Stocks Bounce Back as Financials Rally

Stocks rebounded Tuesday amid hope that Congress will regroup and find a way to approve a $700 billion bailout plan for banks which it rejected on Monday.

The Dow Jones Industrial Average clawed back 250 points, or roughly one-third, of the 777.68 it lost in Monday's bloodbath. The S&P 500 and Nasdaq also reclaimed about one-third of the 9 percent they lost on Monday. The CBOE Volatility Index confirmed that the fear has subsided somewhat today as the VIX dropped back to around 40 after hitting a record 46.72 in the prior session.

President Bush spoke briefly before the market opened, offering words of encouragement to a market still reeling from the House's rejection of the bailout bill and the record 777-point drop that resulted in the Dow.

The legislative process isn't over, Bush said in a live televised statement. "Congress must act," he said. "Our economy is depending on decisive action from the government. The sooner we address the problem, the sooner we can get back on the path of growth and job creation."

"There's an overarching belief that at some point this week, whether it's Wednesday or Thursday, we'll get something passed by the House," Arthur Hogan, chief market analyst at Jefferies, told Reuters.

Art Cashin, director of floor operations for UBS, warned that a failure to pass legislation would have dire effects for millions of Americans.

“All our concern about bailing out Wall Street — it’s really to try to free up Main Street,” Cashin said. “So the guy with the plumbing-supply business who gets a contract can go to the bank and get some of the money he needs overnight.” If credit markets freeze up, Cashin said, “we could see some big names fail — and they won’t be financials."

Fear hit news highs on the market Monday, with the Chicago Board Options Exchange's Volatility Index hit a record high of 46.72, indicating that options traders expect wild swings in stock prices.

Violent market reaction increased pressure on Washington to approve compromise bailout legislation and fuelled expectations that the Fed would cut interest rates on or before its next meeting, which is scheduled for Oct. 29.

Some experts said central banks may now be forced to cut interest rates in a coordinated move because their massive fund injections have done little to ease strains that are threatening to become a bigger systemic breakdown that could endanger the global economy.

Signs that more and more banks are now succumbing to the strains stemming from the U.S. housing slump probably will fuel more volatility, experts said.

In Europe, Belgian-French financial services group Dexia will receive a capital boost of  6.4 billion euros ($9.18 billion) from Belgium, France, Luxembourg and key shareholders, another bank on the continent to need help in the crisis. The bank's CEO and chairman resigned Tuesday morning.

Ireland moved to guarantee all bank deposits for two years in order to avoid a confidence crisis in its banks.

Financials bounced back.

The big banks, including Citigroup , JPMorgan Chase and Bank of America , clawed back at least 7 percent after losing more than 12 percent a day earlier.

The regional banks fared even better, with Sovereign Bancorp , which was the hardest hit Monday, rebounding about 60 percent. National City and Genworth were up more than 20 percent.

Shares of Reliant Energy tumbled more than 30 percent after the power-plant operator said it had to raise $1 billion to replace a credit facility with Merrill Lynch. The company also slashed its forecast, citing damage from Hurricane Ike and hedging losses.

Pepsi Bottling Group reported a lower quarterly profit of $1.06 a share, ahead of expectations by 2 cents. The largest bottler of PepsiCo beverages modestly raised its full-year forecast.

In economic news, the S&P/Case Shiller home-price index plunged a record 16.3 percent in July from a year earlier, though that was roughly in-line with what economists had expected. The Chicago purchasing-managers index slipped in September, though not as much as expected. A gauge of consumer confidence rose to 59.8 in September, the Conferene Board reported, from 58.5 in August.

THIS WEEK:

TUESDAY: Fed's Lockhart speaks; Rosh Hashanah (Jewish new year) holiday
WEDNESDAY: Auto sales; weekly mortgage applications; ADP employment report; ISM manufacturing index; construction spending; weekly crude inventories; Eid (Muslim) holiday
THURSDAY: Short-selling ban expires at 11:59 pm ET; ECB announcement; jobless claims; factory orders; natural-gas inventories; Fed's Bullard speaks; earnings from Constellation Brands
FRIDAY: August jobs report; ISM services index; earnings from Family Dollar

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