NEW YORK (MarketWatch)
U.S. stocks rallied Tuesday for a second day of gains after a regional business indicator proved less awful than a similar gauge last week, with investors reconsidering their more dire economic scenarios.
“From a psychological standpoint, investors’ nerves are raw, and not that far away from the ‘08, ‘09 period.
But the world I would respectively suggest is in a lot better shape than the ‘08 period,” said Phil Orlando, chief equity strategist at Federated Investors.
The Dow Jones Industrial Average rose 322.11 points, or 3%, to 11,176.76, with all but one of its 30 components rising.
Down 9.6% so far this week, Dow component Bank of America Corp. trimmed its drop after Rochdale Securities analyst Richard Bove told Bloomberg Television that the lender has enough capital to contend with rising costs related to bad loans.
Bank of America had been hit hard as the cost to protect its debt from default rose to a record high, and blogger Henry Blodget wrote on Business Insider that write-downs and loan expenses might force the bank to raise about $200 billion. Jefferies analysts on Monday said the bank needed $40 billion to $50 billion in new capital.
The S&P 500 Index climbed 38.53 points, or 3.4%, to 1,162.35, with energy and technology the best performers among its 10 industry groups, with notable gainers including MEMC Electronic Materials Inc. and Nvidia Corp. the former up 13% and the latter gaining 11%.
An analyst at Wells Fargo hiked his rating on Nvidia to outperform from market perform, saying the chip manufacturer should benefit from an increased seasonal demand.
The Nasdaq Composite Index rose 100.68 points, or 4.3%, to 2,446.06.
For every stock falling, nearly six gained on the New York Stock Exchange, where 1.2 billion shares traded; composite volume topped 5.2 billion.
“It’s very hard for investors to not surrender to becoming traders, to hear the ‘stay the course’ story,” said Sandy Lincoln, chief market strategist at BMO Asset Management U.S.
“With all this volatility, you have to wonder how much is hedge-fund related or high-frequency trading related.”
No one really knows how much capital Bank of America needs, leading to a crisis of confidence about the bank's health, Shira Ovide reports on Markets Hub.
Stocks added to their gains after the release of data showing a weaker-than-expected housing market, with sales of new single-family homes sliding to a five-month low in July.
“Both consumers and professionals are vaccinated against bad housing news,” said Lincoln.
And, the Federal Reserve Bank of Richmond’s business activity index slid to negative 10 in August from negative one in July, the weakest since June 2009.
While worse than anticipated, the Richmond gauge “paled in comparison” to the shocking drop in the Philadelphia Federal Reserve’s indicator last week.
“Thus, investors breathed a collective sigh of relief,” said Clark Yingst, chief market analyst at investment banking firm Joseph Gunnar.
One school of thought had the disappointing economic data serving to ramp up expectations of another round of quantitative easing by the Federal Reserve, with Fed Chairman Ben Bernanke speaking at a gathering in Jackson Hole, Wyo., on Friday.
Wall Street “could be rallying in anticipation of what is perceived to be possible Fed monetary action; that said, we don’t believe QE3 is in the cards, the Fed may do a couple of things, but QE3 isn’t one of them,” said Orlando at Federated Investors.
China contracts, but not as much
China's economy pulled back a bit in early August. Also, 2-year Treasurys go on auction in advance of this week's address by Fed Chairman Ben Bernanke.
Crude prices rose for a second day, with the futures contract for October delivery adding $1.02 to $85.44 a barrel; Treasury prices fell, with the yield on the 10-year note rising to 2.137%; and gold futures -3.11% fell for the first time in seven sessions, falling $30.60 to finish at $1,861.30 an ounce.
Both Treasury prices and gold are “at or near bubble-like proportions, just as we saw with the housing and tech bubbles; the asset class that is most undervalued now is stocks,” said Orlando.
Central bankers from around the globe gather this week for the meeting that last year had Bernanke signaling a second round of asset purchases, otherwise known as quantitative easing 2.
Marc Pado, U.S. market strategist at Cantor Fitzgerald, said it’s not entirely clear what Wall Street wants from Bernanke this time.
“Most don’t want to see a straight-up QE3 program, as it would offer nothing new. In an environment where the one thing that is lacking is ‘confidence,’ we don’t want to see the Fed chairman panicking. On the flip side, to do nothing might be seen as complacent, and hurt the markets,” Pado commented.
Ahead of Wall Street’s start, stock-index futures had risen on reports on Chinese factory activity as well as businesses in Germany, with both indicating slower growth but not as dismal as some had expected.
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On Aug.15, Bank of America said it would further pare its consumer-credit-card exposure by selling its Canadian card business to TD Bank Group as well as exit its card businesses in the U.K. and Ireland. Earlier this year, it sold its card unit in Spain and a small business card unit.
Lately, Bank of America and other U.S. bank stocks have been beaten up by fresh signs the U.S. economy remains fragile, the unfolding ramifications of Europe’s sovereign-debt crisis, the cost of settling mortgage foul-ups with regulators, and the possibility another credit rating agency downgrades U.S. debt.
Earlier this summer, investors had hoped Bank of America would be in a position to raise its dividend early next year, but Chief Executive Brian Moynihan tempered those expectations, raising investor concerns about the bank’s capital cushion.
Speaking on a Aug. 10 conference call hosted by institutional shareholder Fairholme Capital Management, Moynihan tried to reassure jittery investors that Bank of America was in stronger standing than it was in 2007. He said he was bullish about the bank’s future and pledged to sell noncore assets.
Bank of America’s CDS spread has more than doubled since July 1 as the bank has been dogged by questions about whether its balance sheet is strong enough to work through mortgage issues stemming from its 2008 Countrywide acquisition. People further speculate if Bank of America will have enough capital to meet new global standards and if it can withstand another potential economic hit to the world economy.
Meanwhile, the spread on Bank of America’s five-year credit default swap widened to nearly 388 basis points — a level last reached in March and April of 2009 when confidence in the U.S. stock market had plunged to a low, according to FactSet Research data.
Wider spreads mean investors are paying more for protection against a possible negative credit event at Bank of America.
Late Monday, Fitch Ratings downgraded PulteGroup’s credit rating a notch deeper into junk territory, citing the company’s underperformance relative to its peers as well as the challenges continuing to face U.S. housing market.
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