Real estate roundup: New construction falls; troubled borrowers fare well with counseling; FDIC selling real estate; commercial real estate slump hits Fannie and Freddie

The big news today in real estate is the unexpected decline in new residential construction. The Commerce Department reported that housing starts in October dropped 10.6% to a seasonally adjusted 529,000 annual rate compared with the prior month and a 30.7% drop from October 2008.

Analysts attributed the drop to builders’ trepidation over whether Congress would extend a popular tax credit for first-time buyers ahead of a Nov. 30 expiration. Just as Southern California home prices and sales received a boost from buyers taking advantage of the credit, builders worried that without an extension the recovery would slow.

Dean Baker, at the Washington-based Center for Economic and Policy Research, has a good analysis this morning that delves a little deeper into the effect the tax credit had on the housing market. His take is that the extension of the credit will not have nearly as big of an effect as the first credit and that the housing market is looking at a sharp drop-off in coming months.

Baker writes:

Given the lead time between contracting and closing, September was the last full month in which homebuyers could have signed a contract and been confident of closing in time to meet the deadline for the tax credit passed in February. While this led to a rush of buyers wanting to get in before the deadline, it also meant that there would be a sharp falloff in sales in subsequent months.

A little more follows here:

The extension and expansion of the homebuyer tax credit by Congress should give a modest boost to sales, but it is unlikely to have nearly as large an impact as the original credit. Most potential first-time buyers will have already purchased their homes. The extension of the credit to existing homeowners will provide some additional incentive for homeowners to buy a new home now (it also provides serious opportunities for gaming), but this will have little net effect on the market. Most current homeowners who opt to take advantage of the tax credit will put their home on the market, leaving no net change in the balance between supply and demand.

In other housing news out of the nation’s capital, the Washington Post had an interesting story based on an Urban Institute study set to be released this morning. The study finds that troubled homeowners who receive housing counseling are 60% more likely to avoid foreclosure and have their mortgage payments lowered significantly than those who try to figure it out themselves.

And the Federal Deposit Insurance Corp., the bank regulator, has gotten into the real estate business big time this year. Bloomberg News reports this morning that the FDIC has sold the most real estate this year since 1994 as it takes over properties on the books of failed banks.

Finally, the Wall Street Journal writes today that the tanking commercial real-estate market is beginning to hit mortgage titans Fannie Mae and Freddie Mac. The firms are facing losses on the loans they made to apartment buildings, according to the Journal.

-- Alejandro Lazo

Fed keeps 'extended period' pledge on low rates

Federal Reserve policymakers stayed with the status quo today, saying in their post-meeting statement that they expected to keep short-term interest rates low "for an extended period."

That had been the big mystery surrounding the Fed’s meeting -- whether Chairman Ben S. Bernanke and peers would feel compelled to signal that the improving economy would lead to tighter credit sooner rather than later.

By retaining the "extended period" pledge, the Fed is offering no incentive for markets to push up short-term rates on their own.

One change of note in the statement: The Fed will pare back on purchases of bonds issued by mortgage giants Fannie Mae and Freddie Mac, citing "the limited availability" of such debt. The change doesn’t affect the Fed’s larger purchase program of mortgage-backed securities, which is the direct way it is attempting to keep mortgage rates down.

Here is the text of today’s meeting statement, followed by the text of the statement from the Fed’s Sept. 23 meeting, for comparison:

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.

The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

The Sept. 23 meeting statement:

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.

The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

-- Tom Petruno

California National Bank expected to be seized tonight

Bank regulators are expected later today to take over Los Angeles-based California National Bank in what would mark the fourth-largest bank failure in the country this year, according to people familiar with the situation.

The bank, a unit of FBOP Corp., is expected to be acquired by the U.S. Bank unit of Minneapolis-based U.S. Bancorp, with no losses to be incurred by depositors, the sources said. The branches would reopen as usual Saturday or Monday as U.S. Bank branches.

Seven other banks owned by FBOP, a privately held Oak Park, Ill., company, are also expected to be seized by regulators and acquired by U.S. Bank. They include San Diego National Bank, with 28 offices, and San Francisco’s Pacific National Bank, which has 17.

FBOP's owner, billionaire Michael Kelly, didn't return a call seeking comment today.

California National, with $7.1 billion in assets and $5.6 billion in deposits as of June 30, is the fourth-largest commercial bank based in Los Angeles County. Only City National Corp., East West Bancorp and Cathay General Bancorp are larger.

The collapse of FBOP's banks would be the latest in a rash of financial failures that began last year with government takeovers of 25 banks. Before today, 106 banks had failed this year.

