On Tuesday, the Dow, S&P 500 and Nasdaq posted their largest one day percent gain since 2003 on the announcement of a coordinated central bank effort to increase liquidity in the financial markets. The major indices finished the day sharply higher, near their best levels of the session, thanks to broad-based buying interest.
The Federal Reserve announced a new Term Securities Lending Facility (TSFL). The Fed will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days, rather than overnight. The borrowers will be able to pledge a variety of collateral ranging from federal agency debt to private AAA rated residential mortgage backed securities (MBS). The auctions will take place on a weekly basis.
Basically, this plan stands to improve liquidity by allowing more thinly traded securities to be used as collateral to borrow highly traded Treasury securities.
The Fed also announced it is increasing its swap lines with the European Central Bank and the Swiss National Bank to $30 billion and $6 billion, respectively. This equates to an increase of $12 billion.
This is a coordinated effort with other central banks, which announced measures of their own. Participating central banks include the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.
The news gave a substantial lift to the financial sector (+7.4%), which posted its largest one day percent gain since 2000. The thrifts and mortgages group (+12.8%) saw the steepest rise, as traders bet the ability to use mortgage backed securities stands to benefit the group the most. Of the sector's 92 members, only Moody's (MCO 35.19, -0.31) finished the day in the red. Beaten down names Washington Mutual (WM 11.88, +1.84), SLM Corp (SLM 19.71, +3.02) and Freddie Mac (FRE 20.16, +2.77) posted the largest percent gains of 18%, 18% and 16%, respectively.
Nine of the ten sectors trended higher, but that does not clearly demonstrate how broad-based the buying interest was on Tuesday. Of the 147 industry groups, only four posted a loss.
Eight sectors posted a gain of more than 2%. Materials surged 6.0%, energy gained 4.6% and industrials advanced 3.7%.
There were some negative items, however, as healthcare (-0.2%) finished the day with a slight loss. The managed healthcare group shed 17.4% after WellPoint (WLP 47.26, -18.66) said it expects its full year 2008 income to be in the range of $5.76 to $6.01 per share, which fell well short of the $6.41 consensus. The company cited higher than expected medical costs, and a lower than expected fully insured environment as reasons for the earnings cut. As a result, Aetna (AET 42.65, -3.86), UnitedHealth Group (UNH 38.24, -6.83) and Humana (HUM 47.38, -15.32) all posted hefty losses.
Texas Instruments (TXN 28.76, -0.89) was the only S&P 500 tech stock that traded lower, due to the company's lower than expected earnings guidance. Tech shrugged off the bearish news, managing to advance 3.6%.
News of the Fed's plan prompted traders to cut their bets how much the FOMC will decide to cut rates on March 18. This helped give a boost to the Dollar Index (+0.4%) and caused a sell-off in Treasuries.DJ30 +416.66 NASDAQ +86.42 NQ100 +4.1% R2K +4.6% SP400 +3.3% SP500 +47.28 NASDAQ Dec/Adv/Vol 767/2165/2.45 bln NYSE Dec/Adv/Vol 535/2647/1.95 bln
