U.S. Stocks Rise, Led by Financials; Countrywide, JPMorgan Gain

Jan. 10 -- U.S. stocks rose for a second day after Federal Reserve Chairman Ben S. Bernanke signaled he may cut interest rates further and investors speculated Countrywide Financial Corp. will be bought.

Countrywide climbed the most in at least 25 years after the Wall Street Journal reported Bank of America Corp. is in advanced talks to acquire the biggest U.S. mortgage company. JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. led financial firms to the biggest rally in a month as traders increased bets that the Fed will reduce its benchmark lending rate by a half point this month.

The Standard & Poor's 500 Index added 12.84, or 0.9 percent, to 1,421.97 as of 3:02 p.m. in New York after earlier falling by 1 percent. The Dow Jones Industrial Average gained 146.64, or 1.2 percent, to 12,881.95. The Nasdaq Composite Index added 15.23, or 0.6 percent, to 2,489.78. Five stocks rose for every two that fell on the New York Stock Exchange.

``The report about Bank of America buying Countrywide is good news,'' said Michael Metz, the New York-based chief investment strategist at Oppenheimer Holdings Inc., which manages about $60 billion. ``Bernanke's comments also indicate the Fed will keep cutting interest rates well into the summer. This may give the market a temporary boost.''

Countrywide fell 39 percent this week before today, hurt by rising foreclosures and speculation it faces a funding shortage. Almost $100 billion in losses tied to subprime mortgages sent bank shares down 21 percent last year, prompting the Fed to cut its benchmark lending rate three times since September.

Countrywide Rallies

Countrywide gained $2.18, or 43 percent, to $7.30 in New York Stock Exchange trading, the biggest rise since at least 1982. A deal between Countrywide and Bank of America could occur ``very soon,'' the Journal reported on its Web site, citing people familiar with the situation. Bank of America slipped 5 cents to $38.69.

``We don't comment on speculation,'' said Bank of America spokesman Bob Stickler. ``If we have a definitive agreement, we will comment.'' He declined to say if the boards of the companies were considering an offer.

A gauge of financial firms in the S&P 500 rallied 3.2 percent after falling as much as 2 percent earlier today.

JPMorgan, the third-biggest U.S. bank, rose $1.05 to $41.31. Wells Fargo, the country's second-largest mortgage lender, added 90 cents to $27.94. Citigroup, the nation's biggest bank by assets, added 59 cents to $28.08. Goldman Sachs Group Inc., the biggest securities firm, increased $5.49 to $197.24.

`Everything is Happy'

``The market is reacting like it's over, subprime is done, we've written it all off, everything is happy,'' said Joseph Saluzzi, the co-head of equity trading at Themis Trading LLC in Chatham, New Jersey.

Bernanke's speech in Washington today was his first on the economy since the central bank cut its target rate for overnight bank lending by 0.25 percentage point to 4.25 percent last month. Odds of a half-percentage point cut at the Fed's meeting this month climbed to 88 percent from 76 percent yesterday, based on Fed funds futures.

``In light of the recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary,'' Bernanke said. ``We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.''

Supply-Side Magic

Tax Cuts: President Bush reportedly might float a $500 tax rebate plan in his State of the Union address. Relief is always welcome, but permanent cuts stimulate the economy. Leave gimmicks to the Democrats.

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A few months after taking office in 2001, with the economy in urgent need of help, the president had the Treasury provide quick relief in the form of tax rebate checks for as much as $600 per family.

Americans were happy to have the extra cash, but the economy didn't take off until marginal income tax rates and capital gains and dividends taxes were cut two years later.

Since the summer of 2003, more than 8 million new jobs have been generated and we've enjoyed the longest sustained employment growth in history. Now that there are some troubling signals the economy is slowing — last month's jump in the jobless rate from 4.7% to 5%, along with a softening real estate market — White House economists are seeking a stimulus.

Among the ideas being considered is another round of rebates, as well as letting businesses deduct half the value of their investments in equipment. But one-off measures such as rebates are more Democratic than Republican. One of Sen. Barack Obama's presidential campaign proposals is a tax credit of as much as $1,000 per family. And Jimmy Carter smiled at the chance to give everybody $50 from the federal fisc.

Those are not the kinds of medicines that really will prove effective for an economy headed for a possible slowdown. But the president, speaking to the Union League Club of Chicago, identified Monday the things that are most important for keeping the economy going.

"In less than three years, the tax cuts that we passed are set to expire," Bush warned. "That creates uncertainty. If you're an entrepreneur thinking about investing, and all of a sudden you're looking at a horizon where your taxes may be going up, it creates uncertainty."

As the president said, "We don't need more uncertainty in an uncertain market. If Congress allows this to happen we'll see an end to the measures that have helped our economy grow, including the 10% individual income tax bracket, the reductions in the marriage tax penalty, and reduced rates on regular income, capital gains and dividends."

He illustrated the damage of letting the tax cuts expire by pointing out that a single mother with two children making $30,000 would suffer a 67% tax increase, while an elderly couple making $40,000 would see their taxes more than double.

In addition to imploring Congress to make his tax cuts permanent, Bush again made a plea to abolish the estate, or "death," tax. In the interest of allaying uncertainty, we could also use a permanent fix of the alternative minimum tax without "compensating" for it by raising taxes elsewhere.

Admittedly, it would be tough — perhaps impossible — to get this Democratic Congress to make the tax cuts permanent. Focusing on measures such as rebates and credits instead, however, could give false hope in an alternative means of fighting possible recession.

As economist Lawrence Lindsey pointed out in his book "The Growth Experiment," the idea behind supply-side tax cuts during the Reagan administration "was the greatest challenge to a reigning economic dogma since the overthrow of classical economics in the 1930s."

To pretend that anything less than making Bush's supply-side tax cuts permanent will change investors' and workers' behavior for the better and keep the good times rolling is taking a step backward to the discredited and disastrous Keynesian economic theories prevalent in the 1970s.