Stocks climb ahead financial rescue vote in House

Published 11:11 am Friday, October 3, 2008

NEW YORK (AP) — Stocks advanced while credit markets remained strained Friday ahead of an expected House vote on the government’s $700 billion financial rescue plan and after Wells Fargo Co. agreed to buy Wachovia Corp. in a $15.1 billion deal. The Dow Jones industrial average rose about 140 points.

Investors also appear relieved that the government’s September employment report wasn’t worse, although the Labor Department said payrolls shrank by 159,000, more than the 100,000 economists predicted. The nation’s unemployment rate remained flat at 6.1 percent, as expected.

Investors are eager for unemployment to remain in check because widespread job losses could damp consumer spending, which accounts for more than two-thirds of the nation’s economic activity.

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Wall Street also appeared pleased by a report that the nation’s service sector was slightly stronger than expected last month. The Institute for Supply Management, a trade group of purchasing executives, said its service sector index slipped to 50.2 in September from 50.6 in August. However, the number came in ahead of the reading of 50 that economists had expected, according to Thomson/IFR. A reading above 50 signals growth, while a reading below 50 indicates contraction.

On a busy Friday, investors were awaiting resolution on the government’s plan to buy up bad assets from banks and other institutions to shore up the financial industry and help resuscitate credit markets. Trading across markets has been volatile throughout the week based on investors’ reading of whether the plan would win approval; on Monday, the House’s rejection took Wall Street and Capitol Hill by surprise.

The Senate subsequently passed a sweetened version of the plan that added tax breaks and raised the limit on federal deposit insurance from $100,000 to $250,000. The revote is expected to occur again during market hours, which could make for somewhat restrained trading until it is complete.

While much of the nervousness on Wall Street has been blamed on uncertainty about the rescue plan’s chances, investors are now contending with worries about the broader economy, not just the credit markets. On Thursday, the Dow industrials, which have seen triple-digit moves each day this week, fell 348 points on a growing belief that the plan won’t stop the U.S. from falling into a prolonged recession.

Investors did find some room for optimism, however. The Wells Fargo-Wachovia deal cheered investors because, unlike several recent banking tie-ups, it wasn’t put together at the behest of regulators or using government money. The agreement upends a plan announced Monday by Citigroup Inc. to acquire Wachovia’s banking operations for $2.16 billion, a move orchestrated by the Federal Deposit Insurance Corp. However, Citigroup was demanding that Wachovia honor its agreement.

Ahead of the House vote, the credit markets indicated increased demand for safety. The yield on the 3-month Treasury bill, the safest type of investment, fell to 0.59 percent from 0.70 percent late Thursday. Yields have remained low in recent weeks because investors are eager to safeguard their money.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.61 percent from 3.64 percent late Thursday.

‘‘People I think are bargain hunting a little on these depressed prices and hoping that the market is going to rally following a favorable vote in the House,’’ said Scott Fullman, director of derivatives investment strategy for WJB Capital Group in New York.

In midmorning trading, the Dow rose 180.88, or 1.73 percent, to 10,663.73.

Broader stock indicators also rose. The Standard & Poor’s 500 index advanced 26.70, or 2.40 percent, to 1,140.98, and the Nasdaq composite index rose 50.47, or 2.55 percent, to 2,027.19.

The dollar was mostly higher against other major currencies, while gold prices fell.

Light, sweet crude rose 33 cents to $94.30 on the New York Mercantile Exchange.

Wachovia shareholders will receive 0.1991 share of Wells Fargo for every share of Wachovia they hold, valuing Wachovia at about $7 a share. The deal represents a nearly 80 percent premium to the stock’s close of $3.91 on Thursday. The stock finished last week at $10, before the deal with Citigroup was announced.

Wachovia shares rose $2.94, or 75 percent, to $6.85, while Wells Fargo rose $2.68, or 7.6 percent, to $37.84. Citigroup fell $2.21, or 9.8 percent, to $20.29.

American International Group Inc., one of the 30 stocks that comprise the Dow, said it plans to sell off a number of businesses and retain its U.S. property and casualty and foreign general insurance businesses. The world’s largest insurer said it will become a smaller, more nimble company. AIG teetered on the edge of failure in recent weeks because of the collapse of the subprime mortgage market and the resulting tightness in the credit markets. Last month, the company received a two-year, $85 billion emergency loan from the government.

AIG rose 49 cents, or 12 percent, to $4.49.

Overseas, Japan’s Nikkei stock average fell 1.94 percent. In afternoon trading, Britain’s FTSE 100 rose 0.24 percent, Germany’s DAX index rose 0.33 percent, and France’s CAC-40 fell 0.13 percent.