Morning Update

Wall Street Turns Exuberant

World markets are soaring and US equities are sharply higher and are extending yesterday's record advance after the US government confirmed plans to invest in banks and back debt. Credit markets remain tight but the massive new initiatives announced over the past 24 hours have calmed lending markets and are encouraging investors to take on risk. Still, earnings season is about to ramp up, and any comments about the outlook will provide a clearer picture of the damage the credit crisis may have inflicted. In equity news, Johnson & Johnson topped the Street's profit estimate and raised guidance, PepsiCo missed and lowered its outlook, and Banco Santander will buy Sovereign Bancorp. Treasuries are much lower amid the improvement in equities.

$250 billion for banks

The Treasury Department plans to unveil its latest plan to stabilize the US financial system and restore confidence. From the $700 billion recently approved by Congress, the government is expected to invest up to $250 billion in the banks via preferred stock, with about half of that going to nine major banks. The FDIC will temporarily provide unlimited insurance on non-interest bearing accounts, bringing the US in line with guarantees offered by several European governments. The US will also guarantee most new debt issued by banks for up to three years. The Treasury's original plan, which was first expected to buy depressed real estate assets, has evolved into something along the lines of the British model, which will provide capital that is needed to shore up balance sheets. President George W. Bush said the government's role will be limited and temporary.

The slow thaw

Libor rates eased for the second-straight day, indicating that credit conditions may finally be starting to thaw amid the massive new measures unveiled to unfreeze credit markets. The overnight rate has tumbled, though it remains high versus the fed funds rate of 1.50%. Longer-term lending, such as the 3-month rate, remains high amid the uncertainty that still remains in the credit markets but the modest decline is welcome.

Director of Sector Analysis Brad Sorensen offered more detail on how the Libor rates are set and why they are so important to investors, businesses and consumers. Mr. Sorensen noted in his piece, Uncovering the Mysteries of LIBOR, that the surge in rates highlights the fear banks have been going through in the credit crisis, and the jump in the little-known rate (at least for the vast majority of US consumers) may mitigate much of the Fed's easing since many loans are tied to Libor.

The market turmoil has taken a particular toll on the psyche of those near or in retirement. This is understandable and to help address those fears Vice President of Financial Planning Rande Spiegelman was recently interviewed for his thoughts on how to reassess your retirement plans. Mr. Spiegelman says that those approaching or are in retirement should avoid changing their long-term portfolio asset allocation because of short-term behavior unless the market volatility has convinced you that you are not as risk-tolerant as previously thought.

Investors across the globe cheer rescue plans

European shares rallied sharply for the second straight day as investors believe that the latest initiatives to clear the credit markets and support the financial system will succeed. Europe's main indexes are up 5% in afternoon action, which is on top of a 10% gain on Monday, with shares drawing strength from the plan by the Treasury Department to inject capital into US banks.

European governments have pledged an astounding 1.9 trillion euros to restore order in the credit markets, including pledges to back up interbank lending and inject capital. And this is on top of an expected $250 billion the US government may use to shore up banks in the US. Gains come despite a near record low in the influential ZEW survey of German business sentiment. The index fell 21.9 points in October to -63.0, well below the Bloomberg estimate of -51.1. The survey suggests that the paralysis in the financial markets over the past month is likely to spill over to the broader economy.

Meanwhile, Russian markets are up solidly and are participating in the global stock market rally, but Iceland's benchmark index is down 75% after being halted for three days. Iceland is on the verge of bankruptcy, and the government is talking to Russian officials about a loan to bail out its banking system.

Tokyo registers record advance

Investors in Japan stormed back into stocks and pushed up the Nikkei 225 Index by 14.2%, its best percentage gain ever, following Wall Street's largest, one-day point rally on record and the rescue plans announced by European governments to restore confidence. Fears have been allayed for now that the implosion in the credit markets was set to cripple the global financial system, while expectations that the US will detail plans early this morning aided the advance. The Hang Seng Index in Hong closed up 3.2%, participating in the global advance, after the government said it plans to guarantee customer banking deposits and support bank capital if needed. South Korea's Kospi Index surged 6.1% amid the rise in confidence, China's Shanghai Composite Index was among the rare losers, closing down 2.7%. Economic pessimism pressured sentiment.