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Stocks Close at Two-Year Highs; Banks Surge

Stocks surged to two-year highs on Thursday as all the major indexes rose beyond their closing highs for the year in the wake of the Federal Reserve's decision to buy $600 billion in Treasury bonds to boost the economy and news that President Obama said he was open to extending the Bush-era tax cuts to all income levels.

The market also got a late afternoon boost after news the Fed will reportedly allow "healthy" banks to raise their dividends.

The Dow Jones Industrial Average rose 219.71 points, or almost 2 percent, to close at 11,434.84, the highest close for the blue-chip index since Sept. 8, 2008. The surge was led by banks and big multinationals, a day after the Dow rose slightlyfollowing the Fed's move.

JPMorgan, Bank of America, and Caterpillar led the blue-chips higher, while Pfizer was the only laggard.

The S&P 500 Index rose 23.09 points, or 1.9 percent, to close at 1,221.05, the highest close for the broad market index since Sept. 19, 2008.

The Nasdaq, rose 37.07 points, or 1.5 percent, to close at 2,577.34, the highest close for the tech-heavy index since Jan. 3, 2008.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, tumbled more than 5 percent to trade under 19.

All key S&P sectors were higher, led by financials, materials and energy.

The Wall Street Journal reported that the Federal Reserve will allowbanks with "strong capital levels," to boost their dividend payments, citing "people familiar with the matter."

Regulators will issue guidance on the standards banks have to meet soon, according to the sources, the Journal said.

Banks getting a boost from the Fed move also included Wells Fargo and regionals Zions Bancorp and PNC Financial Services . The Keefe Bruyette Woods Bank Index also rose.

The news that President Obama might consider a compromisewith Republicans over the tax breaks came from White House spokesman Robert Gibbs two days after voters handed the House of Representatives to the Republicans.

If the tax cuts are extended for all income brackets, it'll take year-end tax selling off the table, Warren Meyers, DME Securities trader, said on CNBC.

"Everybody has been waiting for this, hoping for this to happen," Meyers said. "The fact it now looks like a reality, it's obviously very good for the economy, very good for the equity markets certainly."

In a research note, strategists at UBS said the market was likely already anticipating an extension of the tax cuts, but that their extension could have a "modest positive impact."

"Given the size of the US government’s long term budget deficits, a combination of both spending cuts and higher taxes will have to be part of any solution down the road," UBS said in a research note.

The Fed's decision to pump more money into the economy pushed the dollar to an 11-month lowagainst a basket of currencies, giving a boost to industrial companies that sell goods abroad, where their products will be more competitively priced. Freeport McMoran , International Paper , and U.S. Steel were among the gainers.

In an effort to reassure markets, Fed President Ben Bernanke said the central bank's efforts to stimulate the economy won't spark excess inflation, as some have feared. In an op-ed article in the Washington Post, Bernanke said high unemployment, and excessively low inflation, were bigger worries.

Meanwhile, the lower dollar drove oil prices higher. Oil surged more than 2 percent to more than $86 a barrel, a six-month high. Energy stocks were among the best performers on the S&P 500, including Halliburton , Schlumberger , Chevron , ConocoPhillips and ExxonMobil .

Big cap technology stocks led the Nasdaq to a two-week high. That was helped by Qualcomm , which released surprisingly strong profits and said results for the year would beat expectations, thanks to strong demand for its smartphone chips. In addition, at least six brokerages raised their price targets on the firm.

Microsoft rose after news it had lifted its sales forecastfor the Kinect, a video game device that plugs into its Xbox 360 and turns it into a motion-control game console.

Apple shares climbed after brokerage Baird started coverage of the iPod maker with an "outperform" rating and a $140 target price.

Other big cap tech stocks gained as well, including Google, Intel and Cisco.

On the earnings front, Time Warner Cable rose after the cable provider posted a better-than-expected rise in profitas it added more Internet customers and said it would launch a $4 billion share buyback program. In addition, S&P Equity raised its price target on the firm to $76 from $68.

Rivals Cablevision and DirecTV also reported higher quarterly profits.

The New York Times jumped after the company completed a $225 million offering of 6.625 percent senior notes due in 2016. The proceeds will be used to pay down debt. Meanwhile, News Corp. fell after the U.K. Secretary of State for Business intervened in the media conglomerate's efforts to take over British Sky Broadcasting Group, a pay-television firm in the U.K.

Whole Foods shares soared to lead the S&P 500 after the upscale grocer reported profit that beat Wall Street's viewon strong sales at established markets. At least three brokerages raised their price targets on the company.

European consumer goods group Unilever reported a 3.6 percent rise in sales but warned that higher commodity costs were putting pressure on its profit margins.

Dow component Kraft Foods , videogame publisher Activision Blizzard and coffee giant Starbucks are expected to report earnings after-the-bell tonight.

Investors will be keeping an eye on BHP Billiton and Potash , as the Canadian government rejectedBHP's $39 billion dollar hostile takeover bid for Potash.

In the day's economic news, monthly retail sales figures for October were largely better-than-expected, although warm fall weather muted sales in some categories. Some large department stores fared well, including Macy's , Saks and chain retailers Gap and Limited .

Kohl's and JCPenney's , however, didn't fare as well. Teen retailers also lagged, including American Eagle , Aeropostale and Hot Topic , although Zumiez's sales soared.

Volume on the consolidated tape of the New York Stock Exchange was high, with 5.8 billion shares traded. On the NYSE floor, 1.3 billion shares changed hands. Advancers outpaced decliners five to one.

World stocks also got a boost from the Fed's decision, rising to their highest level since the collapse of Lehman Brothers two years ago. The MSCI all-country world index rose 1.4 percent to 324.12 Thursday, higher than its been since Sept. 9, 2008. The index has gained 8.2 so far this year.

The steady upward climb of the major U.S. indices on Thursday reflects the Fed's plans to pump money into the economy, on top of the fact the economy is already strengthening, said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research.

Detrick described it as a "double-dose of buying pressure."

Another driver behind the surge was the market's negativity ahead of a week filled with news, including the mid-term elections, the Fed's decision, and the nonfarm payroll report on Friday.

The expectation was that the market would sell off on the news, but when that didn't happen, the buyers stepped in.

"The market is the best indicator we know of for what the economy is going to do," Detrick said. "It's making a bet the economy will turn around in the next six to nine months."

In the day's economic news, new claims for unemployment benefits rose 20,000to a seasonally adjusted 457,000, according to the Labor Department, reversing a decline from last week when claims fell to a revised 437,000.

But in a more positive sign for the economy, nonfarm productivity for the third quarter rose 1.9 percent, more than expected, while unit labor costs fell 0.1 percent, which was less than expected.

On Tap:
FRIDAY: Pending home sales index, non-farm payrolls report, consumer credit; Kansas City Fed President Hoenig speaks; before-the-bell earnings from Toyota; after-the-bell earnings from Berkshire Hathaway.

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