Stocks Soar on Regulatory Hopes

A dramatic late-session surge came amid news that Paulson may be working on a Resolution Trust Corp.-style solution to the financial crisis

Major U.S. stock indexes lurched in and out of negative territory Thursday in a volatile session before shooting higher in the final hour of trading on the latest hope of a government solution to the current financial crisis.

Market players faced myriad uncertainties about the state of the financial system, with big questions on the future of major investment banks and the role of short sellers in their recent troubles, whether central banks can unlock frozen credit markets, and the health of money market funds.

But a CNBC report late in Thursday's session said that Treasury Secretary Henry Paulson might be working on a Resolution Trust Corp.-type solution to the current financial crisis, which many observers have urged. The RTC was created to clean up the 1980s savings and loan mess.

Traders have been looking for possible action from Washington in the fast-moving financial crisis as President Bush canceled a planned overseas trip. Bush sought to reassure markets and the public about the growing financial crisis, but offered no plans.

Also Thursday, global central banks pumped $180 billion into the banking system.

On Thursday, the Dow Jones industrial average jumped 410.03 points, or 3.86%, to 11,019.69 after tumbling 4.06% Wednesday. The broader S&P 500 index shot higher by 50.12 points, or 4.33%, to 1,206.51 after falling 4.71% in the previous session. The tech-heavy Nasdaq composite index soared 100.25 points, or 4.78%, to 2,199.10 after a 4.94% plunge Wednesday.

On the New York Stock Exchange, 24 stocks were higher in price for every eight that fell. The ratio on the Nasdaq was 21-8 positive. Trading was active.

Bonds fell in a volatile session as Putnam closed an institutional prime money market fund, the Philadelphia Fed's economic activity index for September unexpectedly rose, and weekly jobless claims moved higher. The dollar index rebounded from earlier losses. Gold futures were up. Oil futures were mixed.

Markets have been whippy of late, but Thursday's session was something else. Indexes started solidly higher after the global liquidity jamboree and the better than expected Philly fed reading. But confidence issues resurfaced, between further sell-offs in shares of major Wall Street firms Morgan Stanley (MS; +3.7%) and Goldman Sachs (GS; -5.7%) and worries about trouble at money market funds. The news of a potential government body to deal with the crisis came out of the blue, and sparked the late-session euphoria.

Regulators continued to get tough on on short sellers, who have been blamed for the steady, precipitous declines of Morgan Stanley and Goldman Sachs over the past several days. On Thursday, the SEC's ban on naked short covering went into effect. New York State Attorney General Andrew Cuomo announced a probe into illegal short selling. Also Thursday, UK regulators banned short selling on financial shares until Jan. 19.

Financial institutions fought back against perceptions of weakness. Morgan Stanley CEO John Mack told employees to stand fast and hold on to their shares, which is what senior management is doing. He explained that authorities were beginning to understand the systemic risk posed by short-selling and that the bank had lost some of its prime brokerage money during the turmoil, but this would have minimal impact on the firm's liquidity. In a town hall meeting with staff, he said the firm is pursuing multiple options and had spoken with Goldman several times on short-selling issues.

According to a CNBC report, Morgan Stanley will begin official merger negotiations with Wachovia imminently. Morgan Stanley is continuing efforts to raise capital from the Chinese government. Earlier, CNBC reported Mack is committed to keeping the firm independent. In addition to Wachovia, the company has talked to Citigroup (C; +18.7%) and foreign banks, according to the report.

Meanwhile, amid worries about money market funds in light of the Putnam news, State Street (STT; -8.9%) said it remained well-capitalized and has ample sources of liquidity in the unlikely event of having to consolidate any of its conduits. It notes that it raised $2.8 billion in capital in June and has no plans for additional equity issuance. Moreover, none of its money market funds have seen their net asset values (NAVs) decline below $1 -- an occurrence commonly called "breaking the buck" -- nor does State Street have exposure to AIG, Lehman, WaMu, Wachovia, Merrill or Morgan.

Bank of New York Mellon (BK; -4.6%) said that that it has isolated Lehman assets in a separate structure that had been part of an institutional cash reserve fund (less than 1% of its lending and fund activity), informing clients and monitoring closely all market-related activity in its money market, cash and securities lending operations.

Washington Mutual (WM; +48.8%) shares were seen higher Thursday on various media reports that firm has put itself up for sale.

Standard & Poor's Ratings Services said it revised the CreditWatch status of most of its ratings on American International Group (AIG; +31.2%) and affiliated companies to CreditWatch developing from CreditWatch negative, and that it raised its short-term counterparty ratings on AIG, its guaranteed subsidiaries, and International Lease Finance Corp. to A-1 from A-2. Standard & Poor's also lowered ratings on various subsidiaries' preferred shares to B from BBB.

