Markets storm back

U.S., European countries move to ease financial crisis

October 14, 2008|By Hanah Cho | Hanah Cho,

Stocks rallied yesterday to a huge comeback after suffering their worst week ever. The Dow Jones industrial average climbed 936 points - the biggest one-day gain in its 112-year history - as several countries took concerted steps to ease the financial crisis.

All the major U.S. indexes rose more than 11 percent, with the Dow posting its best percentage-point gain in 21 years.

The Standard & Poor's 500 index set a record for a one-day point gain and the largest one-day percentage jump since the 1930s. And European and Asian markets also stormed back yesterday.

After eight consecutive days of large losses, which dragged down the Dow nearly 2,400 points, it surpassed the previous record for a one-day point gain of 499.19 set during the waning days of the dot-com boom. The Dow, which lost 18.2 percent last week, or 1,874.19 points, closed yesterday at 9,387.61.

Calling yesterday's market surge a relief rally, investors cautioned that lingering doubts about the credit markets and the economy as whole still exist. But yesterday's surge was a change of pace for those who have watched the values of their 401(k) plans and other investments decline during the past year.

The "just horrendous, cataclysmic end-of-the-world environment we had last week left everyone who's been around for a while to say, 'We can't have too much more of this,' " said Andrew Brooks, the head of U.S. equities trading at T. Rowe Price Group in Baltimore.

"This is some kind of a welcome relief rally. Hopefully, we could hold this and sustain this and build from here."

But he added: "The problems are still enormous that the markets and the economy face that I don't think we're out of the woods of fixing everything that needs fixing. The atmosphere is much better, and there is a big sigh of relief."

Brooks and other investors said they'll keep a close eye today on the bond market, which was closed yesterday for Columbus Day, along with banks, to gauge how credit markets react to the measures.

"Unless the credit markets improve, it would be tough to have a lot of confidence in the stock market rally," said Brian Kroneberger, senior vice president of investments for the Dyer Kroneberger Group at the Baltimore brokerage firm Ferris, Baker Watts.

"I'll take any rally we get, but I think that if we open [today] and the credit markets still have issues, the [stock] market will have a difficult time continuing to go higher."

Bush administration officials said yesterday that they will move soon on the $700 billion rescue program. Officials said they were consulting with law firms about the mechanics of buying ownership shares in a large number of banks to help revive the stagnant credit markets and, in turn, get the economy moving again.

Even with yesterday's gains, U.S. investors continue to see their portfolios suffer. The Dow is down 29 percent for the year; the S&P and Nasdaq are down 32 percent and 30 percent respectively.

Kroneberger noted that investors were heartened in part by Morgan Stanley's ability to seal a $9 billion investment from Japan's Mitsubishi UFJ Financial Group Inc.

Morgan Stanley shares, which had plunged 60 percent last week, gained $8.42, or 87 percent, to $18.10.

Brooks, of Price, said Goldman Sachs also rebounded with a 25 percent gain to $111 yesterday.

"Those are two bellwether financial firms, and as very important broker dealers ... it's very good to see them responding so positively today," said Brooks of Goldman Sachs and Morgan Stanley.

Recapitalizing banks

Several European governments, including Britain, Germany, France, the Netherlands, Spain, Portugal and Austria, put $2.3 trillion on the line to protect their banks.

About $341 billion of the European pledges was earmarked to be spent on recapitalizing banks by buying stakes.

"There seems to be some perception that maybe we're moving in the right direction, certainly with the actions of various G7 countries," said Douglas G. Ober, chairman and chief executive of closed-end mutual funds Adams Express Co. and Petroleum & Resources Corp. in Baltimore.

"Although it wasn't a single concerted action worldwide, they all seem to be moving parallel with each other, including the U.S., although more slowly than the others.

"Nonetheless, this has the possibility of beginning to resolve the problems of capital adequacy in the banks and, subsequent to that, the ability of short-term credit markets to open up a little bit."

Treasury Secretary Henry M. Paulson Jr. met yesterday in Washington with the heads of the five biggest U.S. banks to discuss the rescue plan, the Associated Press said, according to people briefed on the matter.

Neel Kashkari, the assistant Treasury secretary who is interim head of the bailout program, said in a speech yesterday that officials were also developing guidelines to govern the purchase of soured mortgage-related assets.

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