Wednesday, March 11, 2009
Dow jumps more than 300 as Citi announces profit
NEW YORK – Wall Street got some good news from Citigroup, and responded with a huge rally. Led by financial stocks, the market made its first big move upward in weeks Tuesday after Citigroup Inc. said it had operated at a profit during the first two months of the year. All the major indexes soared more than 4.5 percent, and the Dow Jones industrials shot up more than 300 points.
Still, while word of Citi's performance at least temporarily broke a months-long torrent of bad news from the banking industry, analysts weren't ready to say the stock market was at a turning point and about to barrel higher.
"To have a sustained rally, we have to have a shift in sentiment," said Kurt Karl, chief U.S. economist at Swiss Re. "One day isn't going to make a trend.
But the Citigroup news offered investors some hope that the first quarter will show some signs of improvement.
In a letter sent to employees Monday, Citi Chief Executive Vikram Pandit said the first-quarter performance so far has been the bank's best since the third quarter of 2007 — the last time it recorded net income for a full period. Based on historical revenue and expense rates, Citi's projected earnings before taxes and one-time charges would be about $8.3 billion for the full quarter.
Pandit declined to say how large credit losses and other one-time items have been that would at least partially offset profit.
Citi shares jumped nearly 40 percent while Bank of America Corp. was up more than 26 percent; both are Dow components and helped propel the average higher. Other banking stocks also rose sharply.
Financial stocks have been a primary driver in a market collapse that has left the major indexes at their lowest point in more than a decade. Every report of loan losses and asset writedowns have sent banking stocks to incredible lows — Citi fell below $1 a share last week. And fears that hundreds of billions of dollars in government bailouts wouldn't be enough to save the big banks exacerbated the fears on the Street.
But Ben Halliburton, chief investment officer of Tradition Capital Management warned that the advance was likely just another bear market rally.
A bear market is defined as a drop of 20 percent from a market peak — and stocks passed that point last year and continued to plunge, leaving the Dow and S&P 500 at less than half the record highs they reached in October 2007. A bear market rally is an advance that lifts stocks off their lows, but that quickly evaporates as pessimism remains in the market.
"I would be surprised to see us trade back over 800 in the near term," Halliburton said, referring to the Standard & Poor's 500 index. "The news coming out on the economic front will continue to be rather gloomy."
Analysts suggested that the market's gains, especially among financial stocks, could be attributed to short covering, an investment strategy that tends to drive rallies in volatile markets. Short-sellers are traders who sell borrowed stock and then buy it back later on the hopes that the price will fall. If they believe a stock will be going up, they have to "cover" their positions, or buy shares to repay the loan.
Still, short covering does come in response to a more upbeat sentiment in the market. The question during a short covering rally is whether there is enough positive sentiment to sustain the advance.
Investors were further encouraged by Federal Reserve Chairman Ben Bernanke who called for a revamp of the country's financial regulatory system. Speaking before the Council of Foreign Relations, Bernanke said "too big to fail" companies must be subject to more rigorous supervision to prevent them from taking on excessive risk. Bernanke's remarks come as the Obama administration and Congress begin to devise their overhaul strategies.
In early afternoon trading, the Dow jumped 302.82, or 4.6 percent, to 6,849.87. Dow stocks with the biggest gains included General Electric Co., which rose $1.51, or 20.4 percent, to $8.92. GE has a big financial services division, so it tends to move with banking stocks.
The Standard & Poor's 500 index rose 36.51, or 5.4 percent, to 713.04, while the Nasdaq composite rose 74.98, or 5.9 percent, to 1,343.62.
The Russell 2000 index of smaller companies rose 21.10, or 6.2 percent, to 364.36.
Advancing issues outnumbered decliners by 14 to 1 on the New York Stock Exchange, where volume came to 903.9 million shares.
Citigroup's announcement proved to be the dose of good news Wall Street had been waiting for to spark a bounce, but there was still plenty of pessimism in the market.
"There's nothing that anybody can do to turn the market around," said Harry Rady, chief executive of Rady Asset Management. "This is just a little bear-market blip."
"Citigroup is falling apart. For them to say they are having the best quarter since 2007, I don't believe it," he said.
Halliburton was hesitant to put much stock in Citigroup's announcement for fear of rising loan losses that could eat away at the operating profit. As long as housing prices are declining and loan defaults are increasing, "they are going to have to take asset writedowns," he said. "I don't think this is a game changer."
Government officials have been examining additional ways to stabilize the bank should further problems arise, according to a report in The Wall Street Journal Tuesday citing people familiar with the matter. Late last month, in its third attempt to rescue the bank from collapse, the Treasury Department moved to take up to a 36 percent stake in Citi.
News of more job cuts, a particular sore spot for investors, was not enough to deter the market's upward swing Tuesday.
United Technologies Corp. said it plans to cut 11,600 jobs. The manufacturing conglomerate also lowered its 2009 profit forecast because of an anticipated decline in revenue. Shares jumped $2.52, or 6.7 percent, to $40.08.
Also Tuesday, the Commerce Department said wholesale inventories declined 0.7 percent in January, versus a 1.4 percent decline in December. This was better than the 1 percent drop economists had expected.
Big gainers included tech and industrial stocks. Caterpillar Inc. rose $2.55, or 10.7 percent, to $26.47. Among tech stocks, Intel Corp. rose $1.04, or 8.3 percent, to $13.59. Cisco Systems Inc. rose $1.08, or 7.9 percent, to $14.70.
Bond prices were mixed. The yield on the benchmark 10-year Treasury note, which moves opposite its price, jumped to 2.97 percent from 2.88 percent late Monday. The yield on the three-month T-bill, considered one of the safest investments, was unchanged from late Monday at 0.23 percent.
The dollar was mixed against other major currencies, while gold prices sank.
Light, sweet crude for April delivery rose 23 cents to $47.30 a barrel on the New York Mercantile Exchange.
Buoyed by the gains in the U.S., European markets soared. Britain's FTSE 100 rose 4.83 percent, Germany's DAX index jumped 5.26 percent, and France's CAC-40 gained 5.59 percent. Earlier Tuesday, Hong Kong's Hang Seng index jumped 3.08 percent, while Japan's Nikkei stock average fell 0.44 percent.