Stocks jump after late rally
The Russell 2000 (NYSE: IWM) and the Dow posted solid gains following a strong rally late in the afternoon. The small-cap index added 10.97 points, or 1.45%, to 766.39. The Dow Jones Industrial Average (INDU) rose 286.87 points, or 2.18%, to 13,468.78. That’s more than it lost during the sell-off on Friday, Aug. 3.
With little news on the economic front, the financial sector set the tone for today’s trading.
The session got off to an optimistic start after news this morning that financial services giant UBS raised its rating on Merrill Lynch & Co., Inc. (NYSE: MER), the world’s largest brokerage house, to “buy” from “neutral.”
While warning that the industry will continue to experience problems due to the mortgage and credit markets for the foreseeable future, UBS stated that the major brokerage houses are strong enough to handle credit losses caused by the turmoil in the subprime credit market.
Nevertheless, the small-cap index defied expectations and started the day with choppy declines, only briefly coming up for a breath of air around 12 p.m. ET before submerging again. The other major U.S. indices also bounced up and down but generally stayed above the flat line.
The subprime lending sector came into focus again, after news that American Home Mortgage Investment Corp. (NYSE: AHM) filed for Chapter 11 bankruptcy in a Delaware court today. That was hardly surprising, given that on Friday, Aug. 3, the Melville, N.Y.-based lender fired about 90% of its staff and announced that it would no longer take loan applications.
Also ending the day in the dark where shares of Luminent Mortgage Capital Inc. (NYSE: LUM), on news the San Francisco-based real estate investment trust was downgraded to “underweight” from “neutral” by J.P. Morgan.
On the other hand, fellow subprime mortgage lender NovaStar Financial Inc. (NYSE: NFI) announced that on Tuesday it will resume making mortgages through brokers. Shares added $0.83, or 13%, to $5.57.
Countrywide Financial Corp. (NYSE: CFC), the largest U.S. mortgage lender, attempted to calm investors worried about its future by saying that it has $186.5 billion in cash. It funds about $40 billion a month in mortgage loans.
Lenders to borrowers with weak credit histories have taken a beating after housing prices started stagnating in the second half of 2006, resulting in late payments and defaults that have been plaguing the entire mortgage industry.
The slump in the housing is far from over, according to the University of Michigan’s Surveys of Consumers. Half of American homeowners do not expected their home to appreciate in the coming year, while 17% reported that their house lost value in July. In July 2006, only 7% of respondents said that their home depreciated.
Looking ahead, half of those surveyed don’t foresee their home becoming more expensive in the year ahead.
But all that was not enough to prevent the bulls from going on a stampede less than two hours before the close.
The rally was helped be news that the board of major banking player Wells Fargo & Co. (NYSE: WFC) has authorized a stock buyback of 50 million shares.
Also contributing to the rally was a big drop in the price of oil. A barrel of the precious commodity now costs about $72, down more than $3.
The Russell 2000 index moved into positive territory shortly after 2 p.m. ET and continued climbing.
On Tuesday all eyes will be on the U.S. Federal Reserve, which will meet to decide on monetary policy. Economists expect the central bank to leave the federal funds rate unchanged at 5.25%.
