Stocks Jump on Fed Rate Cut Hope

The Dow Jones industrial average scored its "2nd best day ever" on Tuesday, CNNMoney blares, soaring 899 points and triggering a big rally on Japan's Nikkei this morning. Investors "shrugged off a flurry of grim economic news" to push the Dow up by 10 percent, the Wall Street Journal reports, as they instead focused on an imminent Fed interest-rate cut, possibly to as low as 1 percent. While welcome news, a rate cut cannot mask the gloom surrounding the economy's outlook. Consumer confidence, as measured by the Conference Board, fell to its lowest level since the firm began measuring this index 41 years ago, the New York Times reports. And another worrisome indicator: U.S. house prices continue to fall. According to the latest Case-Schiller report, house prices in 20 major U.S. cities tumbled yet again, now down 20.3 percent since the June 2006 peak, MarketWatch reports.

Naturally, the bulls and bears interpreted the news with stark differences. “When the markets go up on bad news, it holds out hope that the bad news has been digested,” Stuart Schweitzer, global markets strategist at J.P. Morgan Private Bank, told the NYT. “The caveat to that is there is still a lot of economic issues to come,” Todd Steinberg, head of equities and commodity derivatives at BNP Paribas-Americas countered. ... Great, we're all in agreement then.

You may have blinked and missed it, but, for a brief moment on Tuesday, the world's most valuable company was none other than Volkswagen, knocking off Exxon Mobil, the Washington Post reports. Shares in the German automaker have soared 348 percent in two days, a nice earner for Lower Saxony, the German state that owns 20 percent of the company. But not everyone is a winner. A list of blue-chip hedge funds holding precarious short positions—including Greenlight Capital, SAC Capital, Glenview Capital, Marshall Wace, Tiger Asia, Perry Capital, and Highside Capital—are out billions of dollars, the WSJ reports, creating "one of the biggest losses from a single bet in recent memory." They can thank Porsche, which secretly amassed a 74 percent stake in VW, all but sinking short positions, as we reported yesterday. Staying in the automotive sector, General Motors' financing arm GMAC is looking to transform itself into a bank holding company, a move that would allow it to, in theory at least, "gain access to a piece of the government's $700 billion financial rescue plan," the WSJ reports, citing people in the know. The newspaper adds that it now appears that the ongoing GM-Chrysler merger talks "are being structured specifically to ensure [GMAC shareholder] Cerberus and GM can take advantage of financial bailout programs offered by the Treasury Department and the Federal Reserve."

There's some welcome news for the automotive sector, and for consumers. The retail gas prices in the United States hit a 17-month low this week, holding steady around $2.63 per gallon, according to CNNMoney. But the relief at the pump is not expected to last very long. The Financial Times writes that "output from the world’s oilfields is declining faster than previously thought," citing a new report by the International Energy Agency. "The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and meet long-term de­mand. The effort will become even more acute as prices fall and investment decisions are delayed," the FT writes.

Wish you were here? Not if the location is Iceland, where, the FT reports, the government has been forced to hike interest rates to a record 18 percent (from 12 percent a day earlier) as a precondition of the proposed $2 billion loan from the International Monetary Fund "to help rescue the stricken island." Seeing how Iceland's central bank just one week ago had cut rates by 3.5 percent, it might be termed an understatement to observe the "influence the IMF now has over policymaking in Iceland." It could be worse for many in Hungary, the Guardian tells us. "[H]ard currency loans account for about 90% of mortgages taken out by Hungarian households since 2006." The paper tells of home loans obtained in Swiss francs and even Japanese yen—both of which are wiping the currency exchange floor with the poor old Hungarian forint. "The effect of a weak forint coupled with high interest payments and the reliance on foreign capital has sent Hungary's economy into freefall," writes the Guardian.

To the world of publishing now and news that Google will pay $125 million to settle lawsuits against book publishers so it can resume its plan to scan millions of library books, BusinessWeek reports. Google was sued by the Authors Guild and five members of the Association of American Publishers. Under the settlement, Google will compensate rights-holding plaintiffs, cover legal fees, and establish a $30 million "book-rights registry, through which scanned books can be viewed in part or in whole and payment made to copyright holders." That was the good news. Now this. The Christian Science Monitor is killing its daily print edition to go online-only, the first major daily to do so. Time Inc. is cutting 600 jobs and Gannett, the largest newspaper publisher in the country, is laying off 10 percent of its work force—up to 3,000 people. As the NYT noted: "Clearly, the sky is falling. The question now is how many people will be left to cover it?"

Finally, you know things are bad when even Russian oligarchs need a bailout. Yesterday the Kremlin allowed Alfa Group, a conglomerate controlled by businessman Mikhail Fridman, "to tap its $50 billion rescue fund to pay back a $2 billion loan to a group of banks led by Deutsche Bank AG," writes the WSJ. It seems the credit crisis could prompt more overleveraged oligarchs to give back some of the billions in state assets they snapped up after the fall of the Soviet Union. Seems Prime Minister Putin might yet succeed in eliminating, "as a class," the oligarchs while still preventing their assets from falling into foreign hands.