Stocks Rebound on Citi News

Indexes gained Tuesday after the financial giant got a $7.5 billion cash infusion. But concerns about the credit market and broader economy persist

by David Bogoslaw

Major U.S. stock indexes recouped the lion's share of the prior session's losses on Tuesday, buoyed mostly by a confidence-boosting capital infusion in Citigroup (C) by an Abu Dhabi investment fund. The deal provided much-needed cash to help offset mortgage and other losses at the financial giant.

But the markets were off their highs after Citigroup said it wouldn't use the cash to bring failing SIVs back onto its balance sheet, said one analyst on CNBC Business News.

On Tuesday, the Dow Jones industrial average ended higher by 215.00 points, or 1.69%, to 12,958.44. The broader S&P 500 index rose 21.01 points, or 1.49%, to 1,428.22. The tech-heavy Nasdaq composite index gained 39.81 points, or 1.57%, to trade at 2,580.80.

Leading the rally were financial stocks, consumer staples names Procter & Gamble (PG) and Altria Group (MO), and Boeing Co. (BA). But traders were dismayed by reports showing weaker-than-expected consumer confidence numbers, lower home prices, and reports of soft Black Friday sales at some retailers, S&P MarketScope said. On the New York Stock Exchange, 12 stocks advanced in price for every 11 that declined, while Nasdaq breadth was 17-13 positive amid slow trading.

Tech names such as Intel (INTC and SanDisk (SNDK) were also making solid gains.

The Abu Dhabi Investment Authority said it will invest $7.5 billion in Citigroup in exchange for a 4.9% interest in the nation's largest bank. Citigroup said the investment was passive and won't buy the Investment Authority a seat on the bank's board. An analyst at CIBC World Markets said she still expects Citigroup to cut its dividend and sell assets to deal with its cash constraints.

"If Citigroup can stuff its assets into the super SIV being created, that's even better for Citigroup," said Brian Reynolds, chief market strategist at M.S. Howells & Co. While the cash infusion is a net positive, it's not enough to overcome what’s going in the credit markets, he said.

"We know in fixed income there's going to be more downgrades and writedowns and that they will continue until at least the first quarter" of 2008, he said.

Unless people start buying credit derivatives, the credit markets will weaken further, yet investors aren't likely to start buying credit derivatives until they see a more aggressive easing of interest rates by the Fed, he said. Since the main pillar of the bull market has been stock buybacks and leveraged buyouts, the ongoing attacks on credit derivatives is calling for the Fed to cut rates. But if the Fed only comes through with a quarter-point rate cut, more pressure will be applied to credit derivatives in an effort to take the financial markets lower, he said.

Leading the economic news was the Standard & Poor's/Case-Shiller U.S. national home price index, whose 20-city composite fell 0.9% in September from August, after a 0.7% decline in August. The index, which measures prices of single-family homes in the 20 largest metropolitan areas, was down 4.9% from a year ago, while the 1.7% drop between the second and third quarters was the largest quarterly decline in the index's 21-year history.

The Conference Board said that consumer confidence dropped more than expected to 87.3 in November from the 95.2 reading in October. The index had been projected to fall to 92.0. The latest figure is the lowest since the aftermath of Hurricane Katrina in Fall 2005, while the expectation component was the weakest since just before the start of the Iraq War in early 2003.

The data imply that record gasoline prices, falling equity prices, financial market turmoil and general negative news headlines are all continuing to weigh on sentiment, Action Economics said. Most of the decline was tied to expectations, which plummeted to 68.7 from 80.