Blue Chips Rally after GSE Rescue

Major U.S. stock finished higher Monday in a session that featured some remarkable developments. The Dow industrials and S&P 500 index advanced strongly in reaction to the announcement Sunday of the federal government's takeover of Fannie Mae (FNM) and Freddie Mac (FRE), which own or guarantee half of the country's $12 trillion in outstanding home mortgage debt. The action removes some uncertainty about the solvency of the government-sponsored enterprises and instills some confidence in the economy.

Also on Monday, UAL Corp. (UAUA) shares fell sharply, to near 3.00 at one point in the session from their opening price of 12.17, and then recovered to finish the session down 1.38 at 10.92. The airline operator said reports that the company filed for bankruptcy are completely untrue and were caused by the irresponsible posting of a six-year-old Chicago Tribune article by the Florida Sun Sentinel newspaper website with the date changed. The story was related to United's 2002 bankruptcy filing. (United exited bankruptcy in February, 2006.) United is launching an investigation.

The Nasdaq composite index lagged the blue chips, amid declines in Google (GOOG) and Apple (AAPL).

Bonds rose in price. The dollar index climbed. Energy futures ended mixed. Gold eased.

On Monday, the Dow Jones industrial average jumped 270.56 points, or 2.41%, to finish at 11,491.52. The broader S&P 500 index climbed 23.01 points, or 1.83%, to end the session at 1,265.32. And the tech-heavy Nasdaq composite index gained 12.78 points, or 0.57%, to close at 2,268.66.

On the New York Stock Exchange, 20 shares were trading higher for every 11 that fell in price. The ratio on the Nasdaq was 17-11 positive.

Major stock indexes overseas rallied hard Monday on the GSE bailout. In London, the FTSE 100 index surged 3.81% to 5,440.20. In Paris, the CAC 40 index jumped 4.1% to 4,368.00. Germany's DAX index gained 2.66% to 6,290.35.

Asian markets rallied overnight. Japan's Nikkei 225 index climbed 3.38% to 12,624.46. In Hong Kong, the Hang Seng index shot higher by 4.32% to 20,794.27.

The U.S. financial sector was boosted by the Fannie/Freddie news, with the major U.S. financial institutions like Bank of America (BAC), JPMorgan Chase (JPM), and Citigroup (C) finishing higher. Homebuilding shares also gained.

However, not all financials rallied. Fannie and Freddie shares plunged to below $1 on the news, capping a meltdown of tens of billions of dollars in market cap over the past year for the mortgage firms.

In an announcement Sunday, Treasury Secretary Henry Paulson said the firms were being placed in a government-operated conservatorship, ousting their chief executives and eliminating their dividends. The Treasury may purchase up to $200 billion of stock in the firms to keep them solvent. Under the plan, the Federal Housing Finance Authority will assume the power of the board, and the two firms' CEOs will resign after a transitional period. Common and preferred dividends paid by each company have been suspended.

In addition, S&P and Citigroup lowered their equity ratings on Fannie and Freddie to sell.

Bond-market guru Bill Gross of PIMCO expects the news to help housing and the economy, notes Action, while a leading hedge fund, Paulson & Co., is looking to buy financial stocks.

"We believe the plan is a significant positive for the housing market, the economy, and the capital markets and that its announcement may prove a key turning point in the ongoing credit crisis," wrote Lehman Brothers economist Zach Pandl in a note Monday.

The extraordinary news concerning Fannie and Freddie somewhat overshadowed developments elsewhere in the financial sector.

Washington Mutual (WM) announced that Alan H. Fishman has been appointed CEO to succeed Kerry Killinger who is leaving the company. WaMu says Fishman has also joined the company's board.

Lehman Brothers Holdings (LEH) replaced key senior management, appointing new co-heads of its Fixed Income unit and new co-chief executives of the Europe and the Middle East segments. An unconfirmed report from Reuters also says that Korean regulators are urging Korea Development Bank to take a cautious approach to dealings with Lehman, and cites Japanese sources suggesting that Nomura Holdings is considering acquiring a stake in the firm. Merrill Lynch (MER) upgraded its recommendation on Lehman to neutral from underperform, saying that it believes the environment has improved for Lehman to be able to attract the equity capital it needs at a price around the current market.

Merrill also upgraded Goldman Sachs (GS) to buy from underperform.

Friedman Billings (FBR) upgraded shares of East West Bancorp (EWBC), (UCBH) and (ZION) to outperform as it believes that the government's decision to place the GSEs into a conservatorship has positive implications for bank stocks in general, specifically those with depressed valuations driven by uncertainty surrounding capital levels relative to exposure to housing-related losses.

Bankunited Financial (BKUNA) announces that it received notification Monday that the Office of Thrift Supervision has reclassified the bank's regulatory capital status from well-capitalized to adequately capitalized although the Bank's capital ratios exceed the statutory threshold for well-capitalized institutions. As a result, Bankunited is subject to restrictions on accepting brokered deposits.

While the GSE bailout garnered the lion's share of the market's attention Monday, traders were also looking ahead to reports on the U.S. trade balance Thursday and retail sales Friday.

Energy futures turned lower despite worroies that Hurricane Ike will hit the Gulf of Mexico's oil structure. The Weather Bureau so far has not been able to pinpoint where the storm will make landfall. October WTI crude oil futures were lower at $105.37 per barrel. Meanwhile, OPEC ministers are gathering in Vienna for tomorrow's meeting. They were widely expected to leave formal targets unchanged, especially as the powerful hurricane has lifted oil prices. Also, there was speculation the ministers did not want to cut output with global economies appearing to be headed for a recession.

Gold traded on a heavier footing, with a broad dollar rally encouraging movement out of commodities and in to other assets. The improved risk profile generated by the U.S. GSE bailout weighed on gold, with some of last week's safe haven bid coming undone as equity markets moved broadly higher.

Among other stocks in the news Monday, Altria Group (MO) agreed to acquire UST Inc. (UST) in an $11.7 billion deal, which includes assumption of $1.3 billion in debt. Terms: $69.50 cash per UST share.

Gehl Co. (GEHL) agreed to be acquired by its largest shareholder, Manitou BF S.A., a manufacturer and distributor of material handling equipment headquartered in France, in a $450 million deal (aggregate enterprise value). Terms: $30 cash per Gehl share.

Hercules Offshore (HERO) reported that all of its drilling rigs, liftboats and marine vessels located in U.S. Gulf of Mexico have been accounted for, appear to have sustained no damage as a result of Hurricane Gustav. Notes, all of its contracted drilling rigs have resumed operations, except for three drilling rigs on stand-by and one drilling rig that was recently re-evacuated as Hercules Offshore takes precautions as it monitors Hurricane Ike.

Treasury market

Bond prices recovered somewhat from earlier lows. The 10-year note fell to 102-10/32 for a

yield of 3.725%, while the 30-year bond was lower at 103-06/32 for a yield of 4.312%.