Dow Jumps 400 Points as Financials Soar
Stocks shot out of the gate like a rocket Friday after the Federal Reserve, Treasury and SEC jumped in to triage the meltdown in the banking system with measures including a ban on short selling in financials.
The Dow Jones Industrial Average soared nearly 400 points, or 3.5 percent. The S&P 500jumped 3.5 percent and the Nasdaq barreled 3 percent higher. The CBOE Volatility Index, considered the best gauge of fear in the market, fell 13 percent to below 30.
Brokerages and banks roared higher, with Goldman Sachs, Merrill Lynch, Morgan Stanley, Wachovia and Washington Mutual all up more than 30 percent.
Veteran trader Art Cashin, the floor director at UBS, said he actually felt better heading into today's trading session after Thursday, Wall Street's best day in six years.
"I think yesterday was the most credible rally we’ve seen this year. It had that stampede effect that I’ve been looking for," Cashin told CNBC. However, he cautioned that today's rally is probably going to be exaggerated by 30 to 50 percent due to the ban on short selling.
Plus, contracts for stock index futures, stock index options, stock options and single stock futures (SSF) all expire, a process known as quadruple witching, causing increased volatility in the market, according to analysts.
So, is this the bottom?
"Too early to say," Cashin said. "Watch the bank-lending rate -- that’s where the whole game’s played out in the next week."
The SEC temporarily banned short-selling of 799 financial stocks, effective today, to help boost investor confidence and protect any future victims of short sellers, who have been criticized in the demise of Bear Stearns, Lehman Brothers and AIG. This follows a similar move in the U.K. a day earlier. (See a full list of the 799 companies. Plus, cast your vote: What do you think of the ban?)
Meanwhile, Treasury Secretary Hank Paulson announced a plan to address "illiquid assets" on banks balance sheets that might include the government taking on financial firms' bad debts. Part two of that plan would be to ramp up the government's rescue of Fannie Mae and Freddie Mac more quickly, without Congress's approval.
And the Federal Reserve is taking steps to stabilize money-market funds by extending loans to banks.
"One initiative will extend non-recourse loans at the primary credit rate to U.S. depositary institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds,'' the Fed said in a statement.
There may be more Wall Street-Main Street pairings before the day is through:
Wachovia Bank is said to be in advanced merger talks with Morgan Stanley, one of the two last large independent, U.S.-based investment banks. The other is Goldman Sachs. Both stocks were pummeled earlier this week amid concerns about the investment-bank model.
Washington Mutual shares jumped after a Wall Street Journal report suggested that Citigroup was considering making a bid for the bank, the largest U.S. savings and loan.
Insurers' woes continue, with Moody's Investors Service saying it may downgrade by more than one notch the ratings of bond insurers Ambac and MBIA because of increasing losses from subprime mortgage debt.
Asian stocks surged, closing between 3 and 9 percent up and European stock markets went through the roof, with the FTSE 8 percent higher. UK banks shot up 32 percent.