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Dow up 145 as credit worries ease

Bank of America will invest $2 billion in Countrywide Financial. Stocks jump on deal talk and confidence that the credit crunch is letting up. Big banks borrow $2 billion from the Fed. Oil prices continue to drop. Stocks have regained half of their losses in the sell-off.

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August 22, 2007 -- 16:20 ET

[BRIEFING.COM] Stocks rallied Wednesday as investors embraced everything from a fresh round of much needed M&A news to increased hopes of a Fed rate cut and the belief that stocks remain oversold at current levels.

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The stock market enjoyed what might be best described as a summer rally, thanks to renewed talk of mergers and buyouts, lower oil prices and growing confidence that the worst of the credit crunch has passed.

At the close, the Dow Jones industrials were up 145 points, or 1.1%, to 13,236. The Standard & Poor's 500 Index moved 17 points higher, or 1.2%, to 1,464, and the Nasdaq Composite jumped nearly 32 points, or 1.2%, to 2,553.

The rally came on relatively light volume, just 1.45 billion shares on the New York Stock Exchange and 1.8 billion shares on Nasdaq. Both were below average.

The Dow has recovered about half of its loss between July 19 and its bottom last Thursday afternoon.

• Get free, real-time stock quotes on MSN Money

A $2 billion stake in Countrywide

After the close, Countrywide Financial (CFC, news, msgs) shares soared nearly 18% to $25.65 on a report in The Wall Street Journal that Bank of America (BAC, news, msgs) was investing $2 billion in troubled mortgage lender.

The Journal, citing sources, said Bank of America will buy preferred stock yielding 7.25% in the deal. The preferred shares will be convertible into common shares of Countrywide at $18 each.

Countrywide and other mortgage lenders have been struggling to regain investor confidence amid a surge in defaults that's made it harder for them to borrow money and raised questions about their financial health.

Last week, many companies were having trouble raising money through the commercial-paper market, a critical source of short-term funds. Countrywide was forced to tap an $11.5 billion credit line.

The Federal Deposit Insurance Corp. said today U.S. banks' noncurrent real estate loans rose for the fifth consecutive quarter to $66.9 billion at the end of July. That was up 36% a year ago and up 10.6% from the end of April.

Noncurrent loans are those where payments are at least 90 days overdue.

Charge-offs -- losses due to unpaid loans -- jumped sharply in the quarter to the highest level since the last quarter of 2005. Net charge-offs totaled $9.2 billion, up 51% from $6.1 billion in the same quarter of 2006.

Rising U.S. home foreclosures and problems in the subprime mortgage market have spilled into broader financial markets in recent weeks.

Deals are not dead

Stocks moved higher right after the open, thanks to an eruption of deal talk. This included Dubai World's announcement that it's spending $5 billion for a stake in MGM Mirage (MGM, news, msgs), the casino company. MGM Mirage shares jumped 8.9% to $80.94 on the news.

Meanwhile, mining giant Rio Tinto (RTP, news, msgs) announced it had successfully -- and easily -- raised $40 billion to buy Canadian aluminum producer Alcan (AL, news, msgs). Rio Tinto shares were up 6.1% to $259.40 in New York, and the news that investors were more than willing to finance the deal suddenly lit fires under other potential deal candidates, including Nucor (NUE, news, msgs), U.S. Steel (X, news, msgs).

Stock Charts (Year)

MGM Mirage

Rio Tinto

Alcoa (AA, news, msgs), which was widely thought likely to be a takeover candidate after failing to win Alcan, was the Dow leader with a 4.7% gain to $36.22.

At the same time, another drop in crude oil added confidence to the markets because it meant that the U.S. consumer will be less squeezed. Crude closed at $69.26 a barrel, down 31 cents from Tuesday. So far this month, crude is down 11.4%.

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Finally, there was a growing sense that moves by the Federal Reserve and central banks around the world to maintain liquidity in the credit markets may be working.

Financial stocks were weak for much of the day, but they started to move higher in the last half hour. Briefing.com noted that the strength of the financial rally came from insurance companies.

