Stocks moved sharply higher over the course of the trading day on Monday, with the major averages more than offsetting the losses posted in the two previous sessions to reach their best levels in over a month. The standout gains came after the Obama administration revealed its plan to help banks sell toxic assets.
The plan unveiled by Treasury Secretary Timothy Geithner will set up an investment fund to buy mortgage-related securities and other assets that are hurting the balance sheets of banks. The new Public Private Investment Program would combine taxpayer money with private funds, aiming to buy loans and free up banks to renew lending.
Geithner's plan involves using up to $100 billion in funds from the $700 billion financial rescue plan passed in 2008 in addition to capital from private investors to generate an estimated $500 billion to purchase the toxic assets, a number that could double to $1 trillion over time.
While stocks moved sharply higher on the news, Hugh Johnson, chief investment officer for Johnson Illington Advisors, expressed some skepticism about the bad asset program in an interview with RTT News.
I don't know if it can do the trick - I have my doubts, Johnson said. He added, There's no question that the plan is positive and to some extent will certainly help strengthen bank balance sheets, but he emphasized that until we see a recovery in loan demand, it's not likely to lead to a big increase in lending as well as a recovery in the economy.
Johnson stressed that the prices of those toxic assets are the big missing piece and predicted that there's likely to be a struggle as prices are negotiated. In terms of private sector interest, Johnson said, At the right price, the private sector will certainly step up to the plate, though he reiterated that the right price is the key.
In economic news, existing home sales unexpectedly rose in the month of February, according to a report released by the National Association of Realtors, with sales rebounding after hitting a twelve-year low in the previous month.
The report showed that existing home sales rose 5.1 percent to a seasonally adjusted annual rate of 4.72 million units in February from a pace of 4.49 million units in January. Economists had expected sales to slip to a 4.45 million unit rate.
Some of the strength on the day also came as investors reacted to Canadian integrated oil and natural gas companies Suncor Energy (SU) and Petro-Canada (PCZ) jointly announcing that the companies have agreed to merge in an all-stock deal.
Furthermore, Walgreen (WAG) reported second quarter earnings that fell year-over-year but still pleased investors. Comparable stores sales increased 1.3 percent in the quarter, while comparable store front-end sales decreased 1.2 percent.
The major averages accelerated to the upside going into the close, ending the session at or near their best levels of the day. The Dow closed up 497.48 points or 6.8 percent at 7,775.86, the Nasdaq closed up 98.50 points or 6.8 percent at 1,555.77 and the S&P 500 closed up 54.38 points or 7.1 percent at 822.92.
In response to Geithner's plan, banking stocks led the broader markets higher throughout the trading session, posting some of the biggest gains of the day. The Kbw Bank Index closed up 18.6 percent, ending the session at its best closing level in well over a month.
Brokerage stocks also posted considerable gains on the day, as reflected by the 14.3 percent gain shown by the Amex Securities Broker/Dealer Index.
Additionally, benefiting from upgrades within the sector, real estate stocks also ended the trading day sharply higher. The Morgan Stanley REIT Index closed up 17.2 percent on the day.
Housing, oil services, and steel stocks also climbed substantially higher, as investors respond to some strength in commodity prices. Most of the other major sectors also showed strong upward moves, reflecting broad based strength in the markets.
All of the Dow components ended the session in positive territory contributing to the standout gain posted by the blue chip index. Following the lead of the broader markets, financial stocks within the Dow led the way higher.
One of the biggest gains was shown by Bank of America (BAC), which closed up 26 percent on the day, breaking through some recent resistance to reach its best closing level in over two months.
JP Morgan (JPM) and Citigroup (C) also made massive runs higher throughout the session, rising 24.7 percent and 19.5 percent, respectively.
American Express (AXP), Alcoa (AA), and Caterpillar (CAT) also ended the day with considerable advances. American Express and Alcoa closed up 18.8 percent and 13.2 percent, respectively, while Caterpillar climbed 9.5 percent.
In overseas trading, stock markets across the Asia-Pacific region closed substantially higher on Monday, with Japan's benchmark Nikkei 225 Index closing up 3.4 percent.
The major European markets also ended the session firmly in positive territory, with the U.K.'s FTSE 100 Index ending the session up 2.9 percent, while the French CAC 40 Index and the German DAX Index closed with gains of 2.8 percent and 2.7 percent, respectively.
In the bond market, treasuries ended the session modestly lower, driving the yield on the benchmark 10-year note up 3.5 basis points to 2.66 percent.
While there are no major economic reports due to be released on Tuesday, trading could be impacted by comments from Chicago Federal Reserve Bank President Charles Evans.
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