On Thursday, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank announced coordinated liquidity measures for global markets. According to a Fed statement, the measures are "designed to address the continued elevated pressures in U.S. dollar short-term funding markets."

The Fed authorized a $180 billion expansion of its temporary reciprocal currency arrangements, known as swap lines, to provide dollar funding for both term and overnight liquidity operations by the other central banks. The Fed also authorized increases in the existing swap lines with the ECB and the Swiss National Bank to support the provision of U.S. dollar liquidity in amounts of up to $110 billion by the ECB and up to $27 billion by the Swiss National Bank. New swap facilities were authorized with the Bank of Japan ($60 billion), the Bank of England ($40 billion), and the Bank of Canada ($10 billion).

Meanwhile, the New York Fed conducted a $50 billion overnight repo to inject much-needed temporary reserves into the banking system, following closely on the heels of the coordinated liquidity facility increase overnight.

U.S. jobless claims rose 10,000 to 455,000 in the week ended Sept. 13, following the unrevised 445,000 level the week before. The 4-week moving average was 445,000 versus 440,000 previously. Continuing claims fell 55,000 to 3,478,000 in the week ended Sept. 6. The claims print was higher than expectations, though were likely distorted by the impact of Hurricane Gustav, notes Action Economics.

The U.S. Philadelphia Fed rebounded sharply to 3.8 in September, well above the August reading of -12.7, and the -10 that markets had expected. The new orders index jumped to 5.6 from -11.9 in August. In addition, the six-month business conditions index improved to 30.8 from 27.6. Prices paid fell to 31.5 from 57.5 and the employment component edged up to -0.9 from -1.1, though it remains negative.

The U.S. index of leading economic indicators fell by a greater than expected 0.5% in August, following the -0.7% reading in July, and hit its lowest level since October 2004. Negative readings were seen for the average workweek, jobless claims, deliveries, capital goods orders, building permits and money supply. Support was provided to the index from gains in stock prices, the yield curve, consumer expectations and, to a lesser degree, consumer goods orders.

October NYMEX crude oil futures were trading at $96.61 per barrel in New York, down 55 cents, after peaking at $102.24 earlier in the session.

December gold futures, which soared $70 Wednesday, were up $49.70 to $900.20 at Thursday afternoon in a continued flight to safety from U.S. financial crisis plagued stocks market in U.S., Europe, and Russia. Some analysts say gold could rise to $1000 short term and grind higher after that. Wednesday's surge was the biggest since 1980.

Among other stocks in the news Thursday, FedEx Corp. (FDX; +3.5%) reported first quarter earnings per share of $1.23, vs. $1.58 one year earlier, as higher operating costs offset an 8% sales rise. The company expects second quarter EPS to be in the range of $1.40-$1.60, vs. $1.54 a year ago. FedEx reaffirmed its its EPS guidance of $4.75-$5.25 for fiscal 2009, which reflects weaker global economic conditions and incorporates current fuel prices and the related impact of fuel surcharges.

ConAgra Foods (CAG; +2.7%) posted first quarter earnings per share continuing operations (excluding items) of 27 cents, vs. 26 cents one year earlier, on a 17% sales rise. ConAgra slightly lowered its fiscal 2009 outlook; it now sees EPS from continuing operations to be slightly above $1.50 (excluding items).

Constellation Energy Group (CEG; -2.3%) reached a tentative agreement with MidAmerican Holdings under which MidAmerican would purchase all of CEG's outstanding stock for $26.50 a share. The transaction is expected to be completed, pending due diligence and the required regulatory and shareholder approvals, in the second quarter of 2009. MidAmerican is owned by Warren Buffet's Berkshire Hathaway (BRKA; +2.6%).

European markets turned lower in late trading Thursday. In London, the FTSE 100 index fell 0.66% to 4,880. In Paris, the CAC 40 index dropped 1.06% to 3,957.86. Germany's DAX index added 0.04% to 5,863.42.

Asian markets finished lower Thursday. Japan's Nikkei 225 fell 2.22% to 11,489.30. In Hong Kong, the Hang Seng index edged lower by 0.03% to 17,632.46.

Treasury market

Bonds plunged late in Thursday's session following reports the Bush administration might be working on an RTC-type program designed to deal with the financial crisis that has crippled Wall Street the past month or so and the housing industry for the past year. The 30-year bond was down 24/32 to 106-10/32 for yield of 4.131%. The 10-year note was off 27/32 to 104 for yield of 3.525% and the 2-year note was off 09/32 to 101-03/32 for yield of 1.805%.

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