Dow component American International Group (AIG, news, msgs) finished up 1.3% to $66.69. MetLife (MET, news, msgs) jumped 4.5% to $66.76, and Allstate (ALL, news, msgs) rose 2.4% to $56.44.

The Amex Securities Broker/Dealer Index ($XBD.X) finished up 0.9% to 224.24. Bear Stearns (BSC, news, msgs) fell 2.1% to $114.75. But Lehman Bros. (LEH, news, msgs) was up 1.7% to $58.54 after announcing it was shutting the doors on its subprime mortgage business. The move will cut 1,200 jobs in 23 offices.

For those interested in technical matters, the S&P 500 closed above its 200-day moving average for the first time since Aug. 9. That should be a sign of institutional confidence, but financial stocks were generally moving lower in after-hours trading.

What did the market lose?

If you're an investor, you might be pulling out your hair because the major indexes and many stocks haven't come close to retracing their losses since their July 19 highs.

But simply for drama, the stock market has been a compelling show. Between July 19, when the Dow hit a closing high of 14,000.41, and the worst of Aug. 16, the blue-chip index dropped 10.6%.

Since that bottom, which occurred roughly at midday on Thursday, the Dow has risen 5.7%. In other words, the average is regained nearly half of what it lost.

There's no guarantee that the stock market will come all the way back. Wall Street is still very edgy despite today's rally, especially about financial stocks. Plus, two more factors have been at work to push stocks higher in the last few days:

• The rally since last Thursday's bottom includes a lot of short-covering by investors who wanted to unwind their positions.

• Stocks are susceptible to quick rallies just now because volume is light. Many money managers and traders are on vacation. You won't really know what Wall Street is thinking until after Labor Day.

All that said, here's what the market did during the tumble and since the bottom:

Why Dubai World wants to buy into MGM

Dubai World is paying $5 billion for a 9.5% stake in MGM Mirage plus 50% of the company's CityCenter hotel-casino-condo project in Las Vegas. Dubai World, owned by the Middle Eastern country's government, will pay $84 a share for the stake, a 13% premium over MGM's closing price Tuesday.

"MGM is the No. 1 entertainment company in Las Vegas, and there really is no No. 2 or No. 3," Dubai World Chairman Sultan Ahmed bin Sulayem told Bloomberg News. "We're attracted to the high-end-hotels market, and Las Vegas is high-end and high-growth."

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MGM's Vegas holdings include famous names like the Mirage and the Bellagio. Investor Kirk Kerkorian's stake in the company will be reduced slightly, to 51.6%, but he will continue to be the majority shareholder.

Big banks drink at the Fed's water fountain

Four big banks -- Citigroup (C, news, msgs), JPMorgan Chase (JPM, news, msgs), Wachovia (WB, news, msgs) and Bank of America -- said today that they had borrowed $500 million each from the Federal Reserve's discount window. The discount window is how Wall Street describes the process of borrowing money from the Fed at its discount rate. Traders continue to worry that the credit crunch that shook financial markets last week is slow to ease.

In fact, the demand for the safety of short-term Treasury securities remains quite strong. The yield on the 13-week Treasury bill was 3.57% this afternoon, up slightly from yesterday's 3.42%. It's down 1.5% this week and down nearly 26% this month.

The Fed last week cut its discount rate to 5.75% from 6.25% and is widely expected to cut its federal funds rate at its September meeting. That rate is now 5.25%.

Web brokerages weigh a merger

There was deal talk among online brokers, too. TD Ameritrade (AMTD, news, msgs) and E*Trade Group (ETFC, news, msgs) could be merging.

The Wall Street Journal reported that the two companies have held merger talks for several weeks but that no agreement has yet been made.

Hedge funds SAC Capital and Jana Partners, both of which own stakes in TD Ameritrade, have been pushing for the merger discussions, the report said, to help boost profit margins and attract more customers. The funds, which own a combined 8.4% stake in TD Ameritrade, say that Toronto-Dominion Bank, which owns a 39% stake, isn't prioritizing maximizing shareholder value, the paper said.

