U.S. Stocks Close With Second Day Of Gains On Subprime Plan

NEW YORK (MarketWatch) -- U.S. stocks on Thursday extended gains for a second day after the White House offered its plan to curb home foreclosures, bolstering financial shares battered for months by the subprime mortgage crisis and related credit crunch.

"It's a step in the right direction, at the very least we're putting together a plan," said Art Hogan, chief market strategist at Jefferies & Co.

The administration's proposal targets about 10% of subprime borrowers who are able to afford their mortgage payments as they now stand, but would not be able to keep current once they reset higher, Hogan said.

The Dow Jones Industrial Average rose 174.9 points, or 1.3%, to 13,619.9, with 27 of its 30 components ending higher, led by a 5.5% rise by American Insurance Group Inc. shares.

Also bolstering investor sentiment is an expectation of another interest-rate cut by the Federal Reserve when the central bank meets on Tuesday.

"A 25 basis-point cut is a foregone conclusion, but there's a big camp that believes there's a possibility of 50 basis points; this is a Fed that sees enough trouble in the financial markets that it may put aside its fears of inflation and get more aggressive," said Hogan.

The S&P 500 gained 22.33 points, or 1.5%, at 1,507.34, and the Nasdaq Composite was up 42.67 points, or 1.6%, to 2,709.03.

Shares of Countrywide Financial Corp. were up 16.8%, with the mortgage lender leading gains in the financial sector as President Bush and other administration officials offered their strategy for aiding some subprime borrowers. .

Volume on the New York Stock Exchange passed 1.3 billion, and advancing stocks outnumbering those declining 4 to 1. On the Nasdaq, nearly 2 billion shares traded hands, and advancers outpaced decliners more than 2 to 1.

On the New York Mercantile Exchange, gold futures reversed earlier sharp losses to trade higher, recently up $3.4 to end at $807.1 an ounce, while crude-oil futures gained $2.74 to $90.23 a barrel.

Fed rescue

Thursday afternoon, Bush and Treasury Secretary Paulson detailed the administration's plan, made with input from mortgage lenders and banks, to freeze interest rates for as long as five years to help some subprime borrowers.

The proposal does not involve any government funds, and companies that service loans are expected to abide by guidelines for refinancing and modifying subprime loans for able borrowers, Paulson said.

Illustrating the housing woes, the Mortgage Bankers Association on Thursday reported foreclosures hitting new highs in the third quarter, with the rate of loans in the foreclosure process at 1.69% of all outstanding, up from 1.4% in the second quarter. .

Sales target

Target Corp. shares dropped 7.6% after the retailer said it expects December sales to be down "well short" of its prior view. In November, Target had predicted same-store sales would be down in the low single digits.

The retailer also reported that November same-store sales increased 10.8%, while on a calendar-adjusted basis, sales for the period increased 1.1%.

November same-store sales were mixed during a month of heavy promotions.

Wal-Mart Stores , Macy's and Costco Wholesale beat expectations, while Fred's cut its earnings outlook and Limited Brands sales fell more than forecast.

Starbucks Corp. shares fell 0.9% after the chain recalled about 167,000 China-made coffee mugs after reports of nine minor injuries. .

Jobless claims

Earlier, the government said its four-week moving average for jobless claims climbed to a level unseen in more than two years, with the underlying trend "consistent with the recent softening in the labor market," said Omair Sharif, an analyst at RBS Greenwich Capital.

The Labor Department reported its moving average for initial jobless claims hit its highest mark since late October 2005, wit the seasonally adjusted four-week moving average for initial jobless claims up 4,750 to 340,250. .

On Friday, the government is slated to release its employment report.

"We expect nonfarm payrolls tomorrow to show a gain of 90,000, with an uptick in the unemployment rate to 4.8%," Sharif said in his commentary.

Elsewhere, the Organization of Economic Cooperation and Development said the U.S. will avoid a recession next year, though the housing problems will lead to a downturn.

The Bank of England joined the Bank of Canada in making an interest-rate cut this week. The European Central Bank held steady and kept rates at 4%.

"This is the first time in two years they have cut and is further evidence that the credit crisis is global," Kevin Giddis, an analyst at Morgan Keegan & Co. Inc., said of the BoE's move.

Overseas, European shares fell back as investors factored in the rate cut, although a strong update from the royal Bank of Scotland lifted banking stocks. .

The dollar was mixed, gaining on the yen but erasing gains against the euro and pound. .

By Kate Gibson