U.S. Markets Surge As Credit Starts to Thaw
Fed's Debt-Buying Program Gaining Traction

By Cecilia Kang
Washington Post Staff Writer
Wednesday, October 29, 2008

Stocks skyrocketed nearly 11 percent yesterday in the second-biggest point gain ever for the Dow Jones industrial average, buoyed by signs of improving credit conditions and expectations that the Federal Reserve would slash a key interest rate today.

Investors were cheered by reports that the Fed was making progress in unlocking corporate debt markets through its program to buy commercial paper, or loans used for everyday operations, and by developments at major blue-chip companies Boeing and General Motors.

GM chairman and chief executive G. Richard Wagoner Jr. was in Washington over recent days negotiating with Treasury officials for government money to help finance a proposed merger with Chrysler, said an industry source briefed on the matter.

But analysts and investors warned that continuing global economic uncertainty could send the stock market tumbling again in coming days. They also said low trading volume made them cautious about declaring the market had turned a corner. Moreover, stocks often rally the day before the Fed's policymaking committee meets and then lose some of those gains soon thereafter.

"Is this a real bottom? I'd be more convinced if there were more volume behind trading," said Alan Lancz, president of Alan B. Lancz & Associates, an investment firm in Toledo.

The Dow closed up 889.35 points, to 9065.12, second only to Oct. 13, when the average rose 936.42 points. The Standard & Poor's 500-stock index rose 91.59, or 10.8 percent, to 940.51. The tech-heavy Nasdaq composite index jumped 143.57, or 9.5 percent, to 1649.47. The rally spread to Asian markets today, with stocks in Japan rising more than 6 percent in early trading.

Investors who had been on the sidelines while heavy trading by hedge and mutual funds made for a volatile market in recent days were lured yesterday to buy the shares of companies with strong balance sheets now trading at sharply lower prices.

This heightened demand followed signs that the credit squeeze crippling companies was thawing. According to Fed data, sales of longer-term commercial paper soared tenfold after the central bank began buying the corporate loans on Monday. Companies on Monday sold 1,511 issues of debt maturing in more than 80 days, representing a record $67.1 billion compared to a daily average of 340 issues valued at $6.7 billion last week.

"At long last, there were tangible signs that the credit market was easing and government programs were beginning to work," said Jack Ablin, chief investment officer of Harris Private Bank in Chicago. "This is the basis of confidence and the underpinning of the economy."

Still, some companies continue to face extremely tough borrowing conditions despite the Fed's action on commercial paper, which is typically used to make payroll and buy supplies. The Fed is buying commercial paper only of top-grade companies, leaving others searching for ways to finance day-to-day operations.

Companies that drew down lines of credit at banks are starting to look for ways to raise new money. As credit conditions ease, there could be a long line of firms trying to sell bonds, and that could keep borrowing costs high.

"The commercial paper market from our point of view is closed," said Anthony Kamerick, vice president and treasurer at Pepco Holdings. "So what that does is require us to borrow from our banks as a temporary measure." Pepco Holdings has announced plans to sell $750 million of bonds for three subsidiaries.

It won't be alone, Kamerick said. "There's a huge backlog of issuers who have not had access to the market," he said, adding that after third-quarter earnings are announced, there will be "a wave" of companies announcing plans to sell bonds. Those firms will probably end up paying higher interest rates than they would when credit isn't as tight.

All 30 companies in the Dow closed higher, with shares of Boeing up 15.5 percent, to $48.91, after the company announced Monday that it had reached a tentative contract agreement with striking machinists.

Shares of GM closed up 14.8 percent, to $6.25, on reports of the company's talks with the Treasury. The source briefed on the negotiations said the size of Wagoner's loan request to the government was unclear. Analysts have said that a combined GM-Chrysler would need about $10 billion in fresh cash to compensate laid-off workers, close plants and integrate their operating systems. The White House could not confirm that $10 billion was the contemplated number.

"The automakers have been in contact with us," White House press secretary Dana Perino said at a briefing yesterday. "We're trying to work with them at various levels and at different departments, including Energy, Treasury and Commerce. And we're trying to work with the tools that Congress has provided us."

By midday, the market regained its upward momentum. Along with commercial paper markets rebounding, investors were cheered by the prospect of the Fed's expected half-percentage-point decrease in its key fund rate, to 1 percent.

"The main thing people are looking at today is the Fed because monetary stimuli will have a natural effect on more liquidity, and people think that this is a positive for the economy," said Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati.

Tom Sowanick, chief investment officer at Clearbrook Financial in Princeton, N.J., said the Fed might be wise to wait and let the rescue efforts planned by the government take effect.

"The Fed would be well-served to see how these work out instead of using one of the few bullets left in its arsenal," Sowanick said. He pointed to the program by the Fed to buy up commercial paper as a "major event" that addresses the heart of market fears.

The day started on a strong note, with global markets rallying overnight Monday because of the yen's decline against the dollar, a positive sign for exports from Japan, which are its main engine of growth.

Currency markets remained volatile yesterday and reversed some of the dramatic shifts of recent days, especially in mid-size developing countries. This reflected renewed investor confidence in these economies. The Brazilian real rose 4 percent vs. the dollar, and there were similarly sharp rises in the currencies of Mexico, South Korea, Poland, South Africa, Turkey and Hungary. The European Union, World Bank and International Monetary Fund last night said they would provide Hungary with $25.1 billion in loans to help shore up its faltering economy.

Shortly after the U.S. market opened yesterday, the Dow jumped 300 points before turning downward on a private research firm's report that the consumer confidence index had hit the lowest level in its 41-year history. The Conference Board's index plunged to 38 in October from 61.4 in September, signaling the possibility of a long recession as consumers curb spending. That pessimism was compounded by bleak housing data. The S&P/Case-Shiller home-prices index fell 16.6 percent in 20 major metropolitan areas in August compared with August 2007.

Staff writers Steven Mufson, Kendra Marr and Neil Irwin contributed to this report.

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