California National has had its share of lending problems. As of June 30, the last time it reported its financial results publicly, the bank had five times as much foreclosed property on its books and twice as many non-current loans as it had a year earlier. But the bank's main problem was its loss of about $500 million on heavy investments in Fannie Mae and Freddie Mac preferred shares, securities that were rendered nearly worthless by the government takeover of the giant mortgage firms last year.

U.S. Bancorp has been buying the remains of a number of failed banks. It acquired the remains of Downey Savings of Newport Beach and PFF Bank & Trust of Pomona when those struggling thrifts failed last November. Just this month, it bought 20 Nevada branches from BB&T Corp., which had acquired them as part of its deal to buy Colonial BancGroup Inc. At $25 billion in assets, Montgomery, Ala.-based Colonial was the largest bank to fail this year.

-- E. Scott Reckard

Fannie, Freddie shares dive on zero-value prediction

A new analysis of loss-ridden mortgage giants Fannie Mae and Freddie Mac tries to nail shut the coffin on their common stocks.

In a report, financial services research specialist Keefe Bruyette & Woods says the companies’ shares would have zero value under the workout scenario the firm believes is most likely: the creation of new Fannie and Freddie entities as mortgage guarantors owned by the banks that use their services, while the government continues to support the old Fannie and Freddie loan portfolios as they wind down.

Keefe may not be telling speculators in Fannie and Freddie shares anything they didn’t already suspect, but the report still must be spooking some of those players today: Fannie’s shares were down 25 cents, or 17%, to $1.21 at about 10:45 a.m. PDT; Freddie was off 31 cents, or 18%, to $1.41.

"There is general consensus that the primary role of the agencies in the future is in the loan guarantee business and not in the investment business," Keefe analysts led by Bose George wrote in the report. "By creating ‘bad banks’ of the existing portfolios and putting the existing portfolios into receivership, the government can limit its losses and define its role in supporting the mortgage industry through the crisis and create an exit strategy."

But that exit strategy would leave nothing for shareholders, the Keefe analysts assert. They believe that the companies’ combined $96 billion in debt to the Treasury -- which seized them 13 months ago after saying the firms were in danger of failing -- will grow in the near term as mortgage defaults continue to rise.

Even presuming that the old Fannie and Freddie portfolios would earn net operating profits over the next 10 years as the mortgage crisis abates, the companies still would have negative equity at the end of that period because of what they owe taxpayers, Keefe says.

"In this scenario, both the common and preferred equity of the [companies] should be worthless," the firm says. "Our bad bank analysis suggests that the companies will still owe the government almost $100 billion by the end of year ten. As a result, we are ... cutting our price targets to $0."

Speculators ran wild with Fannie and Freddie shares in August, driving both up more than 200%. Fannie peaked at $2.04 on Aug. 28; Freddie peaked at $2.40 the same day. But the stocks have been drifting lower since then as interest has waned.

-- Tom Petruno

Photo: Fannie Mae's headquarters in Washington. Credit: Joshua Roberts / Bloomberg News

The stock market doesn't care what you think (if you're a bear)

Halfway through September, the stock market pullback that was widely predicted for this month is a no-show.

Once again, Mr. Market demonstrates that he doesn’t like to be told what to do.

Instead of the 10%-plus decline that many sidelined investors were hoping for, stocks have padded their gains of the spring and summer rally. The Standard & Poor’s 500 index, at 1,052.63 as of Tuesday’s close, was up 3.1% for the month, 16.5% for the year and 55.6% from its 12-year low reached March 9. Stocks are broadly higher again today.

You can sense the exasperation of the bears. They thought they had something going at the turn of the month as the S&P slid 3.5% in the four trading sessions ended Sept. 2.

Since then, however, the index has risen every day but for the 0.1% slip last Friday.

It was a logical call, coming into September, that the market was vulnerable after six straight months of gains. Classic measures of market sentiment were strongly bullish, which often signals at least a short-term top in stock prices.

Other warning signs: Corporate insiders were heavy sellers of their own shares; the Chinese market, which led the global rebound in equities early this year, had tumbled 22% in August; and speculators were running wild in garbage penny stocks such as Fannie Mae and Freddie Mac.

And, of course, there was September’s historical track record as the market’s worst month of the year.

Market bulls, however, expected investors to keep focusing on the economy and whether the evidence supported the idea that a recovery was underway.

The evidence has cooperated: From Aug. 31 to Friday, nearly two-thirds of the 26 major U.S. economic reports released in that period either beat or matched analysts’ expectations, according to Bespoke Investment Group.

