January 11, 2008

Stocks Stage Late Rally

After see-sawing much of Wednesday, indexes moved decisively higher in the final 90 minutes of trading, aided by bargain hunters
Finally, the stock market managed to arrest its downward slide on Wednesday. Major stock indexes managed to recoup earlier losses and hold onto a rally, as financials, airlines and other stocks rebounded from oversold conditions.

The late break to the upside was a welcome relief after see-sawing moves for most of the session. Nagging fears about recession and inflation had investors skittish as they brace for what promises to be a rocky fourth-quarter earnings season.

On Wednesday, the Dow Jones industrial average closed 146.24 points, or 1.16%, higher at 12,735.31. The broader S&P 500 index advanced 18.94 points, or 1.36%, to 1,409.13. The tech-heavy Nasdaq composite index gained 34.04 points, or 1.39%, to trade at 2,474.55.

Solid gains by Dow components DuPont (MBI) and Hewlett-Packard (HPQ), as well as comments from Berkshire Hathaway Inc. (BRK-A) that it wouldn't rule out an investment in one of the beleagured bond insurers, provided much-needed psychological support to the equities in the face of growing pessimism about the economy as a whole.

In one expression of that deepening gloom, Goldman Sachs projected negative U.S. growth in the second and third quarters. Goldman economists expect the Fed funds rate to drop by another one and three-quarter percentage points from the current 4.25% to 2.5%, with a half-point cut at the end of January. Other Wall Street economists have changed their outlooks since last week's data releases showed a jump in unemployment to 5%, a paltry 18,000 gain in jobs and significant weakening in the Institute for Supply Management manufacturing figures.

Not everyone's convinced that a recession is on the way, however. William Poole, president of the St. Louis Fed and a non-voting member of the central bank’s policy committee, said Wednesday that the economic data isn't all pointing to a slowdown, saying that labor market remain tight despite the December jobs report and that prime mortgages aren't under strain. But well-anchored inflation expectations give the Fed leeway to make large interest rate cuts without risking inflation, he added.

The markets will be listening eagerly on Thursday to Fed Chairman Ben Bernanke's speech about the financial markets, the economic outlook and monetary policy for clues about what action the Fed may take on Jan. 31.

"It comes down to whether he tries to disabuse investors' expectations of a 50-basis point easing" in interest rates, said Bob Ried, president of Ried Thunberg & Co., in Palm City, Fla. "I don't think he can do it. Three [regional Fed] banks requested a 50-basis point cut in the discount rate back in December and economic conditions have deteriorated since then."

In a reversal from his stance for much of the past two years, Ried said it's critical that the Fed fights the recession winds first and worry about rising inflation later. But he believes the recession has already taken hold and that the Fed needs to look to the second half of 2008 to figure out how it can limit it to just two quarters of negative growth.

Among stocks in the news Wednesday, MBIA (MBI) shares fell 14.8% after the company announced a plan to shore up its capitalization by offering $1 billion in debt, to be treated as capital, and cutting its quarterly dividend to 13 cents from 34 cents a share. Fitch Ratings said MBIA would be able to maintain its triple-A rating if it can successfully raise that debt. The announcement comes a day after MBIA shares fell more than 20% in response to Morgan Stanley cutting its profit estimates for MBIA and Ambac Financial Group (ABK), citing deteriorating credit markets.

In economic data, the Mortgage Bankers Association released its weekly mortgage applications survey, which showed a 32% jump in the Market Composite Index, which measures loan application volume, in the holiday-shortened week ending Jan.

4 from the prior week, which included the Christmas holiday. The refinance portion of mortgage activity increased to 57.7% of total applications from 50.9% the previous week, while adjustable-rate mortgages fell to 9.3% of total applications from 9.8% a week earlier.

Oil prices settled lower, unable to hold onto gains despite a rekindling of supply concerns after the U.S. Energy Information Administration reported a much bigger decline in oil inventories than had been anticipated.

February NYMEX crude oil ended 66 cents lower at $95.67 per barrel, as traders focused on increases in gasoline and distillate stockpiles instead of on the 6.8 million barrel drawdown in crude inventories during the week ending Jan. 4, which was more than triple the 2.1 million drop that Platts had predicted.

In other news Wednesday, E*Trade Financial (ETFC) shares were well off earlier highs, trading up 6.7% after the company said that after the Nov. 29 sale of its $3 billion asset-backed securities portfolio, it successfully completed the orderly sale of additional $3 billion of securities, including a combination of mortgage-backed securities and municipal bonds. It also reduced wholesale borrowing levels at its bank by eliminating about $3.5 billion in Federal Home Loan Bank advances and repurchase agreements, vs. the prior quarter.

Oneok (OKE) shares rose 10.0% after it raised its earnings forecast for 2007 to between $2.75 and $2.79 from $2.62 to $2.72 per share, reflecting better-than-anticipated performance in its Oneok Partners segment. The company sees 2008 earnings of $2.75 to $3.15 per share, also driven by Oneok Partners.

Apollo Group (APOL) shares rose 16% after the education company posted a 23% gain in first-quarter earnings to 83 cents per share on a GAAP basis, vs. 65 cents a year ago, on 17% higher revenue. Standard & Poor's reaffirmed its buy rating on the stock.

Robbins & Myers (RBN) reported a first-quarter profit of 80 cents per share vs. 62 cents a year ago on a 12% increase in sales. The industrial equipment maker said that based on first-quarter strength, it was raising its fiscal 2008 earnings outlook from $3.30-$3.50 to $3.55-$3.75 per share and announced a 2-for-1 stock split. Shares were up 12.6%.

Garmin Ltd. (GRMN) shares fell 5.3% on a Deutsche Bank downgrade to hold from buy on rising competitive pressures in the U.S. and pricing concerns. The maker of GPS navigational devices warned for the first time that some European markets are slowing.

European stocks were trading lower Wednesday. In London, the FTSE 100 index dropped 1.32% to 6,272.70. In Paris, the CAC 40 index fell 1.10% to 5,435.42. Germany's DAX index was off 0.86% at 7,782.71.

Major Asian markets finished mostly higher. Japan's Nikkei 225 index climbed 0.49% to 14,599.16. In Hong Kong, the Hang Seng index rose 1.86% to 27,615.85. The Shanghai composite index advanced 0.91% to 5,435.81.

Treasury market

Treasury bonds drifted lower as equities moved decisively higher. The 2-year Treasury note inched down 02/32 to 101-00/32 for a yield of 2.72%, the 10-year note fell 11/32 to 103-15/32 for a yield of 3.82% and the 30-year bond dropped 18/32 to 110-27/32 for a yield of 4.34%.

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