By PETER A. MCKAY
The market's gains waned in the afternoon but a late round of buying pushed major indicators back within reach of their daily highs at the closing bell.
The Dow Jones Industrial Average, which was up nearly 350 points at its intraday peak, finished 290.43 points higher, its biggest one-day gain in a month. The blue-chip indicator climbed 2.6% to 11510.74, down 13% on the year. All its financial components posted big gains on Monday, led by Bank of America, up 7.8%, and Citigroup, up 6.6%. Home Depot, which could stand to benefit from any increased housing-sector activity the rescue of Fannie and Freddie stirs, jumped 5.5%.
"The government has stopped an implosion here, just like they did with Bear Stearns," said Bill King, chief market strategist at M. Ramsey King Securities in Burr Ridge, Ill. He alluded to the March acquisition of the troubled bank by J.P. Morgan Chase, in a deal facilitated by the Federal Reserve for the sake of stabilizing the broader financial system. But Mr. King added: "The question is how often are you going to have to do this? Do you have to keep doing one of these types of things every few months?"
Other market gauges also rose, though the gains were milder. The Standard & Poor's 500 Index gained 2.1%, rising 25.48 points to 1267.79, down 14% on the year. The small-stock Russell 2000 climbed 2% to 732.87, down 4.3% on the year. The technology-focused Nasdaq Composite Index edged up 0.6% to 2269.76, off 14% on the year. It was weighed down Monday by a 1.4% decline for tech bellwether Apple, which is due to unveil improvements to its iPod music players on Tuesday. Research In Motion, another industry heavyweight, was down 4%.
Trader Don Bright, of the proprietary firm Bright Trading in Chicago, said that fears about the broader economy, or activity outside the financial sector, continued to weigh on the market in the wake of several recent downbeat developments, including data last week showing an eighth straight month of job losses in the U.S.
In particular, those concerns have weighed on the most speculative corners of the market, like technology.
"That's a sector that really tends to do well when people are optimistic about the future," said Mr. Bright. "Who feels that way now? The government may be saving Fannie and Freddie, but does that get your neighbor a job or help him make a payment on his mortgage?"
Shares of Fannie Mae and Freddie Mac had been beaten down over the past few months on speculation that bleak credit-market conditions would force the government to step in and take control of the mortgage-finance giants. The plan unveiled by the Treasury Department is likely to lead to steep losses for holders of the companies' common and preferred shares. In recent trading, the common stock of both had tumbled by more than 80% to beneath $1. Fannie and Freddie preferred shares also dropped sharply, falling in line with the common shares.
Companies with large exposure to Fannie and Freddie shares were mixed. Standard & Poor's said American International Group, among other insurers, have large holdings of the preferred shares. AIG rose 1.9%. But Sovereign Bancorp, which owns roughly $900 million in the preferred securities, saw its shares fall 6.6%.
But the bailout protects Fannie and Fannie bondholders, which include many pension funds, foreign central banks and mutual funds. The government's plan is also expected to lower mortgage rates, which have remained stubbornly high despite deep cuts in borrowing costs by the Federal Reserve.
The prospect of a housing-market turnaround lifted shares of homebuilders. Toll Brothers shares soared 9.4% and Lennar shares jumped 10.3%. The shares of buyers of Fannie and Freddie debt also gained. Annaly Capital Management, a real-estate investment trust, jumped 10.2%. But there were losers as well. Mortgage insurers including Radian Group and PMI Group coughed up gains made earlier in the day to end lower.
Other dangers remain for investors. Economic woes in the U.S., including continued job losses and slowing growth, seem to be spreading overseas. Also, prices of homes in the U.S. remain low and inventories of unsold units remain high. That situation is cutting into many average Americans' wealth and could keep prices of mortgage securities depressed in the months ahead even if it becomes easier for those instruments to change hands.
"The Fannie and Freddie deal could help mortgage rates, but mortgage rates only affect how big of a house people buy, not whether they buy one in the first place," said Kim Caughey, senior investment analyst at Fort Pitt Capital Group in Pittsburgh. "To get people to make big-ticket decisions like that, you'll really need to improve consumer confidence and other things that are still looking pretty bad."
Treasury prices rose and pushed interest rates down on Monday. The two-year note were up 2/32 to yield 2.289%. The benchmark 10-year note was up 16/32 to yield 3.648%. The dollar rose sharply against major foreign rivals. The U.S. Dollar Index was up 1.2%.
Washington Mutual, one of the lenders most affected by the credit crunch, has ousted Kerry Killinger as chief executive. And Lehman Brothers Holdings launched a sweeping shake-up of senior management, including the departure of some of its international operational chiefs. Washington Mutual shares were off 3.5%, while Lehman was down 12.7%.
Oil prices seesawed and finished little changed as traders followed the progress of Hurricane Ike, which may damage offshore facilities in the Gulf of Mexico in the days ahead. Crude futures snapped a six-day losing streak, finishing 11 cents higher at $106.34 a barrel in New York.
Write to Peter A. McKay at peter.mckay@wsj.com.
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