Stocks finished strong Monday as Wall Street spent the session pondering the U.S. government's takeover of the mortgage giants Fannie Mae and Freddie Mac.
Today’s Markets
At the 4 p.m. close in New York, the Dow Jones Industrial Average gained 289.78 points, or 2.58%, to 11510.74. The broader S&P 500 Index was up 25.48 points, or 2.05%, to 1267.79. The Nasdaq Composite rose 13.88 points, or 0.62%, to 2269.76.The consumer-friendly Fox 50 gained 22.36 points, or 2.5%, to 915.53.
Market volatility was high with more than 1.5 billion shares trading hands. The Dow swung from a session high of more than +350 points to a session low near the +100 point mark. Of the thirty members in the Dow, 29 closed higher on the session. The lone red mark on the index was aluminum giant Alcoa (AA), which continued a five-day losing streak.
At the beginning of the session the Dow popped more than 350 points, but pared its gains as the trading day went on. Two sectors weighing on the broader markets were airline stocks like United Airlines (UAUA) and two financials: Washington Mutual (WM) and Lehman Brothers (LEH).
The technology-heavy Nasdaq index traded lower compared to the broader markets - dragged down primarily by the index's heavyweights such as Apple (AAPL), Research in Motion (RIMM) and Google (GOOG).
But the big story of the day was in the mortgage industry.
After weeks of speculation, U.S. regulators seized control of Fannie Mae (FNM) and Freddie Mac (FRE) after the the subprime mortgage mess and subsequent credit crunch brought both firms to the brink of insolvency. Shares of both companies plummeted in Monday's trading to a level below $1 a share.
The companies have been placed into a government conservatorship under the recently created Federal Housing Finance Agency in a plan announced Sunday by Treasury Secretary Henry Paulson and FHFA Director Jim Lockhart.
"Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe," Paulson said at a press conference in Washington D.C. "A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance."
In a conservatorship (like bankruptcy), common stockholders are expected to lose their investments. The government will take approximately 80% ownership of the firms through the issuance of senior preferred stock and warrants.
"It was not a matter of if, but a matter of when the government would step in," said Alan Valdez, a trader with Hilliard Lyons.
Fannie and Freddie may soon join now-dead investment bank Bear Stearns as casualties of the subprime mortgage mess and credit crunch. Because Fannie and Freddie exclusively do business in the mortgage market, as foreclosures have skyrocketed and housing prices have fallen, both companies have seen their shares fall off a cliff.
Combined, Fannie and Freddie own or guarantee $5.3 trillion-worth of mortgages - nearly half of the U.S. mortgage market.
Only a year ago, both Fannie and Freddie shares trading in the $60-a-share range.
Airlines
In a bizarre episode Monday morning, trading was halted on UAL Corporation (UAUA), the parent company of United Airlines, after the stock fell to around $3.00 on heavy volume. The company said they believe the stock dropped after a report surfaced claiming the airline was planning to file for bankruptcy protection.
A United spokesperson told FOXBusiness the report was “untrue" and said the incident was prompted “by the irresponsible posting of a 6-year-old Chicago Tribune article by the Florida Sun Sentinel newspaper website with the date changed.”
United is demanding a retraction from the newspaper and plans to investigate. The company exited bankruptcy in February 2006.
Shares of United fell dramatically before trading was stopped at around 11:06 ET on Monday morning. Trading resumed at around 12:25 ET, and shares were down 7.5% or 92 cents.
Commodities
In the commodities markets, oil seesawed throughout the day to rise 4 cents to $106.39 a barrel in New York. Crude traders are watching the movement of Hurricane Ike as it passes over Cuba as a Category 2 storm. Forecasters at the National Weather Service have predicted that Ike could enter the Gulf of Mexico later this week.
Both ExxonMobil (XOM) and ConocoPhillips said Monday they have begun preparations to evacuate personnel from off-shore oil platforms in the Gulf of Mexico.
Also related to crude, Goldman Sachs (GS) reemphasized its forecast for oil to remain at the $130-a-barrel for the fourth quarter this year. It also said it expects oil to be $140 a barrel through 2009.
Gold rose $2.60 to $805.30 an ounce.
Other Company News
Washington Mutual announced the departure of its chief executive Kerry Killinger. Alan Fishman will replace Killinger as CEO, and will sit on the company's Board of Directors.
Tobacco company Altria (MO), formerly known as Phillip-Morris, will purchase UST(UST), formerly known as U.S. Tobacco, for $69.50 per share in chase.
Machinists at Boeing (BA) walked out and began a strike on Saturday morning at 12:01 a.m. after negotiations stalled Friday night. Manufacturing has stopped, the company said. It will cost Boeing $100 million in revenue per day the strike goes on.
Global Markets
In Asia, Japan’s Nikkei index jumped more than 3.4% while Hong Kong’s Hang Seng closed up more than 4.3%.
European markets from London to Berlin were all broadly higher.
