Market gain a 21-year high on on financial rescue plan

Market gain a 21-year high on on financial rescue plan, but investors not out of woods yet 14 minutes ago TORONTO — North American stocks ended one of the most tumultuous weeks in their history with a massive bounceback Friday, propelling Canadian share prices to their biggest rally since the 1987 market crash. After falling into a bear market earlier, the Toronto Stock Exchange gained more than 850 points as investors welcomed a U.S. government plan to bail out troubled Wall Street banks to ease the global credit crunch. The surge of just over seven per cent on the TSX produced the biggest one-day percentage gain on the Canadian market since the post-Black Monday crash of Oct. 21 1987, when shares soared nine per cent two days after an 11 per cent drop. On Wall Street, the Dow Jones industrials rose nearly 370 points, on top of a 400 point gain the day before. "This is going to be remembered as a historic week in equity markets," said George Vasic, equity strategist and chief economist at UBS Warburg. With massive swings in stock prices every day this week, investors managed to break even at the end of the trading day Friday. However, brokers pocketed big trading commissions because of the huge volumes on Wall Street and Bay Street markets. In the U.S., a new government ban on short selling, or placing bets that a stock will fall, likely added to the huge Dow rally. "A big chunk of this is scaring all the shorts to cover their bets," said Joe Battipaglia, market strategist at Stifel, Nicolaus & Co. Most of Friday's investor optimism was fuelled by a series of sweeping steps taken by the U.S. government to prop up the world's biggest and most influential financial system. Key measures included rescuing banks from billions of dollars in bad debt and a ban on short selling, or placing bets that a stock will fall. Treasury Secretary Henry Paulson, speaking about the rescue plan, said a bold approach is needed to remove troubled assets from the books of financial firms. He offered few details, but said he would work on the plan through the weekend with congressional leaders. For much of the last two months, the financial world has been gripped by fear that the credit crisis sparked by millions of defaulted U.S. mortgages was not only not subsiding, but getting much worse. Danger bells were sounded with the government bailouts of mortgage giants Fannie Mae and Freddie Mac and insurer American International Group. Those fears were brought to a fever pitch by the collapse of Lehman Brothers Holdings, the fourth-largest U.S. investment bank, on Monday. For the Toronto market, that meant a big slide that took it down nearly 20 per cent over two months and put it into a what traders call a bear market, or a period of prolonged stock selloffs. When central banks began to step in on Thursday, injecting billions of dollars into the global financial system, traders took heart and North American markets began to groggily recover. Friday's big leap - the TSX soared almost 850 points, or seven per cent, while the Dow gained close to 370 - was further sparked by higher oil prices and a U.S. and European crackdown on short selling, where traders borrow stock and sell it, bet the price will take a big dive, buy it up when it gets cheaper and pocket the difference. Short selling can cause a company's stock price to drop dramatically and was blamed for eroding share values in investment and commercial banks. Canadian regulators were mulling a similar move. But Norm Rothery, chief investment strategist at Dan Hallett and Associates, said the interventionist steps taken by the U.S. government could hurt the market in the long run. "My view is this is a short-term salve that's been put on the market, but it bodes poorly for the longer term," said Rothery. "The scale of government intervention is very high, and people will now have to adjust to it." He said halting short selling could inflate stock prices, making them unreliable, which could in turn "prolong the downturn." The markets will likely stabilize on the steps taken by the U.S. government, but Rothery said he remains "moderately bearish" on concerns the financial woes on Wall Street aren't fixable by government alone. "Unless they're willing to wander out and buy up everyone's mortgages and to prop up real estate prices, you're holding a rear-guard action on the market," he said. "It's a good attempt but I think the problem is too big for them." Vasic said he expects the regulatory steps to even out some of the volatility seen this week. "Now that (investors) presumably have, or will have, some clarity on the magnitude of potential risks, they can remove a lot of the what-if scenarios they had been fearing," he said. "The worst fears are off the table, but now we can return to the ongoing cyclical fears we had previously." He added that the spike seen Thursday and Friday is a short-term trend that will be halted by ongoing economic uncertainty in global markets. "We don't think this is the beginning of a new V-shaped recovery in equity markets because there's still too much ground yet to cover," he said. Meanwhile, Prime Minister Stephen Harper again asserted there is no need for Canadians to fear financial instability. "I have to reiterate ... the Canadian financial system is very strong," he said, speaking in Farnham, Que. "The balance sheets of the Canadian financial system are very strong. The core banks and insurance companies in this country are in, for the most part, very good financial shape." "We don't anticipate any crisis in the Canadian financial system." His U.S. counterpart, President George Bush, sounded a similar, though more cautious, note. "In the long run Americans have good reason to be confident in our economic strength," Bush said as his administration announced it will move to safeguard assets in money market mutual funds. But the cost of the U.S. bailout plan "will be enormous, darkening the U.S. fiscal picture in an environment where there is already plenty of concern over rising deficits and the integrity of the Fed's balance sheet," noted Scotia Capital currency strategist Steve Malyon.