The economy may not feel good to many people, but relatively speaking, it looks good to investors who’ve just wanted more signs that the recession has ended. (Cue Billy Crystal in his Fernando Lamas persona of the mid-1980s.)

No wonder, then, that the leading sectors in this month’s stock rally are those whose fortunes ride on prospects for a global economic rebound -- industrial companies, producers of basic materials and energy firms.

Bringing up the rear: financial issues, which have been held back in part as many of the junkiest names (Fannie, Freddie, AIG and Citigroup) have deflated from their August peaks, but without taking the rest of the market with them.

Buyers are finding plenty to like: Rising stocks have outnumbered losers by more than 2 to 1 on the New York Stock Exchange in seven of the last eight sessions.

That encourages bulls like Ned Davis Research, a well-known market research firm in Venice, Fla. that  correctly called the rally earlier this year and has maintained the view that stocks are going higher.

"So much money has been sitting on the sidelines and now is looking for a place to go" as confidence in a recovery rises, said Tim Hayes, the firm’s chief investment strategist.

Ned Davis believes this is "cyclical" bull market within a longer-term, or "secular," bear market. But given the firm's forecast for the S&P 500 to peak sometime in 2010 in the range of 1,200 to 1,300, it makes no sense to sit out the cyclical rebound, Hayes said.

Reluctant investors, he said, will eventually get the pullback they've been praying for. "We probably will get a decent correction at some point" in the near future, Hayes said. "But we’re not going to try to time that."

-- Tom Petruno

 

Fannie, Freddie avoid NYSE delisting after stocks soar

Speculators went wild for shares of Fannie Mae and Freddie Mac in August. And thanks to that buying frenzy, the two government-controlled mortgage giants will avoid getting booted off the New York Stock Exchange.

The companies separately said today that the NYSE had informed them that they were back in compliance with minimum share price requirements after their stocks rocketed last month.

Fannie Mae shares jumped from 58 cents at the end of July to $2.04 by Aug. 28; Freddie Mac soared from 62 cents to $2.40 in the same period.

Both stocks sold off earlier this week but are trading higher today, with Fannie up 12 cents to $1.76 and Freddie up 7 cents to $1.94 at about 11:50 a.m. PDT.

The NYSE last November warned both companies that their stocks were in danger of being delisted because they had fallen under $1. The shares had collapsed after the government seized the companies last September, saying they were on the brink of failing.

In February, however, the NYSE suspended its $1 minimum stock price requirement for all listed companies in an effort to give stocks time to recover from the fall and winter market meltdowns. The NYSE put the rule back into effect on Aug. 1, which gave Fannie and Freddie until mid-October to "cure" their penny-stock problems.

With their shares now well above $1, the two companies won’t have to worry about the October deadline.

Does the government have an interest in keeping the stocks on the NYSE? Probably. Even though the shares may ultimately be worthless (the Treasury already has 80% ownership of both firms), an NYSE listing provides more flexibility for the Obama administration as it works on a plan for the future structure of the companies.

It also would seem to be in the interest of the many remaining institutional investors in Fannie and Freddie for the stocks to stay on the NYSE.

So maybe it wasn’t just rank speculators driving the stocks higher last month.

Conspiracy theorists, have at it.

-- Tom Petruno

Despite Wall Street's scorn, speculators don't give much ground

Some speculators finally bailed out of shares of American International Group, Fannie Mae, Freddie Mac and Citigroup on Monday after the wild rallies the stocks have had this month.

But considering the scorn that people on Wall Street and in the financial media have heaped on traders who’ve been playing in these names, the surprise may be that the sell-off wasn’t all that drastic.

All four of the stocks opened the session sharply lower but quickly snapped back from their worst levels.

AIG, for example, fell as low as $42.80 at the opening bell, down nearly 15% from Friday’s close of $50.23. But the shares soon rebounded to $47.67 before pulling back again. AIG closed at $45.33, down $4.90, or 9.8%, for the session.

Fannie Mae fell from $2.04 on Friday to $1.79 at the start of trading Monday, but then clawed back to close at $1.93, off 11 cents, or 5.4%.

Freddie Mac lost 4.6% for the session, to close at $2.29, and Citigroup fell 4.4%, to $5.00. They were down as much as 14% and 7.5%, respectively, at their lows.

It probably helped the stocks that the broad market also avoided a serious slide, despite widespread expectations of an imminent pullback. The Standard & Poor's 500 index lost 0.8% for the day after being down as much as 1.4% early on.

