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Markets soar amid optimism over credit

Wed., Oct. 29, 2008, midnight

But consumer confidence drops to 41-year low

Stocks skyrocketed nearly 11 percent Tuesday in the second-biggest point gain ever for the Dow Jones industrial average, buoyed by signs of improving credit conditions and expectations that the Federal Reserve would slash a key interest rate today.

Investors were cheered by reports that the Fed was making progress in unlocking corporate debt markets through its program to buy commercial paper, or loans used for everyday operations, and by developments at major blue-chip companies Boeing and General Motors.

GM chairman and chief executive G. Richard Wagoner Jr. was in Washington over recent days negotiating with Treasury officials for government money to help finance a proposed merger with Chrysler, said an industry source briefed on the matter.

But analysts and investors warned that continuing global economic uncertainty could send the stock market tumbling again in coming days. They also said low trading volume made them cautious about declaring the market had turned a corner. Moreover, stocks often rally the day before the Fed’s policy-making committee meets and then lose some of those gains soon thereafter.

“Is this a real bottom? I’d be more convinced if there were more volume behind trading,” said Alan Lancz, president of Alan B. Lancz & Associates, an investment firm in Toledo, Ohio.

In a survey released Tuesday, consumer confidence dipped to its lowest level on record, a 41-year low, as Americans reacted with growing pessimism to financial uncertainty and widespread job losses.

After increasing slightly in September to 61.4, the consumer confidence index fell more than 23 points to 38.0, the worst assessment of the nation’s economic health since the Conference Board began conducting the survey in 1967. A rating of 90 or above indicates that consumers see a strong economy.

For analysts, the survey from the private business research firm offers more evidence that the holiday season will be dismal and leaves little doubt that the country is entering a prolonged period of negative growth.

“Drops of this magnitude take place during recessions,” said Lynn Franco, director of the board’s Consumer Research Center.

The Dow closed up 889.35 points, to 9065.12, a rise second only to Oct. 13, when the average rose 936.42 points. The Standard & Poor’s 500-stock index rose 91.59, or 10.8 percent, to 940.51. The tech-heavy Nasdaq composite index jumped 143.57, or 9.5 percent, to 1649.47.

Investors who had been on the sidelines while heavy trading by hedge and mutual funds made for a volatile market in recent days were lured Tuesday to buy the shares of companies with strong balance sheets now trading at sharply lower prices.

This heightened demand followed signs that the credit squeeze crippling companies was thawing. According to Fed data, sales of longer-term commercial paper soared tenfold after the central bank began buying the corporate loans on Monday. Companies on Monday sold 1,511 issues of debt maturing in more than 80 days, representing a record $67.1 billion, compared with a daily average of 340 issues valued at $6.7 billion last week.

“At long last, there were tangible signs that the credit market was easing and government programs were beginning to work,” said Jack Ablin, chief investment officer of Harris Private Bank in Chicago. “This is the basis of confidence and the underpinning of the economy.”

Still, some companies continue to face extremely tough borrowing conditions despite the Fed’s action on commercial paper, which is typically used to make payrolls and buy supplies. The Fed is buying commercial paper only of top-grade companies, leaving others searching for ways to finance day-to-day operations.

Companies that drew down lines of credit at banks are starting to look for ways to raise new money. As credit conditions ease, there could be a long line of firms trying to sell bonds, and that could keep borrowing costs high.

“The commercial paper market from our point of view is closed,” said Anthony Kamerick, vice president and treasurer at Pepco Holdings. “So what that does is require us to borrow from our banks as a temporary measure.” Pepco Holdings has announced plans to sell $750 million of bonds for three subsidiaries.

All 30 companies in the Dow closed higher, with shares of Boeing up 15.5 percent, to $48.91, after the company announced Monday that it had reached a tentative contract agreement with striking machinists.

Shares of GM closed up 14.8 percent, to $6.25, on reports of the company’s talks with the Treasury. The source briefed on the negotiations said the size of Wagoner’s loan request to the government was unclear. Analysts have said that a combined GM-Chrysler would need about $10 billion in fresh cash to compensate laid-off workers, close plants and integrate their operating systems. The White House could not confirm that $10 billion was the contemplated number.

“The automakers have been in contact with us,” White House press secretary Dana Perino said at a briefing Tuesday. “We’re trying to work with them at various levels and at different departments, including Energy, Treasury and Commerce. And we’re trying to work with the tools that Congress has provided us.”


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