Markets & Finance

Stocks Rally Amid Mortgage Relief Plan


Investors hoped a new plan to help keep subprime borrowers in their homes might alleviate the financial crisis and ease pressure on the economy

Stocks rallied Thursday as a Bush administration proposal raised hopes for an end to the subprime mortgage crisis.

In an agreement announced Thursday afternoon, the mortgage industry would freeze interest rates on certain subprime mortgages for five years. The plan encourages homeowners to refinance mortgages, in an effort to avoid a wave of foreclosures and a sharp drop in home prices.

On Thursday, the Dow Jones industrial average climbed 174.93 points, or 1.3%, to 13,619.89. The broader S&P 500 index rose 22.33 points, or 1.5%, to 1,507.34. The tech-heavy Nasdaq composite index gained 42.67 points, or 1.6%, to 2,709.03.

For every 7 stocks falling in price on the NYSE, 25 moved higher. The ratio was 22 to 8 positive on the Nasdaq.

"The rescue plan for subprime loan holders cheered the market," says Peter Cardillo, chief market economist at Avalon Partners. But the plan's announcement also coincided with rising hopes for more Federal Reserve interest rate cuts, as well as growing confidence that the U.S. economy will avoid recession, he says.

In economic news Thursday, U.S. initial jobless claims fell 15,000 last week to 338,000. Claims jumped 24,000 to 353,000 the week before. Traders were looking ahead to Friday's employment report, which is seen as a key test of whether the economy is slowing down, as many fear.

Oil prices moved higher Thursday. January crude oil futures were up $3 to $90.49 per barrel in NYMEX trading.

Among the stocks in the news on Thursday, homebuilders surged on hopes for the mortgage relief plan. Luxury home builder Toll Brothers (TOL) reported October quarter loss per share of 52 cents, vs. EPS of $1.07 a year ago. The loss included $314.9 million in pretax writedowns, mainly for homes it could no longer sell at a profit.

Retailers reported mixed sales figures for November, including Wal-Mart (WMT), which reported same-store sales rose 1.5%, not including fuel. Total sales were 8.4% higher, and Wal-Mart expects December same-store sales to rise 1 to 3%.

Target (TGT) shares fell after the retailer posts 1.1% higher November same-store sales (on calendar-adjusted basis). It said softness in the final week of November caused the month overall to fall short of its planned range. It noted that sales trends will need to meaningfully improve in December in order to achieve fourth quarter EPS growth.

Abercrombie & Fitch (ANF) had 2% higher same-store sales and 25% higher total sales in November.

The Gap (GPS) reported flat same-store sales and 11% higher same-store sales. It reiterated previous earnings guidance for the 2008 fiscal year.

Nordstrom (JWN) reported same-store sales were up 8.7% and total sales were 7.4% higher.

American Eagle (AEO) saw flat same-store sales in November, but total sales jumped 16%. It reiterated its fourth quarter earnings guidance.

Goldman Sachs (GS) and Morgan Stanley (MS) were reportedly downgraded by an analyst at Merrill Lynch from buy to neutral.

Conagra Foods (CAG) says earnings last quarter, which ended Nov. 25, will be higher than expected. Outperforming were Conagra's trading and merchandise unit and food and ingredients unit, the firm said.

Coca-Cola Company (KO) will get a new CEO when chief executive Neville Isdell steps down on July 1, 2008. President and chief operating officer Muhtar Kent will take over as CEO, while Isdell will remain chairman of the board until April 2009.

Genentech (DNA) received disappointing news on breast cancer chemotherapy drug Avastin after an FDA advisory committee voted 5 to 4 that data are not sufficient to justify its use for certain patients.

European stock indexes barely budged on Thursday. In London, the FTSE 100 index was off 0.13% to 6,485.60. In Paris, the CAC 40 index edged up 0.26% to 5,673.76. Germany's DAX index fell 0.05% to 7,940.58.

Asian stocks moved higher overnight. Japan's Nikkei 225 index rose 1.7% to 15,874.08. In Hong Kong, the Hang Seng index gained 0.73% to 29,558.92. The Shanghai composite index fell 0.15% to 5,035.07.

Treasury market

Treasuries fell as investors shifted capital toward equities. Ten-year notes fell 18.32 to 101-28/32 for a yield of 4.02%, and the 30-year bond sank 28/32 to 108-13/32 for a yield of 4.48%.

Steverman is a reporter for BusinessWeek's Investing channel.

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