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Fed Inspires 416-Point Rally; Best Day Since 2002

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March 11, 2008 – Comments (0)

Matt Egan FOXBusiness 

The Fed acted today in a creative, coordinated effort aimed at thawing the ongoing credit freeze that ails the economy -- a move that was greeted with a great amount of enthusiasm on Wall Street. The market closed with its best single-day point gain since Oct. 2002, as the financials led a huge 416-point surge on the Dow.

Today’s Market

The Dow Jones Industrial Average rose 416.66 points, or 3.55% to 12156.81, the Standard & Poor’s 500 index soared 47.28 points, or 3.71% to 1320.65 and the Nasdaq Composite Index rose 86.42 points, or 3.98%, to 2255.76. The consumer-friendly Fox 50 picked up 34.31 points, or 3.81%, to 935.70.

Even before the Federal Reserve's new plan to pump $200 billion into the financial markets was revealed this morning, the market appeared poised for a bounce back. Few could have anticipated the move would have been this big, however. The bears have dominated the tug-of-war in recent days, as the Dow had lost more than 900 points in an eight-day span.

The sector that buried Wall Street during yesterday's sell-off, the financials, led the way higher today. Citigroup (C: 21.49, +1.80, +9.14%) and American Express (AXP: 43.83, +3.79, +9.46%) posted huge gains of 9% each and Bank of America (BAC: 37.72, +2.41, +6.82%) jumped nearly 7%. Mortgage banks, which have been hammered in recent days, saw big gains, with Thornburg Mortgage (TMA: 1.56, +0.85, +119.71%) and Indymac Bancorp (IMB: 5.78, +1.08, +22.97%) soaring.

The Nasdaq Composite surged even more than the broader market, gaining about 4% today. Apple (AAPL: 127.31, +7.62, +6.36%), Bed, Bath & Beyond (BBBY: 28.65, +1.85, +6.90%) and Intel (INTC: 21.20, +1.08, +5.36%) are among the stocks that saw big gains today.

The news that ignited today's big rally came from the Fed, which announced a new program called the Term Securities Lending Facility. The plan is to lend up to $200 billion to banks for a term of up to 28 days instead of the typical overnight loan. These short-term loans will allow big investment firms to pledge other securities -- including residential-mortgage-backed securities. “The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally,” the Fed said in a statement.

"The fact that you are able to put up mortgage-backed securities is the key. They are broadening the scope of what you are able to put up as collateral," said Marc Pado, U.S. market strategist at Cantor Fitzgerald, who likened it to the items consumers can use as leverage. "It’s like now they are saying they will take your car, boat and lawnmower for collateral so you can take out more money.”

Traders interpreted the move as a signal the Federal Open Market Committee may be less likely to aggressively reduce interest rates at its regularly scheduled meeting next week. However, the market is still anticipating a more modest cut to boost the economy despite worries about inflation.

"The Fed is basically using the other tools it has at its disposal," said Steve Sachs, director of trading at Rydex Investments. "Ultimately, we need this liquidity to loosen up the log jam in credit standards to get this money out to consumers who are going to spend it.”

This comes after Friday’s move to boost the size of the Term Auction Facility to $100 billion -- another action aimed at coaxing banks to begin lending once again. Today’s plan is a joint effort between the Fed, the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank. The announcement moved the market sharply higher in pre-open action and the U.S. dollar strengthened against the Japanese Yen -- a key indicator of currency demand.

“I think it’s a huge move. I think the Fed is being very creative here,” said Anthony Conroy, head trader at BNY ConvergEx.

The financial market has been in turmoil for several months as banks like Citi and Merrill Lynch (MER: 45.60, +2.76, +6.44%) were forced to take huge writedowns due to bets gone bad in the risky subprime mortgage market. Banks have since held onto more capital to protect against future losses -- meaning they were less likely to lend to credit-worthy businesses and individuals. The ensuing credit freeze has hurt consumer spending and poses a serious risk to the economy. The market has been calling for action from the government to ease the freeze for several weeks now.

“It’s about time…We needed them to step up,” said Pado.

Worries about the financial sector were not erased today, however. Bear Stearns (BSC: 62.97, +0.67, +1.07%) continues to be at the center of rumors about its financial health. Today Bear closed 2% higher, erasing earlier losses of nearly 8%. Worries about Bear's liquidity subsided some after SEC Chairman Christopher Cox made comments to reporters in Washington.

"We have a good deal of comfort about the capital cushions at these firms at the moment," Cox said, according to Bloomberg News. Also, Mike Mayo of Deutsche Bank (DB: 112.33, +6.77, +6.41%) slashed his first-quarter earnings forecast to 46 cents per share from $1.48 and 2008 forecast to $4.45 from $8.05 per share, citing more writedowns. Mayo also lowered his price target to $90 from $104.

Oil prices are still soaring quickly approaching the $110 a barrel mark -- mainly because of the weakening dollar and continued demand internationally. Today crude rose 85 cents to close at $108.75 a barrel in New York. Earlier in the day crude hit an all-time high of $109.72 a barrel.

Corporate Movers

Google (GOOG: 439.84, +26.22, +6.33%) jumped 6.5% on news the European Union has given the Internet search giant the green light for its $3.1 billion offer to acquire online ad company DoubleClick without conditions. The EU had been investigating to see if the deal would hurt competition for online sales.

WellPoint (WLP: 47.26, -18.66, -28.30%) plunged 29% after it spooked the market by lowering its 2008 earnings forecast by around 13%. Now the managed care company sees its full-year earnings coming in at between $5.76 and $6.01 per share. Analysts were looking for the company's previous forecast of $6.41 per share. WellPoint blamed their new forecast on lower enrollment and higher-than-expected costs.

Aetna (AET: 42.65, -3.86, -8.29%) tumbled 8.5% after the managed care provider warned it will likely miss Wall Street's expectations for 2008 earnings. The company said today it sees full-year earnings of $4 per share and first-quarter adjusted profit of 92 cents per share. Mean analyst estimates from Thomson Financial called for $4.04 per share in 2008 earnings and 97 cents per share in the first quarter.

Altria (MO: 75.25, +0.51, +0.68%) said it plans to reaffirm its 2008 earnings forecast calling for 9% to 11% growth. Formerly known as Phillip Morris, Altria also said it sees $1 billion in annual savings by spinning off Phillip Morris International.

Data Dump

Also, the U.S. Commerce Department reported this morning the U.S. trade deficit in January increased as prices for imports rose significantly, including the price of oil. The deficit last month was $58.2 billion, compared to the $59.5 billion economists had expected.

The market has been closely watching trade over the past year because as the U.S. dollar weakens against its main competitors, it makes American goods cheaper on the world market. This has allowed exporters to flourish and has provided some stability to the U.S. economy as the domestic industries falter.

World Markets

European markets closed higher on the coordinated effort from the central banks. The Dow Jones Euro Stoxx 50, a index tracking the 50 largest companies of Europe, rose 60.49 points, or 1.71%, to 3606.59. The FTSE 100, London's benchmark index, jumped 61.30, or 1.09%, to 5690.40.

France's CAC 40 Index rose 60.70 points, or 1.33%, to 4627.69 and Germany's DAX picked up 76.49, or 1.19%, to 6524.57

Japan's Nikkei 225 Index gained 126.15 points, or 1.01%, to 12658.28. Hong Kong's Hang Seng Index rose 290.30, or 1.28%, to 22995.35.

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