The latest assault on the four speculative favorites began in Barron’s magazine over the weekend. Writer Andrew Bary calculated that AIG has negative tangible common shareholder equity after adjusting for the federal government’s current equity stake (post-bailout) and other assets promised to the Federal Reserve. Barron’s suggests that speculating in the company’s bonds is smarter than playing the stock at current prices.

Barron’s also took aim at Citigroup, which it recommended when the stock was around $2.75 a month ago. Now the stock is above Citi’s estimated tangible book value of $4.35 a share, the magazine says. "Citi isn’t a bargain anymore," it says.

On Monday, veteran Fannie and Freddie analyst Paul Miller at FBR Capital Markets in Arlington, Va., put out a brief report asserting that "there is no fundamental value remaining" in the shares, given the government’s 80% stakes in the companies and the rising losses the firms are facing on their mortgage portfolios.

What’s more, Miller doesn’t believe that the government would condone reverse stock splits just to get the shares out of penny-stock territory.

The 1-for-20 reverse split that AIG undertook in July probably has helped to juice the stock since then by making the shares scarcer. But in the case of Fannie and Freddie, which are under direct control of the Obama administration, "In our opinion, the regulators will not want to create a false sense of value in Fannie or Freddie shares and will likely shy away from reverse stock splits," Miller wrote.

But the problem with trying to use fundamental analysis (i.e., logic) to steer speculators away from these stocks is that, by definition, many of the day traders who’ve been driving the shares don’t care about fundamentals. They’re just interested in momentum -- .a.k.a. the Greater Fool Theory: "I’m a fool to pay $2 a share for this, but there’s a bigger fool out there who’ll pay $3, if we can just keep this going."

-- Tom Petruno

Photo credit: Mark Lennihan / Associated Press

Pimco, Goldman dropped from Fed's mortgage-bond purchase program

The Federal Reserve Bank of New York plans to get along without the help of bond giant Pimco or Goldman Sachs Group as the central bank continues its massive purchases of mortgage-backed securities.

The New York Fed on Monday said it had "streamlined" its 8-month-old, $1.25-trillion program to buy mortgage bonds from four investment managers to two.

The bank is retaining Wellington Management Co. and BlackRock Inc., while Newport Beach-based Pimco (Pacific Investment Management Co.) and Goldman Sachs Asset Management will exit.

In a statement, the New York Fed said the changes were "not performance related."

The bank said it had "anticipated that it would make adjustments to its use of external investment managers as it gained more experience with the program. . . . The New York Fed is committed to implementing its programs in the most efficient and cost effective manner possible."

But the bank didn’t indicate why Wellington and BlackRock won out over Pimco and Goldman, or whether the latter two wanted out for some reason.

A Goldman spokeswoman said the firm had no comment. A Pimco spokesman couldn’t be reached.

The mammoth purchase program is aimed at keeping a lid on mortgage rates by providing a constant source of demand for home-loan-backed bonds issued by Fannie Mae, Freddie Mac and Ginnie Mae.

Bloomberg News calculates that based on the contracts the Fed had with Pimco and Goldman, they each stood to earn $7.8 million in fees per quarter once the Fed’s holdings of bonds reached $1 trillion. The Fed has purchased $742 billion of mortgage bonds so far, according to Bloomberg’s tally.

Pimco in July surprised Wall Street by dropping out of the running for the Treasury’s program of partnering with private money managers to buy rotting mortgage bonds from banks.

Some critics of the Fed and Treasury purchase programs have questioned whether participating money managers could benefit from inside information that would give them an edge in managing assets of their other clients.

-- Tom Petruno

Photo: The Federal Reserve Bank of New York. Credit: The Fed

Fed preview: More upbeat, but not about spending trillions

The challenge for the Federal Reserve in its post-meeting statement today: Persuade investors that the economy is slowly getting better -- and that it won't take another $2 trillion in Fed aid to keep things on track.

Chairman Ben S. Bernanke and peers are likely to use their statement to sound slightly more upbeat about the economy, given recent data on GDP, manufacturing and employment.

But they may not deviate much from their June meeting summary, because the basic facts haven't changed: "The pace of economic contraction is slowing," the Fed said in June. That's still true -- we hope.

Likewise, the Fed will almost certainly repeat that it expects to keep its benchmark short-term interest rate near zero "for an extended period." Many Fed-watchers believe there is no chance of a rate hike before mid-2010, at the earliest.

Then what's left for the Fed mandarins to discuss? The trillions of dollars they've pumped into the financial system to keep it afloat -- and when they might begin to take some of that cash back.

