Stocks surge on renewed optimism

Stocks rallied Wednesday after Federal Reserve Chairman Ben Bernanke again pledged to keep interest rates low for the foreseeable future, reassuring investors worried about the outlook for the economy.

The Dow Jones industrial average (INDU) gained 91 points, or 0.9%, according to early tallies, while the S&P 500 index (SPX) rose 11 points, or 1%. The Nasdaq composite (COMP) added 22 points, or 1%.

Stocks posted slim gains in the early going, lost some steam after a worse-than-expected new home sales report and then turned higher again after the Fed chief began speaking. The gains continued throughout the session.

"Bernanke said they are going to keep the fed funds rate low, the dollar got hit and people started buying stocks," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams.

The weaker dollar lifted dollar-traded commodities and big corporations that do a lot of business overseas and therefore benefit from a weaker greenback. Financial and technology shares were also on the rise.

Investors were digging back in after a two-session decline. That retreat occurred as a lackluster forecast on consumer spending and a plunge in a key measure of consumer confidence amplified concerns about the strength of the recovery.

Stocks managed to advance in the previous two weeks as investors focused on the positives in the company and economic news, after a four-week rout.

Bernanke: In his first day on Capitol Hill, Bernanke told the House Financial Services Committee that while the economic recovery is moving along, the jobs market remains weak. Against this backdrop, the Fed is unlikely to lift the fed funds rate, the key overnight bank lending rate, anytime soon.

Bernanke was testifying before the House Wednesday and was scheduled to appear before the Senate Thursday.

"I don't think Bernanke is breaking a lot of new ground here," said Scott Anderson, senior economist at Wells Fargo. "A lot of his testimony is defending the Fed's actions during the crisis, while the economic outlook is similar to the minutes from the last Fed meeting."

Investors are looking for more on how and when the central bank plans to unwind emergency programs that were put in place at the height of the financial crisis, particularly after the Fed boosted the discount rate last week.

The Fed boosted the discount rate -- the emergency bank lending rate -- by a quarter-percentage point to 0.75%. It was a largely symbolic move in a rate that is rarely used by banks, but it was also the first rise in rates in over a year and the first move in any direction for rates in over two years.

The move was another step toward returning monetary policy to a so-called normalized state after the extraordinary measures of the last two years.

In his early statements, Bernanke implied that the Fed will at some point need to raise the fed funds rate, the key bank lending rate, but that such a move is not likely to happen soon, considering the still moderate pace of recovery.
0:00 /1:47Who is Toyoda?

On the move: Big financial firms JPMorgan Chase (JPM, Fortune 500), Morgan Stanley (MS, Fortune 500) and Bank of America (BAC, Fortune 500) all rallied, along with regional banks such as Keycorp (KEY, Fortune 500), Fifth Third Bancorp (FITB, Fortune 500) and Regions Financial (RF, Fortune 500).

In deal news, printing services firm R.R. Donnelley (RRD, Fortune 500) said it is buying Bowne & Co. (BNE), a printer of corporate regulatory filings, in a deal worth $481 million. The $11.50 per share all-cash deal values the stock at more than 60% over Friday's closing prices.

Shares of Bowne & Co. rallied 60% in unusually active New York Stock Exchange trading, while RR Donnelley shares gained 3%.

Shares of STEC (STEC) plunged 24% in unusually active Nasdaq trading after the company issued a 2010 profit forecast late Tuesday that disappointed investors. The computer data storage firm forecast revenue in a range that is more than 50% below analysts' forecasts and said it would report a quarterly loss, versus current forecasts for a profit.

JPMorgan Chase led the list of analysts downgrading or cutting forecasts on the company on Wednesday.

Market breadth was positive. On the New York Stock Exchange, winners beat losers by more than five to two on volume of 1 billion shares. On the Nasdaq, advancers beat decliners eight to five on volume of 1.3 million shares.

Toyota: The carmaker faced Congressional scrutiny for the second straight day, with company president Akio Toyoda speaking before the House Oversight Committee regarding the recall of millions of vehicles over safety issues.

Toyoda, speaking through a translator, apologized for the safety problems that led to deaths, injuries and the eventual recall of more than 8 million vehicles with brake problems.

