Stocks Have Their Best Day in Five Years

Stocks turned in their best showing in five years Tuesday after the Federal Reserve announced a liquidity plan, a more creative measure than rate cuts, to loosen the credit crunch.

The Dow Jones Industrial Average closed up 3.6 percent, or 416.66, the index's fourth-largest point gain on record. The Dow and Nasdaq posted their biggest one-day percentage gains since March 2003. For the S&P 500 index, it was the biggest percentage jump since October 2002.

The market was driven today by the Fed's liquidity plan and Bear Stearns, with the S&P 500 Index cresting and retreating along with Bear Stearns, which logged trading volumes five times the normal average.

The Fed, in conjunction with other central banks, announced plans to get hundred of billions of dollars in fresh funds to cash-starved credit markets. The Fed said it will expand its securities-lending program to $200 billion and, for the first time, include primary dealers such as investment banks. It's also adding non-agency private AAA mortgages to the program, instead of just agency-backed mortgages.

"This is big," Art Cashin, director of floor operations at UBS, told CNBC. "The [Fed] helicopter is up in the air ... and it's about to rain down money on lots of places." Cashin attributed the market's reaction to short covering.

Fed-funds futures backed away from expectations for a rate cut of three-quarters of a percentage point at the Fed's next meeting, March 18, favoring instead a cut of half a percentage point.

Even without the Fed's help, the market -- and financials -- probably would've been up anyway, said Matthew Tuttle, president of Tuttle Wealth Management. "We've had so many down days in a row that there was no reason to go down anymore," Tuttle said.

The Fed may have helped things along today, but "nothing has happened today to resolve core issues -- At the end of the day it's the economy and inflation," Tuttle said. "I think maybe we'll see a couple more up days, followed by more down days."

But for today, financials had their day in the sun, with notable gains in banks including Citigroup , Lehman Brothers , Washington Mutual and Wachovia .

"Positive market moves are fueled by two things -- confidence and liquidity -- and the Fed gave us both today," Fred Froewiss, vice president for institutional sales at RF Lafferty, told CNBC.

The only thing holding the market back earlier was likely liquidity rumors about Bear Stearns, Lafferty said. When Bear recovered, the market bounded higher.

Bear Stearns Shares Claw Their Way Back

Bear Stearns eked out a gain after falling as much as 11 percent in an earlier rout as rumors persisted that the investment bank is having liquidity problems. Volume was more than five times the normal average.

Alan "Ace" Greenberg, Bear's former CEO and its current executive committee chairman, told CNBC on Monday that speculation that the brokerage is facing liquidity problems are "totally ridiculous."

And Securities and Exchange Commission Chairman Christopher Cox said the SEC is comfortable with capital levels at the five largest U.S. investment banks, including No. 5 Bear Stearns.

Still, "there's got to be something there," said Dave Rovelli, managing director of equity trading at brokerage Canaccord Adams. "Stocks don't lie."

Several traders told CNBC that the Fed's liquidity announcement today was a direct result of something at Bear Stearns.

Without addressing specific rumors, Punk Ziegel analyst Dick Bove told CNBC that the brokerage firm's primary problem is that "the business model is broken." Bear was vertically integrated in the mortgage business, Bove noted, and didn't get out soon enough, which dented its balance sheet. Layoffs are a likely possibility, Bove noted, and the most likely outcome is a sale of the company. Bove cut his price target on the stock by about half to $45.

Shares of mortgage-related companies rallied on the Fed news, with Fannie Mae and Freddie Mac posting double-digit percentage gains for the day.

Thornburg Mortgage shares surged 46 percent after the Fed announcement. Earlier, the "jumbo" lender, which provides loans for expensive homes, reported a $676.6 million writedown for adjustable-rate mortgages, 58 percent higher than it projected four days earlier.

Shares of credit-card providers and homebuilders also received a boost from the Fed news, with notable gains in Discover Financial Services , Capital One , KB Homes and DR Horton .

Meanwhile, the U.S. trade gap expanded in January amid soaring prices for imports such as crude oil. The trade deficit widened to $58.2 billion from $57.9 billion in December, the Commerce Department reported.

Crude oil set a record for a fifth straight day, topping $109 a barrel, in intraday trading before settling at $108.75 a barrel.

Boeing was the Dow's only decliner after the defense giant said that it will <