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While the two may be talking, neither company's shareholders seemed enthusiastic. E*Trade shares were down 2.1% to $15.25. TD Ameritrade shares were up 4.9% to $17.15. But that was lower than the daily high of $17.56.

E*Trade had 4.7 million brokerage and banking accounts at the end of June, and TD Ameritrade had 6.3 million accounts, according to The Wall Street Journal. Charles Schwab (SCHW, news, msgs), currently the biggest online broker, had 6.9 million, the paper reported.

Schwab shares were up 3.3% to $19.90.

Nymex for sale?

Now, here's takeover talk that does have shareholders interested. The parent of the New York Mercantile Exchange, Nymex Holdings (NMX, news, msgs), said it has held talks to be acquired And Nymex shares promptly jumped nearly 9% before settling back to a 6.1% gain to $126.06.

Late Tuesday night, the operator of the most widely followed energy futures markets said in a statement that it "has talked to certain parties regarding a potential business combination."

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One possible suitor is rumored to be NYSE Euronext (NYX, news, msgs), the parent of the New York Stock Exchange.

Nymex Holdings' chairman "indicated his belief that any transaction would have to be at a meaningful premium to the company's current share price," the statement said.

The Nymex is the world's largest physical commodities futures and options exchange, according to the company's Web site.

Accredited Home won't make new loans

Another day, another mortgage mess: Home lender Accredited Home Lenders (LEND, news, msgs) said today that it isn't accepting any new loan applications and will cut 1,600 jobs.

The company blamed the meltdown in the subprime mortgage market, and the decision was not a surprise because most of its business was making loans to subprime borrowers. Subprime mortgages are those made to high-risk borrowers.

Rising interest rates and falling home prices have caused many borrowers to default on their mortgages, sending the industry spiraling.

Accredited's cuts came along with cuts announced by Lehman Bros. and HSBC (HBC, news, msgs), which will close an office in Carmel, Ind. next year, laying off 600 workers.

Mortgage lenders announced plans to cut 3,700 jobs just today, bringing the total of announced housing-related job losses since Thursday to more than 12,300.

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"These difficult decisions were made out of necessity in light of the continued and widely publicized turbulence in the mortgage and financial markets, but with a heavy heart," CEO James Konrath said in a statement. Shares of Accredited Home fell nearly 7% to $6.10.

Builder Toll Bros. says profit plunges

Things at home builder Toll Bros. (TOL, news, msgs) were mixed this morning.

The company reported fiscal-third-quarter net income of $26.5 million, an 85% plunge from $174.6 million the company earned in the same period last year. Toll earned 16 cents per share in the recent quarter, down from $1.07 per share last year.

Stock Charts (Year)

Accredited Home

Toll Brothers

But shares rose as the company managed to top Wall Street's expectations.

Excluding write-downs of $147.3 million, Toll Bros. said it earned 70 cents per share. Analysts were looking for a loss of 2 cents per share.

Shares were up 5% to $22.15. Revenue fell 21% in the quarter to $1.21 billion.

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Weak demand in the housing market and oversupply of homes have plagued the company, which warned a few weeks ago that home sales could slow even further amid the recent credit worries.

While cancellations of contracts were the worst in the company's 21-year history, CEO Robert Toll had slightly more uplifting words this morning.

"We believe that our buyers generally should be able to continue to secure mortgages, due to their typically lower loan-to-value ratios and attractive credit profiles," Toll said in a statement. While the business is crummy right now, he said that the company's subdivisions "have value that we don't wish to sacrifice to generate short-term sales volumes and cash flow."

As of Tuesday's close, shares of Toll were down 14% over the past year.

BHP Billiton's outlook is rosy

Mining giant BHP Billiton (BHP, news, msgs) reported profit of $13.42 billion for fiscal 2007, a 28% rise from $10.45 billion the company earned the year before.

BHP Billiton said its business was boosted by strong global demand, especially from China and India. The company also said the U.S. credit crunch that has been roiling markets around the world would not have a "material impact" on demand.

Shares of the stock rose 3.5% to $59.59 today.

By Charley Blaine and Elizabeth Strott