The company said it is creating a system that will make it easier for customer complaints to be addressed and that it is forming a "quality advisory group" to seek input on safety and quality measures.

On Tuesday, witnesses argued that the problems with the brakes could be tied to the vehicles' electronic throttle system, but Toyoda disputed that.

New home sales: Sales of new homes tumbled to the lowest level on record in January, the government reported Wednesday, surprising economists who expected a rise in sales.

Sales fell 11% to a 309,000 annual unit rate from 348,000 in the previous month. Economists expected sales to rise to a 354,000 annual unit rate.

"It's a quite disappointing number," said Anderson. "We saw incredible weakness in new home sales following the improvements we saw in the fall."

He said the improvements in the fall were largely as a result of the tax rebates for buyers and that, with the impact of those rebates fading, the sales have dropped off. But the existing home sales market is improving, he said, and the overall outlook for housing is getting better.

Jobs: The Senate approved a $15 billion jobs creation bill that gives businesses tax breaks for hiring the unemployed and extends tax breaks that encourage companies to buy equipment.

World Markets: In overseas trading, major European markets ended with moderate gains. Asian markets ended lower.

The dollar and commodities: The dollar tumbled versus the euro and the yen.

The dollar's weakness gave a boost to dollar-traded commodities.

U.S. light crude oil for April delivery rose 92 cents to $79.78 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery fell $6 to $1,097.20 per ounce.

Bonds: Treasury prices rose, lowering the yield on the 10-year note to 3.67% from 3.68% late Tuesday. Treasury prices and yields move in opposite directions.

Colleges cut back on generous financial aid

The college admissions process is already a crapshoot without throwing in the financial aid game. Subsidized Stafford loans, unsubsidized Stafford loans, Pell Grants, DirectPLUS loans — it all adds up to a bewildering tangle for which families of prospective students are turning to financial aid consultants to sort out.

And now, making the task of financing a recession-era college education even more difficult, colleges are withdrawing generous no-loan policies they implemented as the stock market hit its giddy heights.

Williams College is the most recent casualty. In the wake of a $500 million decline in its endowment, the college announced last week that it would repeal its 2008 pledge to drop loans from the financial aid packages of students. Williams was among nearly 30 top institutions to make the move for loan-free aid within the past couple of years, following harsh criticism – especially from politicians – that students were buried in debt post-graduation.

Senator Chuck Grassley (R-Iowa) helped catalyze the no-loan movement in 2007 when he addressed the crisis of conscience posed by sky-high tuition at a time when colleges were enjoying healthy growth in their endowments.

But the timing could not have been worse for pumping money into financial aid. 2009 turned out to be the worst year for university and college endowments since the Great Depression, with an average decrease of 18.7%.

Still, not all colleges and universities are rolling back their no-loan policies, even in hard times. Top-tier institutions like Harvard University, despite an $11 billion drop in its endowment, have continued their commitment to no-loan education. To do that, the university had to cut costs elsewhere, such as by halting construction on a $1 billion science complex this fall, leaving only its foundation in place.

In President Obama’s 2011 budget request he apportioned an additional $3.5 billion in educational spending, including an expansion of the Pell Grants, the lifeblood of college financial assistance for lower-income families. If approved, the expanded grants would provide aid to one million more students.

The debate continues among college cost experts about whether federal aid like Pell Grants, which will undoubtedly become more necessary as schools roll back no-loan programs, are actually counterproductive. There's a chicken/egg dilemma here: Does more federal aid mean higher college costs, or do higher college costs necessitate more aid? With its generosity to students, is the federal government effectively padding the coffers of educational institutions?

As it stands, the math is this: Two-fifths of schools with billion-dollar endowments have some sort of no-loan policy in place. (The top 16 universities in U.S. News & World Report’s 2010 ranking, with the exception of Johns Hopkins, fall into this category.) If the endowment amount per equivalent full-time enrolled student exceeds $500,000, a school should be able to afford eliminating loans from financial aid packages for low-income students.

For many schools no-loan policies began as a way to increase enrollment for low-income students — that is, those coming from households with less than around $50,000 in income. But in the case of a number of schools (large universities and smaller liberal arts colleges alike), the programs cover all undergraduates.

Until, that is, it turns out they don't.