Major U.S. stock indexes finished modestly higher on Friday, capping a volatile session. Setting the pace for the selling was once again the embattled financial sector, rocked by a report that Merrill Lynch & Co. (MER) may be investigated for dealings intended to hide losses from subprime mortgages.
On Friday, the Dow Jones industrial average ended up 27.23 points, or 0.20%, at 13,595.10. The broader S&P 500 index edged up 1.21 points, or 0.08%, to 1,509.65. The tech-heavy Nasdaq composite index rose 15.55 points, or 0.56%, to 2,810.38.
The late bounce appears to have been sparked by a report from Dow Jones Newswires that Citigroup's board has called an emergency meeting for this weekend. Citigroup's shares got a mild pop to the upside on the news. The report didn't speculate about what the focus of the weekend meeting might be, but there was immediate talk that it would likely include a plan of action around further asset impairments and replacing Chairman and CEO Chuck Prince. Bigger-than-expected writedowns and a downgrade by CIBC World Markets have compounded selling pressure on the stock in recent weeks.
Next week, the market's focus will be on the export numbers that come out on Friday, as the strength of the global economy is increasingly being counted on to offset domestic weakness. The Institute for Supply Management's non-manufacturing index for October, due on Monday, and nonfarm productivity, coming out Wednesday, will also be watched.
The deeper implications of Merrill Lynch's alleged efforts to hide some subprime mortgage exposure, if true, are whether the brokerage may have been driven to take extreme actions out of worries about much larger losses than it has stated up until now, said Richard Sparks, an equity analyst at Schaeffer's Investment Research in Cincinnati. Market concerns about the magnitude of further writedowns have even pushed the Fed's Oct. 31 rate cut into the background, he added.
But market psychology has been perverse in the subprime era, and it might also be that the nonfarm payrolls gain is being read as confirmation that the Fed won't be stepping in to ease interest rates again anytime soon.
"What the market's really waking up to is that the price of oil is in the $90s and has been all week and that's not good for consumer spending or corporate profits," said Art Hogan, chief market analyst at Jefferies & Co. in Boston.
After heavy selling pressure earlier, most of the collateral damage in the financial stocks has been contained, he said. He sees the overall market as "clearly oversold on a two-day basis," and attributed the brief uptick to the sellers running out of conviction and nothing else.
The technology stocks are currently providing the only relief with upside surprises in earnings and M&A activity, he said.
In economic news Friday, nonfarm payrolls leaped by 166,000 in October, more than double the 80,000 that were expected. The September figure was revised downward to 96,000 from 110,000. Not surprisingly, another 21,000 manufacturing jobs were lost, while retail was down 22,000 jobs and construction down 5,000. Professional business jobs rose 65,000 and temporary jobs were up 20,000. The unemployment rate held at 4.7%, while average hourly earnings edged 0.2% lower.
The data indicate that the labor market carried solid momentum into the fourth quarter, led by service sector strength, Barclays Capital Research said in a Nov. 2 note. It also suggests real growth in U.S. gross domestic product will be higher than Barclays' 1.5% estimate for the fourth quarter and will likely increase the Fed's conviction in keeping rates unchanged in coming months, the note said.
Some market players were skeptical about the report, predicting a significant downward revision in the future.
That, and more negative economic data in the interim, would likely put new pressure on the central bank to lower rates, as many investors are convinced the broader economy has yet to register the full impact of the housing and financial sectors' turmoil.
September factory orders increased 0.
2%, where a 0.5% decline was anticipated. Shipments were unchanged, while inventories rose 0.6%. The durable goods data revisions were negligible, leaving durable orders down 1.7%, with durable shipments down 2.1% and durable inventories flat at 0.4%. Nondurable orders/shipments jumped 2.1%, led by a 10.6% price-related surge in petroleum.
The oil markets reacted positively to the employment report. Crude oil for December delivery in New York surged $2.44 to close at $95.93 per barrel after gaining some strength in overnight trading. Oil traders continue to look at the dollar, though the greenback appears to have seen its worst levels for the time being.
Oil prices will continue to rise next week on talk that OPEC won't boost production as fast as consumption grows this winter, according to 21 out of 35 analysts surveyed, Bloomberg News reported.
Among stocks in the news Friday, Chevron (CVX) earnings came in lower than expected. The oil giant posted $1.75 a share in third-quarter profit, which includes 19 cents in charges, down from $2.29 a share a year ago due to weak refining and marketing conditions in U.S. Revenue rose to $55.17 billion from $54.21 billion a year ago, but missed analysts' estimate of $58.29 billion. Even without the charge, Chevron's earnings fell short of analysts' consensus forecast of $2.07 a share.
More trouble may be in store for Merrill Lynch after The Wall Street Journal reported the investment bank engaged in deals with hedge funds that may have been designed to delay recognition of losses from mortgage securities. The Securities & Exchange Commission will probably investigate. Standard & Poor’s downgraded the stock to hold from buy.
International Paper Co. (IP) reported income from continuing operations of 57 cents a share in the third quarter, compared with 45 cents in the year-ago period, on a 1.9% rise in sales. It expects slightly higher income from continuing operations in the fourth quarter, but noted that volumes will slow seasonally in most segments. Pricing continues to improve and the costs for wood, energy and transportation will continue to increase, it said.
Martha Stewart Living Ominimedia (MSO) narrowed its net loss in the third quarter to eight cents a share from a 49-cent loss a year ago, thanks to a 13% revenue increase. The company expects $120 million in revenue and $33 million to $35 million in operating income in the fourth quarter. For 2007, it sees revenue of $330 million, operating profit of $7.5 million to $9.5 million and adjusted earnings before interest, taxes, depreciation and amortization of $33 million to $35 million.
EBay (EBAY)was downgraded to peer perform by Bear Stearns on projections that profit margins will fall next year.
European equity indexes were trading lower on Friday. In London, the FTSE 100 index fell 0.84% to 6,530.60. Germany's DAX index dropped 0.40% to 7,849.49. In Paris, the CAC 40 inched down 0.18% to 5,720.42.
Asian markets ended mostly lower. In Japan, the Nikkei 225 index was down 2.09% at 16,517.48. In Hong Kong, the Hang Seng index dropped 3.25% to 30,468.34. The Shanghai composite index slid 2.31% to 5,777.81.
Treasury prices barely reacted to the positive jobs data and then climbed higher as stocks resumed their downward trend, as credit concerns continued to dominate trading. The two-year notes gained 05/32 to trade at 99-28/32 for a yield of 3.68%; 10-year notes rose 07/32 to 103-12/32 for a yield of 4.32%; and the 30-year bond rose 11/32 to 106-05/32 for a yield of 4.62%.