Bank-rescue hopes buoy stocks
Wall Street stages a snapback rally after major gauges touch two-month lows.
NEW YORK (CNNMoney.com) -- Stocks rose Thursday, erasing earlier losses, as investors breathed a sigh of relief that the government will make more funding available to Bank of America, which is struggling in the aftermath of its purchase of Merrill Lynch.
After the close, Intel (INTC, Fortune 500) reported a 90% drop in fourth-quarter earnings Thursday that nonetheless met forecasts. Shares gained modestly in extended-hours trading.
The Dow Jones industrial average (INDU) added 0.1%, after ending lower for six consecutive sessions. The Dow had fallen as much as 205 points earlier, dropping below 8,000 for the first time since Nov. 21, when it hit a 5 1/2 year low.
The Standard & Poor's 500 (SPX) index rose 0.1% and the Nasdaq composite (COMP) rose 1.5%.
Stocks tumbled through most of the session, extending the 2009 market selloff, on worries about the banking sector, the future of Apple, and the depth of the recession.
But stocks snapped back in the afternoon after more information circulated about the government's economic stimulus plan and reports that Bank of America may get a government-backed guarantee of as much as $200 billion related to its purchase of Merrill Lynch.
The combination of technical factors and the Bank of America news sparked the rally, said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams.
"As soon as you saw the confirmation that they weren't going to let Bank of America become the next Lehman Brothers, everyone jumped to cover their short positions," he said. "Then the momentum becomes self-fulfilling."
Investors also reacted to the latest details about the proposed economic stimulus plan. House Democrats are pitching an $825 billion bill that is roughly $550 billion in spending and $275 billion in tax cuts. The measure is likely the most expensive spending plan Congress has ever proposed. (Full story)
"It's an oversold rally after days of selling," said Joseph Saluzzi, co-head of equity trading at Themis Trading. He said that the market action so far in 2009 is likely to continue throughout the next few months. "We're going to see this kind of thing, where you have negative headline after negative headline, until one bit of good news comes out that squeezes the short-sellers."
Short-selling is a process by which investors that have sold stocks short so as to take advantage of a falling market need to buy the shares back.
After the close, a Senate measure to block the release of the second half of the bailout failed, giving the Treasury and President-elect Barack Obama access to the remaining $350 billion.
Also after the close, Bank of America said it will report fourth quarter and full-year 2008 earnings Friday morning.
Fear of a prolonged recession has taken its toll on stocks in the new year. As of Thursday's close, the S&P 500 is down almost 7% year-to-date.
Investors are again pulling money out of equity mutual funds after a brief period of adding funds in December. For the week ended Jan. 14, investors pulled $13.3 billion out of stock funds, according to investment-research firm Trim Tabs. In the previous week, investors poured $6.4 billion into funds.
Financial sector: JPMorgan Chase (JPM, Fortune 500) reported a surprise quarterly profit Thursday. But income was down 76% from a year ago, and the company's CEO, Jamie Dimon, warned that the economy and financial sector will continue to weaken. Shares fell 6% after spending time on both sides of breakeven through the session.
Bank of America (BAC, Fortune 500) tumbled 18.4% on reports that the company is seeking billions more in federal funds to help it complete the purchase of Merrill Lynch. Shares had been down more than 26% in the morning, before the broad market turned around. (Full story)
Citigroup (C, Fortune 500) shares slipped 15.5% one day before the company is expected to report another massive quarterly loss and announce restructuring moves. Earlier, Citi had been down as much as 25%.
On Wednesday, Citigroup said it is selling a majority stake in its brokerage unit to Morgan Stanley, a move that would seem to indicate the beginning of the break-up of the troubled banking firm.
A variety of other bank shares declined, sending the KBW Bank index down 8%. The Bank index had fallen to multiyear lows earlier in the session.
Year-to-date, the KBW Bank index is down 25.7% as of Thursday's close, versus a drop of 7% for the S&P 500.
Apple: Apple (AAPL, Fortune 500) CEO Steve Jobs said late Wednesday that he's taking a medical leave through the end of the second quarter because his health-related issues are "more complex" than he thought. Shares closed down 2.3% Thursday, erasing bigger losses.
In other news, Motorola (MOT, Fortune 500) said late Wednesday that it will slash 4,000 jobs on top of the 3,000 cuts it announced in late 2008. Shares gained 7%.
Market breadth turned positive. On the New York Stock Exchange, winners beat losers by eight to seven on volume of 1.65 billion shares. On the Nasdaq, advancers topped decliners five to four on volume of 2.52 billion shares.
Economy: A variety of economic news was released Thursday, including a pair of regional manufacturing reports. Both the New York Empire State index and the Philadelphia Fed index fell more than expected, showing the deepening recession.
The number of people filing for first-time unemployment benefits rose more than expected last week, pushing the number to 524,000.
The Producer Price Index, a measure of wholesale inflation, fell 1.9% last month, as expected. PPI fell 2.2% in November. The so-called core PPI, which strips out volatile food and energy prices, rose 0.2% after rising 0.1% in the previous month. Economists thought it would rise 0.1%.
Bonds: Treasury prices slipped, raising the yield on the benchmark 10-year note to 2.21% from 2.20% Wednesday. Treasury prices and yields move in opposite directions. Yields on the 2-year, 10-year and 30-year Treasurys all hit record lows last month.
Lending rates tightened. The 3-month Libor rate rose to 1.09% from 1.08% Wednesday, a five-year low, according to the British Banker's Association. Overnight Libor rose to 0.12% from 0.10% Wednesday, a record low.
Other markets: In global trading, Asian and European markets tumbled.
The dollar fell versus the euro and gained against the yen.
U.S. light crude oil for February delivery fell $1.88 to settle at $35.40 a barrel on the New York Mercantile Exchange.
COMEX gold for February delivery fell $13.40 to settle at $807.30 an ounce.
Gasoline prices rose seven-tenths of a cent to a national average of $1.799 a gallon, according to a survey of credit-card swipes released Thursday by motorist group AAA. 
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