A report that BofA could buy the troubled lender cheered investors Thursday. Wall Street also weighed a Bernanke speech and weak sales updates from retailersStocks, hammered over the past week on recession fears, rose broadly Thursday as Federal Reserve chairman Ben Bernanke virtually promised to lower interest rates to stimulate growth in the U.S. economy.
Financial stocks soared. Airlines up on merger speculation. NYSE breadth 21-10 positive. NASDAQ breadth 17-12 positive. Trading active. Bonds mixed after Bernanke talk. Dec. retailer sales weak, Jobless Claims down, Wholesale Inventories up. Rubin called for $100 billion eco. stimulus plan. Dollar fell. ECB, BOE left rates unchanged. Oil futures fell.
A Wall Street Journal report that troubled mortgage lender Countrywide (CFC) is in advanced talks to be purchased by banking giant Bank of America (BAC) also cheered investors. A resultant rally in financial shares helped major indexes erase earlier losses. Countrywide shares shot up over 50% on the news.
Prior to the Countrywide news, stocks had been trading mixed after Bernanke promised substantive action to stimulate economic growth. The markets had been sputtering because many expected an inter-meeting rate cut from the Fed, according to Standard & Poor's MarketScope, which says there may be "trouble" if the central bank doesn't cut rates by 50 basis points at its Jan. 30 meeting.
Investors also weighed broad weakness in December sales reports from major retailers, as well as a profit warning from Capital One Financial (COF). Economic reports showed a drop in first-time jobless claims and a rise in wholesale sales.
On Thursday, the Dow Jones industrial average fought its way back from an 80-point drop to finish 117.78 points, or 0.93%, higher at 12,853.09. The broader S&P 500 index gained 11.20 points, or 0.80%, to 1,420.33. The tech-heavy Nasdaq composite index added 13.97 points, or 0.56%, to 2,488.52.
Transportation stocks were propelled Thursday by a Wall Street Journal report that Delta Air Lines (DAL) directors were to consider formal merger talks with Northwest (NWA) and UAL (UAUA) as part of a long-anticipated airline industry consolidation. The news sparked a 7.4% advance in the S&P Airlines index, and a 2.7% gain in the Dow Jones transportation index.
In a speech at the Women in Housing and Finance and Exchequer Club Joint Luncheon in Washington, DC, Thursday, Bernanke said that "light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary." The Fed chief said policymakers "will be carefully evaluating incoming information bearing on the economic outlook" and that the Fed stands "ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks."
Morgan Stanley economist David Greenlaw said Bernanke's message was "more dovish than we had anticipated". Morgan Stanley now looks for the Fed to cut the Fed funds rate target by 50 basis points at its Jan. 30 meeting. "We also believe that an intermeeting rate cut is possible although still not the most likely outcome," Greenlaw wrote in a Jan. 10 note.
Bernanke's remarks helped offset the effect of some downbeat retail sales updates for December. Holiday sales at stores open at least one year dropped for 67% of retailers reporting on Thursday, according to CNBC Business News, with the losers including Target (TGT), Abercrombie & Fitch (ANF), Nordstrom (JWN), AnnTaylor Stores (ANN), Limited Brands (LTD), and Bebe Stores (BEBE).
ced its profits for the year. Shares dropped 1%.
Zale Corp. (ZLC) shares fell 2.9% after it reported a 9% drop in same-store sales in November and December and 10% lower revenue for the holiday season. The jewelry retailer now expects same-store sales to fall by about 8% to 9% in its second quarter, with earnings from continued operations anticipated at $1.08 to $1.13 per share.
Federal Home Loan Mortgage Corp. (FRE) shares gained 2.7% Thursday despite news that Moody's Investors Service placed its A-Bank Financial Strength Rating on review for a possible downgrade on the possibility the company may experience higher credit losses than Moody's previously expected.
European stocks ended lower as the European Central Bank and Bank of England left interest rates unchanged. In London, the FTSE 100 index fell 0.8% to 6,222.70. In Paris, the CAC 40 index dropped 0.64% to 5,400.43. Germany's DAX index was off 0.89% at 7,713.09.
Major Asian markets finished mostly lower. Japan's Nikkei 225 index lost 1.45% to trade at 14,388.11. In Hong Kong, the Hang Seng index shed 1.39% to trade at 27,230.86. The Shanghai composite index rose 038% to 5,456.54.
Treasury market
Bernanke's comment that the central bank would take additional action to support growth if needed drove a curve-steepening trade in Treasuries. Specifically, yields on short-term bonds, which are most sensitive to changes in monetary policy, fell to reflect the potential for further rate cuts; yields on the longer maturities, which generally reflect long-term inflation expectations, rose.
The 10-year note slid 18/32 in price to 102-30/32 for a yield of 4.89%. The 30-year bond plunged 60/32 to 109-04/32 for a yield of 4.44%.
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