U.S. stocks closed sharply higher Monday, sending the large-cap S&P 500 index back above 800 and to its best level since October, 2008. Fueling the rally were the release of details on the Obama administration's plan to remove toxic assets from bank balance sheets, and news that U.S. existing home sales rose 5.1% in February.
Investors are hoping the Obama plan will unlock the credit markets and revitalize the economy, says S&P MarketScope. Wall Street was also encouraged by reports bond-fund giant PIMCO said it would participate in the plan.
On Monday, the 30-stock Dow Jones industrial average finished higher by 497.48 points, or 6.84%, at 7,775.86. The broad S&P 500 index added 54.38 points, or 7.08%, to 822.92. The tech-heavy Nasdaq composite index gained 98.50 points, or 6.76%, to 1,555.77. NYSE breadth was 29-3 positive, while Nasdaq breadth was 23-4 positive. Trading was active.
Goldman Sachs (GS) also benefitreed from a Wall Street Journal report the company is considering selling part of its 4.9% stake in Industrial & Commercial Bank of China Ltd., a move that could raise more than $1 billion, according to several people familiar with the matter.
Homebuilding shares surged Monday on the better than expected existing home sales report.
The U.S. dollar, which last week suffered its biggest drop since the 1985 Plaza Accord, was lower. Treasuries and gold futures also fell. Crude oil futures were higher.
Noting that the U.S. financial system "is still working against economic recovery," the Treasury Dept. Monday revealed details of its plan to address toxic assets weighing on banks' balance sheets. Treasury said one major reason the financial system is still facing challenges is because of "legacy assets" and securities that are compromising banks' ability to raise capital and their willingness to boost lending.
Under the new program -- the Public-Private Investment Program -- the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. plan to work with private investors to try to restart a market for these troubled assets. The federal government will use as much as $100 billion in funds from the Troubled Asset Relief Program and capital from private investors in order to generate $500 billion in purchasing power to buy legacy assets, Treasury said. The department said the program could potentially expand to $1 trillion over time.
The program would address both the legacy loans banks are holding on their balance sheets and the legacy securities backed by mortgage-related debt that is clogging the balance sheets of financial firms.
"By providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets," Geithner said in an op-ed piece published in Monday's Wall Street Journal. "The ability to sell assets to this fund will make it easier for banks to raise private capital."
U.S. FDIC Chairwoman Sheila Bair endorsed the toxic asset plan as a "critical step forward to restoring clarity in the markets," lending some of her credibility to the moves. She said the FDIC will move forward in a methodical and transparent way, noting that the 6-to-1 leverage ratio represents the "outer range" of leverage it will finance within acceptable credit risk of the program. Ultimately she sees the toxic asset plan making money for the FDIC, estimating that banks have about $1 trillion in legacy assets on their balance sheets, with about half of that targeted for removal initially via RMBS and CMBS.
"While the initial reaction is positive, there are lingering doubts about how willing the private sector will be to partner with the government…given fears of potential interference in operational affairs in light of the ongoing firestorm surrounding bonuses at AIG," wrote David Joy, chief market strategist at RiverSource Investments, in a note Monday.
Jean-Claude Trichet, thee president of the European Central Bank, said Europe doesn't need to boost spending more to combat the global financial crisis, throwing the bank's weight behind Europe's governments in their battle with the U.S. over how to overcome the worst recession in a generation. Trichet, in an interview with the Journal, said that instead of pushing new measures, governments around the world should move faster on what they've already announced -- referring in part to delays and difficulties in the U.S. government's rescue of its troubled banks.
Templeton Asset Management's Mark Mobius told Bloomberg TV the next bull-market rally has begun and there are bargains in every emerging market following a record slump in stocks. The MSCI Emerging Markets Index has jumped 23% since reaching a four-year low on Oct. 27, outperforming the 2.5% drop in the MSCI World Index and 9.5% decline in the Standard & Poor's 500 Index. Emerging markets made up the 10 best-performing benchmark gauges this year, led by the 26% gain for China's Shanghai Composite Index. "You have to be careful not to miss the opportunity," said Mobius. "With all the negative news, there is a tendency to hold back."
U.S. existing home sales rebounded 5.1% to 4.72 million in February from 4.49 million in January, well above the 4.45 that markets had expected. Existing home sales are still down 4.6% over last February. Single family sales rose 4.4%, offsetting the 4.7% drop in January. Condo/coop sales jumped 11.4% after falling 10.2% in January. The months supply held at 9.7, while the median home price fell to $165,400 from a downwardly revised $164,800 (was $170,300 previously), and is down 15.5% year-over-year.
"While the sales data have been bouncing around the 4.25-to-4.75 million range for months, the February sales data increases hopes that the housing market is stabilizing," says Standard & Poor's senior economist Beth Ann Bovino.
Steverman is a reporter for BusinessWeek's Investing channel.