With the economy showing signs of improvement, Bernanke and other Fed officials have been forced this summer to address the question of an "exit strategy" for the alphabet soup of lending programs they've created, ballooning the central bank's balance sheet to $2 trillion.

Bond investors fear that too much of the money will eventually get into the real economy and stay there, fueling an inflation surge. The Fed, not surprisingly, insists that it'll be able to vacuum up that money fast enough -- once the economy is growing -- to avoid an inflation breakout.

If Bernanke & Co. want to throw a bone to the exit-strategy crowd, they could easily do so today by saying they'll allow their program of buying Treasury securities to expire as planned when purchases reach $300 billion in September.

The goal of the Treasury buyback plan, launched last winter, was to restrain government bond yields amid the Obama administration's massive borrowing wave. But Treasury note and bond yields have risen anyway this year, in large part because investors are eschewing government debt in favor of riskier assets such as stocks.

At this point, "The Treasury purchase program is embarrassing and becoming more so" for the Fed, said Michael Kastner, head of fixed income at Sterling Stamos Capital Management in New York.

But the central bank isn't about to call off its more important program of buying $1.25 trillion in government agency mortgage-backed securities by year's end.

"In the mortgage market, they are the buyer," said Steven Stanley, chief economist at RBS Securities in Stamford, Conn. That makes the Fed a crucial element of the Obama administration's strategy of using Fannie Mae and Freddie Mac to refinance loans of underwater homeowners.

What's more, the Fed may be forced to ante-up more aid for the deeply troubled commercial real estate sector, a market Bernanke last month said he's "paying very close attention" to.

All told, the Fed has already warned that its balance sheet is likely to expand further by year's end, to about $2.5 trillion.

Since the financial system collapse last fall, the Fed has repeatedly reminded markets that there is no limit to the amount of credit it can create. But policymakers have to be more careful about their boasting now: If $2.5 trillion begins to look more like $3 trillion or $4 trillion, the Fed and the administration could face their -- and our -- worst nightmare: A sudden buyers' strike by inflation-paranoid bond investors, triggering the Mother of All Credit Crunches.

-- Tom Petruno

Photo: Fed Chairman Ben S. Bernanke. Credit: Karen Bleier / AFP/Getty Images

After a lull, buyers pile into financial stocks again

The financial sector led Wall Street into the abyss last fall -- and it still seems determined to lead it out.

On an otherwise down day for the stock market, major financial shares surged Wednesday for a third straight session.

An index measuring the performance of the 79 financial stocks in the Standard & Poor’s 500 jumped 3.3% to its highest level since Nov. 7, even as the S&P overall eased 0.3% for the day.

Citigroup shot up 33 cents, or 10.2%, to $3.58. Bank of America rose $1.02, or 6.5%, to $16.66. Private-equity and hedge fund manager Blackstone Group rocketed $2.03, or 15.7%, to $14.96.

Nicolas Colas, chief market strategist at brokerage BNY ConvergEx in New York, said it was a good sign, not a bad one, that the banks, money managers and other financial players that survived last year’s meltdown are attracting a second wave of investors after the May-June lull that followed their spring surge.

"Financials are still the tip of the spear in this rally," he said.

Wild gains Wednesday in some of the most speculative shares -- including Fannie Mae and Freddie Mac, both controlled by the government -- suggested that traders were in a frenzied pile-on, which often is what happens when rallies are peaking.

But the sector also was underpinned by some solid fundamental news, Colas said. American Express said its level of credit-card writeoffs fell in July for a second straight month, suggesting that the economic situation was "stabilizing," CEO Ken Chenault said during an investor presentation.

Radian Group, the third-largest mortgage insurer, reported an unexpected second-quarter profit, stunning investors. The firm’s shares zoomed $3.05, or 83%, to $6.72.

Fortress Investment Group, which like Blackstone manages private-equity and hedge funds, jumped 55 cents, or nearly 13%, to $4.85 after reporting quarterly results that beat estimates.

It has helped, of course, that the Treasury, the Federal Reserve and the Federal Deposit Insurance Corp. have made trillions of dollars in cheap credit available to banks, brokerages and other players, aiming to revive them.

In any case, the earnings data are emboldening investors who want to believe that "the companies are catching bottoms" in their operations, said Jon Najarian, co-founder of trading firm optionmonster.com in Chicago.

And for the broader economy -- still credit-starved -- one key to a sustained recovery is healthier financial firms that are more willing to lend and invest, Colas noted.

For that reason, he said, he’d be much more concerned if he saw the stock market rallying without financial stocks helping to lead the way.

-- Tom Petruno