Blue Chips Rally after GSE Rescue

Financial issues led the way Monday after the government takeover of Fannie Mae and Freddie Mac. The Nasdaq lagged on weakness in Apple and Google

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Major U.S. stock finished higher Monday in a session that featured some remarkable developments. The Dow industrials and S&P 500 index advanced strongly in reaction to the announcement Sunday of the federal government's takeover of Fannie Mae (FNM) and Freddie Mac (FRE), which own or guarantee half of the country's $12 trillion in outstanding home mortgage debt. The action removes some uncertainty about the solvency of the government-sponsored enterprises and instills some confidence in the economy.

Also on Monday, UAL Corp. (UAUA) shares fell sharply, to near 3.00 at one point in the session from their opening price of 12.17, and then recovered to finish the session down 1.38 at 10.92. The airline operator said reports that the company filed for bankruptcy are completely untrue and were caused by the irresponsible posting of a six-year-old Chicago Tribune article by the Florida Sun Sentinel newspaper website with the date changed. The story was related to United's 2002 bankruptcy filing. (United exited bankruptcy in February, 2006.) United is launching an investigation.

The Nasdaq composite index lagged the blue chips, amid declines in Google (GOOG) and Apple (AAPL).

Bonds rose in price. The dollar index climbed. Energy futures ended mixed. Gold eased.

On Monday, the Dow Jones industrial average jumped 289.78 points, or 2.58%, to 11,510.74. The broader S&P 500 index climbed 25.48 points, or 2.05%, to end the session at 1,267.79. And the tech-heavy Nasdaq composite index gained 13.88 points, or 0.62, to end at 2,269.76.

On the New York Stock Exchange, 20 shares were trading higher for every 11 that fell in price. The ratio on the Nasdaq was 17-11 positive.

Major stock indexes overseas rallied hard Monday on the GSE bailout. In London, the FTSE 100 index surged 3.81% to 5,440.20. In Paris, the CAC 40 index jumped 4.1% to 4,368.00. Germany's DAX index gained 2.66% to 6,290.35.

Asian markets rallied overnight. Japan's Nikkei 225 index climbed 3.38% to 12,624.46. In Hong Kong, the Hang Seng index shot higher by 4.32% to 20,794.27.

The U.S. financial sector was boosted by the Fannie/Freddie news, with the major U.S. financial institutions like Bank of America (BAC), JPMorgan Chase (JPM), and Citigroup (C) finishing higher. Homebuilding shares also gained.

However, not all financials rallied. Fannie and Freddie shares plunged to below $1 on the news, capping a meltdown of tens of billions of dollars in market cap over the past year for the mortgage firms. S&P Equity Research and Citigroup lowered their equity ratings on Fannie and Freddie to sell.

In an announcement Sunday, Treasury Secretary Henry Paulson said the firms were being placed in a government-operated conservatorship, ousting their chief executives and eliminating their dividends. The Treasury may purchase up to $200 billion of stock in the firms to keep them solvent. Under the plan, the Federal Housing Finance Authority will assume the power of the board, and the two firms' CEOs will resign after a transitional period. Common and preferred dividends paid by each company have been suspended.