Stocks soar after Bush plan unveiled
Wall Street voted approval of the Bush administration’s foreclosure-abatement plan Thursday, as the stock market powered higher with financial and housing stocks leading the way.
The Dow Jones industrial average jumped 174.93 points, or 1.3%, to 13,619.89 amid a broad advance.
The next big test for the market comes today, when the government reports on November employment. Bullish investors are hoping to see a healthy rise in job creation to further damp fears that the economy could be sliding toward recession.
After a strong rally Wednesday, stocks rose further after the White House formally unveiled a program under which lenders would voluntarily freeze interest rates for certain homeowners with adjustable-rate loans. The goal is to give more struggling homeowners a chance to hold on to their properties.
The announcement helped extend a recovery in housing and financial stocks. A Standard & Poor’s index of five big home builders’ shares rocketed 13%. Among lenders, Countrywide Financial jumped $1.68, or 16%, to $12.10 and Washington Mutual rose 54 cents, or 2.9%, to $19.13.
Many on Wall Street have expressed misgivings about the program to stem foreclosures because it would essentially force losses on mortgage-loan investors who would see the interest payments on their loans reduced. The trade-off is that the investors might lose less than they would if home foreclosures continued to soar and the properties were sold for less than their mortgage balances.
Todd Clark, trading chief at Nollenberger Capital Partners in San Francisco, said the stock market’s strength Thursday suggested that many investors believed that “for the greater good of the overall economy, the plan does make sense.”
In another bit of good news for the housing sector, the average rate on 30-year fixed-rate mortgages slid below 6% this week to the lowest level in two years. The average rate nationwide slipped to 5.96%, down from 6.1% last week, according to mortgage giant Freddie Mac.
Falling yields on Treasury bonds have pulled home loan rates down in recent weeks. On Thursday, however, the yield on the benchmark 10-year note climbed to 4.01% from 3.96%.
Investors’ mood also got a lift Thursday as an interest rate cut by the Bank of England helped boost hopes that the global credit crunch rooted in the housing market’s woes might be lessening.
The Bank of England cut its key rate from 5.75% to 5.5%, the British central bank’s first reduction in two years. That followed a surprise rate cut by the Bank of Canada on Tuesday.
Federal Reserve policymakers meet Tuesday and are widely expected to trim their benchmark short-term rate, now 4.5%, by at least a quarter-point. That would follow a half-point cut Sept. 18 and a quarter-point cut Oct. 31.
Among brokerage issues that could be helped by lower interest rates, Merrill Lynch surged $3.58 to $61.33 and Lehman Bros. gained $3.13 to $63.14.
Among home builders, KB Home soared $3.37, or 16.1%, to $24.25. Ryland Group shot up $2.64, or 10.9%, to $26.79.
The central banks and the Bush mortgage plan have helped dispel much of the extreme gloom that had gripped Wall Street in November, as fears deepened that the trouble in the housing market and in the banking system would drag the U.S. economy into recession.
From its recent low of 12,743 on Nov. 26, the Dow has rocketed 876 points, or nearly 7%. It is 3.8% below its record high of 14,164.53 set Oct. 9.
Among other major market indexes, the S&P; 500 on Thursday rose 22.33 points, or 1.5%, to 1,507.34, its first close above 1,500 since Nov. 6. The Nasdaq composite index leaped 1.6%.
Advancing issues outnumbered decliners by about 4 to 1 on the New York Stock Exchange.
The market rallied Thursday despite some mixed news from retailers on November sales and a rebound in oil prices, which jumped $2.74 to $90.23 a barrel in New York futures trading.
As the market revives, it is triggering “short covering” by bearish traders who had been betting on lower prices. Short sellers borrow stock and sell it, hoping to eventually buy it back for less than the sale price.
If stocks rise instead of fall, short sellers face pressure to quickly close out their trades or face large losses. Their buying can help drive the market higher -- and in particular, lift sectors that have been heavily shorted, such as financial issues.
At the end of November, there were 12.77 million NYSE-listed shares sold short, up 3.1% from Nov. 15 and nearing a record high of 12.95 billion set in July, the exchange said Thursday.
