- The Washington Times - Wednesday, October 29, 2008

Investors ignored a record collapse in consumer confidence and went bargain shopping Tuesday on Wall Street, sending the Dow Jones Industrial Average soaring 889 points, or nearly 11 percent in its second largest gain.

The downtrodden shares of an array of companies from Alcoa to General Electric jumped after reaching some of their lowest levels in decades, lifting the Dow back above 9,000 to 9,065, and spurring the Standard & Poor’s 500 Index up by 11 percent.

Wall Street’s powerful rally echoed similar gains in foreign markets. Hong Kong’s main index surged by 14 percent, Brazil’s market soared by 13 percent, Germany’s market gained 11 percent, Mexico’s market jumped 10 percent, and Japan’s market rose 7 percent.

“Investors snapped up stocks today like Lindsay Lohan CDs in the discount bargain bin,” said Mark Frey, vice president at Custom House, a Canadian investment firm. “Investors came to work with a skip in their step and a hole burning in their pocket over the bargains currently available. … If my Asian portfolio wasn’t down nearly 50 percent year to date, I could almost get excited about today’s positive results.”

Two months of turmoil left the ratio of S&P; stock prices to earnings at 10.7, the lowest since 1985.

“It’s a cheap moment to buy stocks,” said Linda Duessel, equity market strategist at Federated Investors Inc. The Dow made its second largest point gain little more than two weeks after its largest gain of 936 points, on Oct. 13, also fed by bargain hunting.

Investors also took hope from signs that the Federal Reserve’s efforts to revive corporate lending after a long, severe credit crunch are bearing fruit. Sales of longer-term commercial paper took a tenfold jump Monday when the Fed started buying the paper under a new program. That particularly helped GE, the largest issuer of commercial paper, with its stock surging by 10 percent.

“Minor signs of a credit thaw set off a running of the bulls,” said Robert Cyran, an analyst with Breakingviews.com. But he said the strong rally also was aided by computer-driven program trading, which lifted the Dow by nearly 450 points in the final hour, as well as rumors of Japanese intervention to support the sagging yen, and a “squeeze” on hedge funds and other investors that were short-selling stocks - which causes the stocks to rise abruptly.

“With the herd so skittish, expect more thundering reversals to be sparked by portents both real and imagined,” Mr. Cyran said.

The Fed is expected to deliver another gift to the markets Wednesday: another half percentage point reduction in interest rates.

“Investors are banking on another supportive rate cut,” said Custom House’s Mr. Frey.

The markets reflected no signs that mounting economic concerns caused a devastating loss of consumer confidence this month. An index published by the Conference Board plunged by a record amount to an all-time low, and people surveyed reported a surge in difficulty finding jobs.

“This report is a mirror image of the depressed situation many U.S. households are facing amid the economic recession and financial market crisis,” said Harm Bandholz, an economist at Unicredit Markets. He estimates that consumers, acting out their gloom, cut spending at a 2.5 percent rate in the last quarter.

The big drop in the stock market — even with Tuesday’s gain, the Dow remains down 36 percent from its record high — has been fueling consumer pessimism, as have big declines in home prices. Accumulated gains in home prices and stocks are the chief forms of wealth for most U.S. households.

Standard & Poor’s Corp. reported another big drop in home prices of 1 percent last month in its Case/Shiller index, bringing the total decline for the top 20 U.S. metropolitan areas to 20 percent in the past two years. The downturn in home prices has been particularly hard on consumers, as it has prevented many from using home-equity loans or cash-out refinancings to supplement their incomes and fund spending projects — a favorite financing tool employed by consumers in the first half of the decade.

“There is little question that the financial market turmoil and severe economic downturn taking place is producing another leg down in housing demand, which implies a re-acceleration in house price declines,” said Stephen Stanley, economist at RBS Greenwich Capital. He said home prices could fall by another 10 percent in the next year before bottoming out.

“Housing is not cheap yet, but more than half of the ‘richness’ has been reversed,” he said.

Given the rough road ahead for consumers and the economy, analysts were far from certain stocks would hold on to Tuesday’s dramatic gains. The markets have seesawed violently since September with each sign of economic duress, and have been driven lower by forced sales and liquidations by hedge funds and other major market players.

“We have not seen yet the worst,” said Carlos Ghosn, the manager who turned around an ailing Nissan a decade ago and is predicting a monumental crunch for the auto industry in coming months.

“Even if the financial crisis stops, the consequences of the market slowdown in terms of unemployment will come. So far we have seen only the beginning of the consequences.”

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