February 1, 2008

Stocks rebound on bond insurer hopes

US stocks rebounded from an early sell-off yesterday after MBIA helped alleviate some of the concerns about the troubled bond insurance sector.

Sentiment picked up after the bond insurer said the company had been the target of "fear mongering" and was confident of retaining its triple-A rating.

Volatile equities had slumped at the open after a spike in jobless claims added to worries about the US labour market market as consumer spending slowed.

Investors later rushed to buy into weakness after the Federal Reserve's 50 basis point rate cut raised the prospect of cheaper borrowing costs, a potential boon for financial companies and the prostrate real estate market. Energy companies remained a weak spot, however, as crude oil prices slumped.

In mid-afternoon the S&P 500 was up 0.8 per cent at 1,366.15, having initially fallen 1.6 per cent. The S&P homebuilder index enjoyed a particularly strong bounce, rising 8 per cent. The Nasdaq Composite rose 0.9 per cent to 2,370.57 and the Dow Jones Industrial Average put on 0.8 per cent to 12,542.98.

"[The rebound] is primarily due to MBIA. There's a lot of short covering, especially in the homebuilders," said Tom Schrader, managing director of US equity trading at Stifel Nicolaus Capital Markets.

Stocks hit the skids in early trading after a sharp spike in weekly claims for unemployment benefit, which jumped 69,000 to 375,000, the highest level since October 2005, unsettled investor. Economists had expected about 320,000.

Although these numbers are often volatile and may have been affected by the timing of a public holiday, the uptick will renew concerns that today's employment report may not be as strong as hoped. Morgan Stanley cut its payrolls forecast to 90,000 from 110,000, still significantly more than than December's 18,000.

The bond insurance sector once again dominated market chatter as MBIA reported a $2.3bn fourth-quarter loss after writing down $3.5bn of credit derivatives. But the shares rallied 5.7 per cent to $14.75 after its chief executive said the company was best positioned to avoid a rating downgrade.Ambac Financial, a rival, climbed 7.4 per cent to $14.75.

If bond insurance losses can be contained and earnings visibility increases, many analysts think the beaten-down S&P financial sector, up 1.7 per cent yesterday, could become an attractive investment.

"From a longer term perspective the action that the Fed is taking allows you to become a bargain hunter in the financial stocks - you can start to take positions in them," said Hugh Whelan, equity manager at Hartford Investment Management.

Investors also bought battered consumer stocks, spurring a 3.7 per cent jump on the S&P retail index. A Deutsche Bank analyst upgraded the broadline retail sector to "neutral" from "cautious". Deutsche told investors "the worst will soon be behind us," amid expectations of an improved retail environment in the second half of this year. Bear Stearns upgraded Nordstrom's shares causing them to rise 6.6 per cent to $39.28.

But mixed earnings and the slowdown in consumer spending underscored the riskiness of calling a bottom in the sector. Personal spending rose 0.2 per cent in December, its slowest pace in six months, with 2007 the weakest year since 2003.

Procter & Gamble, up 0.3 per cent at $65.29, increased fiscal second-quarter earnings 14 per cent and the company raised its full-year outlook. Colgate, up 3.3 per cent at $75.91, increased quarterly profits by 3 per cent.

Burger King, up 2.4 per cent at $46.30, also beat estimates as second-quarter profit jumped 29 per cent. Mattel rose 11.6 per cent to $21.13 after posting beating quarterly profit forecasts.

In contrast, Starbucks' cautious outlook for 2008 unnerved investors. The shares fell 3.6 per cent to $18.52. Amazon.com reported quarterly results in line with expectations but a decline in profit margins caused shares to slide before recovering to $74.65, up 0.6 per cent.

Also in the technology sector, Adobe Systems fell 4.6 per cent to $34.29 yesterday after Jefferies & Co. downgraded the software company from "buy" to "underperform" because of slower January sales.

In energy Cameron International dropped 4.8 per cent to $40.99 after the oil services company gave weaker-than-expected earnings guidance. Marathon Oil's fourth-quarter earnings dropped 38 per cent. The shares fell 4 per cent to $48.90.

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