$19 bln write-down? No problem, stock investors say

NEW YORK (Reuters) - Investors have grown so inured to calamitous reports about global credit markets that they have taken to spinning fresh bouts of bad news into fits of irrational exuberance.

Tuesday's rally in U.S. and European stocks could serve as a veritable case study in this nascent reversal of investor psychology. After all, the day's two big catalysts for the 391-point gain in the Dow Jones industrial average .DJI -- a $4 billion stock offering from Lehman Brothers and a $19 billion bad debt write-down by UBS -- would have sparked panic almost any other day.

Instead investors chose to see it as one bedraggled U.S. investment bank get a much needed market endorsement and a Swiss bank scrubbing its balance sheet clean.

"An important personality change has occurred in the stock market in that bad news is no longer killing the stock market," said Al Goldman, chief market strategist at Wachovia Securities, in St. Louis.

It was only two weeks ago that analysts and investors marked the beginning of the bottoming process with the stunning collapse of Bear Stearns BSC.N.

But to conclude that Tuesday's monstrous rally with the Dow's leap of 391 points is the resumption of a bull market is, well, a bit premature.

Strains still exist in the U.S. credit and banking markets.

"We are still in a banking crisis," said Chris Orndorff, who helps oversee $50 billion in assets as managing principal at Payden & Rygel Investment Management in Los Angeles.

Tuesday, UBS AG (UBSN.VX) unveiled a $19 billion write-down in illiquid real estate assets and announced the departure of its chairman. Its U.S.-listed shares (UBS.N) rose nearly 15 percent.

Hours later Lehman Brothers Holdings Inc LEH.N said it raised $4 billion of capital in a deal designed to stop questions about the Wall Street investment bank's stability. Its stock surged nearly 18 percent.

BONDS STILL SEE A BUMPY RIDE

Even though write-downs and major capital-raising actions from financial institutions have become common fare, that doesn't mean every investor is at ease.

In fact, in the bond market, investors are still bracing for the credit crisis to continue. Junk bond and corporate-debt investors still demand huge premiums for the securities they are holding.

The spreads on Merrill Lynch's investment-grade index still trade at around the widest level since Merrill began tracking the data.

Spreads on junk bonds, or corporate debt rated below "Baa3" by Moody's Investors Service and "triple-B-minus" by Standard & Poor's are at 821 basis points over comparable Treasuries -- or levels not seen since December 2002, according to Merrill.

But all told, this is not to say that a bottom isn't in the making. Typically, a huge failure of an institution such as Bear Stearns has led to extreme policy responses by the Federal Reserve and government regulators.

That has helped restore the confidence of investors, but that doesn't mean they should be off to the races.

"People are getting a little bit ahead of themselves in terms of the magnitude of this stock market rally," said Orndorff of Payden & Rygel. "There was a major financial firm that went kaput not so long ago," he added.

EARNINGS STILL LOOK ANEMIC

Even Goldman of Wachovia said while U.S. stocks are in a bottoming phase, he doesn't rule out another test of the January 22 lows of 11,640 for the Dow Jones industrials and 1,270 for the Standard & Poor's 500 index .SPX.

"I don't think we will see another 'Bear Stearns,' but somehow along the way, some investors have forgotten that we still have earnings," said Orndorff of Payden & Rygel.

He contends that while financial and brokerage stocks look inexpensive on a price-to-earnings basis, "the E in the P/E is going to be falling."

The Fed has provided a backstop for banks and financial firms by opening its discount window, but generating profits will be hard to come by, Orndorff added.

That's because bank earnings remain under pressure with the credit crisis pushing up funding costs and squeezing profit margins.

(Additional reporting by Dena Aubin and Ellis Mnyandu)