Stocks stage rally

Stocks rallied Tuesday afternoon as investors welcomed Hewlett-Packard's strong forecast and comments from government officials that the $700 billion bank bailout is working.

The Dow Jones industrial average (INDU) gained 1.7% around 3 hours into the session. The Standard & Poor's 500 (SPX) index added 1.1% and the Nasdaq composite (COMP) advanced 0.4%.

Stocks managed some gains after Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke told a House committee that the bailout has been working to help stabilize the financial system, despite recent criticism. FDIC Chairman Sheila Bair is also speaking at the hearing.

Lawmakers are especially concerned by last week's decision to stop buying up bank's troubled assets and instead take ownership stakes in the firms. (Full story)

After all the recent dour news on the economy, investors were probably relieved that the officials were saying something positive, said Kenny Landgraf, principal and founder at Kenjol Capital Management.

"Their assessment seems to be that the bailout has helped," said Landgraf. "The news lately has been so negative that people are just glad they're saying something positive."

He said that Hewlett-Packard's forecast was also helping push stocks higher, with investors scooping up a variety of shares hit in the recent selloff.

Hewlett-Packard (HPQ, Fortune 500) forecast fiscal fourth-quarter profit that is above analysts' forecasts, despite the sagging economy. HP also lifted its fiscal-year 2009 forecast. It was welcome news for tech investors after both Intel (INTC, Fortune 500) and Cisco (CSCO, Fortune 500) warned about weaker sales in the current quarter.

Home Depot (HD, Fortune 500) reported weaker quarterly sales and earnings that nonetheless topped forecasts. The retailer also warned that 2008 earnings per share will plunge 24% from a year ago, due to the anemic consumer spending environment. Yet, investors focused on the positive and the stock rallied 6%.

Stocks slipped Monday in volatile trading on Citigroup's massive job cuts and a weak manufacturing report. The declines sent all three major gauges down by at least 2% and sent the Nasdaq to a fresh 5-1/2 year low.

Automakers: Also Tuesday, Congress begins debating whether to bail out the hard-hit industry with an additional $25 billion on top of the $25 billion General Motors (GM, Fortune 500), Ford Motor (F, Fortune 500) and Chrysler have already received.

Senate Democrats and President-elect Barack Obama are in favor of some kind of bailout, while many Republicans would prefer to see the companies file for bankruptcy, restructure and reemerge. (Full story)

Economy: The morning's economic news was far less buoyant than the stock market. Home prices plummeted in the third quarter by a record 9% versus a year ago, amid a flood of foreclosures. On the upside, bargain hunters have been scooping up properties in some of the hardest-hit areas.

A separate report showed that inflationary pressures remain moderate. Wholesale prices posted the sharpest monthly decline on record in October due to the collapse in oil prices over the last four months. But prices excluding food and energy, the so-called "core" reading, rose more than expected.

Other markets: In global trading, Asian markets tumbled and European markets rose in the afternoon.

The dollar gained versus the euro and the yen.

COMEX gold for December delivery rose 30 cents to $742.30 an ounce.

U.S. light crude oil for December delivery rose 53 cents to $55.48 a barrel on the New York Mercantile Exchange, the lowest close since January 2007.

Gasoline prices dipped another 1.9 cents to a national average of $2.068 a gallon, according to a survey of credit-card activity released Tuesday by motorist group AAA. The decline marks the 62nd consecutive day that prices have decreased. During that time, prices dropped by $1.78 a gallon, or 46.3%.

Bonds: Treasury prices gained, lowering the yield on the benchmark 10-year note to 3.61% from 3.65% late Friday. Treasury prices and yields move in opposite directions. (Full story)

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, rose to 0.13% from 0.08% Monday, with investors preferring to take a piddling return on their money than risk the stock market. In September, the 3-month yield reached a 68-year low around 0% as investor panic peaked.

Borrowing rates were little changed from the previous day, with the credit market continuing to stall after a month long improvement. The 3-month Libor rate fell to 2.22% from 2.4% Monday, while overnight Libor was unchanged at 0.4%, according to Bloomberg.com. Libor is a key bank lending rate.