 4,324.87. Germany's DAX index was a relative laggard, rising 5.56% to 6,189.53.
Asian markets finished trading Friday with big rallies. Japan's Nikkei 225 index rose 3.76% to 11,920.86. Hong Kong's Hang Seng index rocketed higher by 9.61% to 19,327.73. China's CSI 300 Index surged by a record 9.3%.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke revealed efforts to craft a massive rescue plan to buy up dodgy assets held by troubled banks and other financial institutions at the heart of the nation's financial crisis. Congressional leaders said they expected to get the plan Friday and act on it before Congress recesses for the election.
Bloomberg reports options that U.S. officials are considering include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff. They spoke on condition of anonymity because the plans may change. Another possibility is using Fannie and Freddie, the federally chartered mortgage-finance companies seized by the government last week, to buy assets, one of the people said.
The Securities and Exchange Commission early Friday imposed a temporary emergency ban on short-selling of financial company stocks, a trading method that bets the stocks will go down. As the financial crisis widened, entreaties had come from all quarters to stem a swarm of short-selling contributing to the collapse of stock values in investment and commercial banks.
The U.S. Treasury Department announced a massive program to shore up the nation's money-market mutual-fund sector, responding to concerns that the global financial crisis is starting to affect those historically safe assets.
Under the temporary program, the Treasury will insure the holdings of any eligible publicly offered money-market fund. The funds must pay a fee to participate in the program. The insurance program will be financed with up to $50 billion from the Treasury's Exchange Stabilization Fund.
The Fed announced enhancements to provide loans to financial institutions to purchase asset-backed commercial paper (ABCP) from money market funds. Not only does that support the money market funds, but it could help revive the ABCP market that pumps liquidity in the corporate sector. These "non-recourse loans will be made at the primary credit rate" and the Fed also will purchase agency discount notes from primary dealers. This more good news for the markets, helping to thaw out these vital investment vehicles.
The government's moves could help alleviate the uncertainty that has been sending the markets into tumult over the past week. Lending has ground to a virtual standstill in the wake of the bankruptcy of Lehman Brothers Holdings (LEH).
President Bush said the financial rescue package was a "pivotal moment" for the economy, which required immediate action from the government, overcoming any partisanship and addressing the root cause of the instability -- mortgage assets. Bush and Paulson said a significant amount of tax dollars would be put on the line, but the assets purchased have value that will be realized over time. Bush urged Congress to act quickly on legislation without any controversial riders that could delay it, as well as updating financial system regulation.
Amid the euphoria on Wall Street, there were some cautionary notes. Former SEC chairman Harvey Pitt said the U.S. needs a new regulatory system now. Also, there was much complaining among traders about the SEC ban on short selling in financial companies, reports S&P MarketScope.
Crisis-control efforts were underway in other countries Friday.
The European Central Bank, Swiss National Bank and Bank of England offered up more cash Friday. The three banks put a combined $90 billion into money markets in a lockstep move. Britain's Financial Services Authority imposed a ban on short selling of financial stocks through January. The U.K. Financial Services Authority banned speculators from betting against financial shares for the rest of the year.
Russia's RTS Index jumped 16% after a two-day suspension and President Dmitry Medvedev's pledge of $20 billion to prop up the market.
Looking ahead to next week's economic events, Fed Chairman Bernanke will be appearing on Capitol Hill the majority of next week, starting with his Joint Economic Committee (JEC) testimony before the Senate Banking Committee Tuesday at 10 ET and followed on Wednesday by JEC testimony before the House Financial Services Committee. As if that was not enough, he will also appear before the House Financial Services Committee again on Thursday at 12 noon ET on the recent takeover of the housing GSEs by the government.
In the middle of the current market turmoil, economic reports on the previous month's activity are pretty much old news. Nevertheless, the main focus of this week's data will be on the sector most crucial to the outlook: housing. Sales of both new and existing homes have shown clear signs of bottoming in recent months, and August updates on both sectors will offer more guidance. Also, the Office of Federal Housing Enterprise Oversight (OFHEO) will publish its report on prices of existing homes in July. Prices continue to fall, but the overall drops have become smaller in recent months with the largest declines increasingly concentrated in the boom-bust areas of California, Florida, Arizona, and Nevada.
Shares in the financial sector moved higher Friday on the bailout news and the short-selling curbs, with Goldman Sachs (GS) and Morgan Stanley ( Next Page
asp?symbol=MS'>MS) among the big gainers.
In a research note Friday, Goldman equity analysts said they believe Morgan Stanley is sound as an ongoing entity, and reiterated the stocks place on Goldman's Buy Conviction List.
According to a Wall Street Journal report, major shareholders are pursuing an effort to try to help pay off the federal government's loan to American International Group (AIG) in time to avoid having Washington take an 80% stake in the company, according to a person familiar with the matter. Hurdles to these shareholders' efforts could be high, as they and other investors they may attract would have to put up significant sums.
According to various media reports, at least five companies are said to be looking a Washington Mutual (WM) as a possible acquisition: HSBC (HBC), Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), and Banco Santander (STD).
October West Texas Intermediate crude oil futures, which expire Monday, were up $5.95 to $103.83 per barrel Friday afternoon, October reformulated gasoline futures were up 11.38 cents to 259.62 cents per gallon on the perception the Bush administration's financial rescue plan will help revive the economy, which would boost the demand for energy. Also, some traders covered short positions before the weekend. The market got a boost from Royal Dutch Shell's warnings that this week's escalation in Nigerian rebel attacks could lead to increased equipment downtime and hurt earnings.
December gold futures, which had surged above $900 an ounce earlier this week, were off $35 to $865.70 per ounce Friday afternoon in a carryover of a sell-off that began late Thursday. Gold had risen recently on safe haven buying as the financial crisis threatened a meltdown. The Bush administration plan news relieves some of the tension, making precious metals less appealing.
Bonds were mostly lower following reports the Bush administration is working on a program designed to deal with the financial crisis that has crippled Wall Street the past month and the housing industry for the past year. The 10-year note was lower at 102-01/32 for a yield of 3.756%, while the 30-year bond fell to 102-16/32 for a yield of 4.353%.
The Treasury market rallied this week, pushing two-year rates down 27 basis points, the most since the five days through June 27, when stocks fell on concern credit-market-related losses were deepening. Investors sought the safest assets after the bankruptcy of Lehman Brothers and the U.S. government takeover of AIG.
There were no major economic reports released Friday.
Among stocks in the news Friday, Oracle (ORCL) posted first quarter GAAP EPS of 21 cents, vs. 16 cents one year earlier, on an 18% revenue rise.
Palm Inc. (PALM) reported a first quarter loss per share of 39 cents vs. a one-cent loss one year earlier loss (both quarters included options expenses) as narrowed gross margin offset a 10% revenue rise. The non-GAAP loss was 12 cents vs. Wall Street's 18 cents loss estimate. Palm reportedly sees second-quarter revenue down sequentially.
Texas Instruments (TXN) says it plans to raise its quarterly cash dividend 10%, to 11 cents per share.
Nvidia Corp. (NVDA) announced that it expects to eliminate about 360 positions worldwide, or 6.5% of its global workforce by the end of its fiscal 2009 third quarter.