Stocks advance as banks, housing stocks gain

By TIM PARADIS,
AP Business Writer Tim Paradis,

NEW YORK – Wall Street turned higher in choppy trading Monday as a surprisingly strong home sales report sent housing sector stocks higher and the implementation of the government's financial bailout plan gave regional bank shares a boost. The Dow Jones industrials rose nearly 130 points.

But the advance was nonetheless tentative as investors remain nervous about the prospects for a protracted global recession; many gains have been quickly given back in this still volatile market. Wall Street also tried to position itself ahead of possible interest rate moves from central banks.

Investors around the world are anxious that the evaporation in available credit in the past month has hurt lending to the point where it will be difficult for the country to avoid a recession. But the U.S. government is carrying out some of its measures this week to help the banking sector.

Investors also grew optimistic that the European Central Bank is moving toward an interest rate cut after President Jean-Claude Trichet said Monday such a step was "a possibility" as inflation pressures ease.

The comments come a day before the start of a regularly scheduled two-day meeting of the Federal Reserve. There is speculation the world's major central banks could announce coordinated rate cuts; the Fed is expected to lower its fed funds rate by a half-point to 1 percent on Wednesday.

Traders are juggling other expectations about the government's next moves. The Treasury said it signed agreements with nine banks and will buy stock in the companies this week. The proceeds from the stock sales are intended to bolster the banks' balance sheets so they will begin more normal lending and help ease the continuing credit crisis. But investors remain worried that stagnant credit has hurt the world economy.

"Clearly, what's most important is that the funding crisis needs to be contained at this point," said Chris Orndorff, director of equity strategy at Payden & Rygel in Los Angeles.

"The banks need to start taking on some more risks," he said. "I think it's going to take months."

Beyond troubles in the financial sector, Orndorff contends investors are focusing on the outcome of the Fed meeting.

In midafternoon trading, the Dow rose 129.75, or 1.55 percent, to 8,508.70, helped by advances in Verizon Communications Inc. and Home Depot Inc.
Broader stock indicators showed more modest gains. The Standard & Poor's 500 index rose 7.77, or 0.89 percent, to 884.54, and the Nasdaq composite index rose 12.98, or 0.84 percent, to 1,565.01.

The Russell 2000 index of smaller companies fell 1.65, or 0.35 percent, to 469.47.
Despite the moves by the major indexes, declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where volume came to a light 725.1 million shares. Lighter volume can call into question the conviction behind big market advances or declines.

Light, sweet crude fell 93 cents to $63.24 per barrel on the New York Mercantile Exchange, while gold prices rose slightly.

The gyrations in U.S. stocks have been sizable since the market's peak a year ago, but particularly since last month's bankruptcy of Lehman Brothers Holdings Inc. and the government rescue of insurer American International Group. With investors uncertain about the economy, the market appears to be bouncing along a rocky bottom after falling sharply earlier this month.

Investors were cheered Monday by news that sales of new homes showed an unexpected increase in September. While median home prices have dropped to the lowest level in four years, investors appeared pleased that the market was beginning to chip away at an inventory glut. The Commerce Department reported that sales of new single-family homes rose by 2.7 percent in September to a seasonally adjusted annual rate of 464,000 homes. Economists had expected sales would drop from August.

The median price of a new home declined by 9.1 percent from a year ago to $218,400, its lowest level since September 2004.

Regional banks advanced after the Treasury began rolling out its investments. Fifth Third Bancorp. rose 99 cents, or 12.3 percent, to $9.06, while SunTrust Banks Inc. rose $1.76, or 5 percent, to $36.87.

Home builders rose after the housing data. Centex Corp. advanced 32 cents, or 3.6 percent, to $9.10, and Lennar Corp. rose 29 cents, or 4.5 percent, to $6.81.
Some companies dependent on the housing sector rose as well. Home Depot rose 71 cents, or 3.8 percent, to $19.22, while Target Corp. rose $1.10, or 3.3 percent, to $34.02.

Verizon rose $3.10, or 12.4 percent, to $28.18, making it the strongest advancer among the 30 stocks that comprise the Dow industrials, after reporting that its third-quarter earnings rose 31 percent after its wireless business showed stronger-than-expected results.

Even with several pieces of welcome news, investors around the world remain worried about the prospects for economic expansion. A surge in the yen illustrated investors' nervousness about how much economic activity could slow. Japan's Nikkei 225 index dropped to its lowest close in 26 years as investors worried that the high yen will hurt Japanese exports and further disrupt economic activity. The yen is seen as a safe haven holding for investors who contend the Japanese economy will fare better in a global recession.

The ongoing selling is due in part to the belief that a worldwide recession is likely inevitable, but it's also being triggered by hedge funds and other investors unloading stock because they're being hit by margin calls. In a margin call, a broker who lent money to an investor calls in the loan, forcing the investor to sell stock to repay the loan.

Greg Church, chief investment officer of Church Capital Management in Yardley, Pa., contends the markets likely will remain volatile as hedge funds and mutual funds step into the market to sell. He also expects that some skittish investors will look to sell their positions as rallies emerge but that the severity of the market's recent sell-off has left it overdue for a rally, even if it's only temporary.

"We probably are due for some type of a bounce. Bear market rallies can be beautiful things. I think we could get one of those things sooner than later," he said.
Investors uneasy about where the market is headed continued to propel demand for the safety of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.71 percent from 3.72 percent late Friday. The dollar was higher against most other major currencies, except the yen, while gold prices rose.

The yield on the three-month bill, regarded as the safest asset around, fell to 0.78 percent from 0.82 percent late Thursday.

A key bank-to-bank lending rate slipped Monday. The London Interbank Offered Rate, or Libor, on three-month loans in dollars dipped to 3.51 percent from 3.52 percent on Friday.

While Libor has fallen steadily for over 10 days as confidence slowly returns to the banking system, investors remain skittish, particularly overseas.
The Nikkei fell 6.4 percent to its lowest level since October 1982, while Hong Kong's Hang Seng Index tumbled 12.7 percent, its lowest finish in more than four years and its biggest single-session drop since 1991.

The sell-off came even as the seven leading industrial nations on Sunday issued a statement warning about the "recent excessive volatility" in the value of the yen. The G7 said it would "cooperate as appropriate," stirring speculation of an orchestrated intervention to help stabilize currency markets.

Selling spread to Europe. Britain's FTSE 100 fell 0.79 percent, Germany's DAX index rose 0.91 percent, and France's CAC-40 declined 3.96 percent. Stocks in Europe pulled well off their lows after Wall Street sidestepped the steep sell-off that hit Asia and after Trichet raised the prospect of an interest rate cut.