Stocks ended higher on Thursday, with investors appearing to gain conviction as oil prices dropped while shrugging off moderately weaker economic data and weaker earnings reports that offset a pop in M&A activity.
On Thursday, the Dow Jones industrial average closed 94.28 points, or 0.73%, higher at 12,992.66. The broader S&P 500 index was up 14.91 points, or 1.06%, at 1,423.57. The tech-heavy Nasdaq composite index rose 37.03 points, or 1.48%, to 2,533.73.
Buying ahead of Friday's options expirations also lifted the market, S&P MarketScope said. On the New York Stock Exchange, 22 stocks gained in price for every nine that were lower, while on the Nasdaq the ratio was 18-11 positive.
CNET Networks Inc. (CNET), the Internet news provider, agreed to be acquired by CBS Corp. (CBS) in a $1.8 billion deal that will give CNET shareholders $11.50 in cash for each CNET share they own. Standard & Poor's downgraded the stock to hold from buy, but the shares leaped 43.5% higher.
Billionaire activist investor Carl Icahn confirmed that he's launching a proxy battle to oust Yahoo's (YHOO) board of directors after the technology company's "irrational" actions toward Microsoft's (MSFT) takeover bid. In a letter to Yahoo Chairman Roy Bostock, Icahn said he is nominating 10 directors, including himself. Yahoo shares were up 1.8%.
Speaking at a Chicago Federal Reserve conference Thursday, Fed chairman Ben Bernanke reiterated his recommendation that banks continue to raise capital and need to have a liquidity cushion for challenging times such as the current credit crunch. Bernanke said many banks aren't prepared to bring off-balance sheet investments onto their books if necessary.
Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics in New York, says he doesn't believe this run to the upside in equity markets will last, even though there's been a firm bid beneath the market for quite some time.
"I think we still have more to run, but I don’t believe we’ve missed the recession or that the credit crunch is in the ninth inning or that the worst of the housing market has past," he says.
Leading the day's economic data, U.S. industrial production fell 0.7% in April, below the median, while capacity utilization eased to 79.7% in April from 80.4% in March.
The headline May Empire State index fell to -3.2, lower than the anticipated 0.6 and down from 0.6 in April. The March headline was the lowest in the survey's seven-year history, but the notable rebound in April, and similar level in May, has left the index well above that level. This leaves the region's manufacturing sector continuing to perform better than what would be expected during a typical recession, Action Economics said.
The Philadelphia Fed index rose to -15.6 in May from -24.9% in April, better than the rise to -18.0 that was expected. While this survey continues to point to manufacturing contraction -- though at a slower pace than in prior months -- improvement in the subindexes in May puts the report more in line with other factory surveys, said John Ryding, chief U.S. economist at Bear Stearns & Co., in an email note. "The price-related subindexes point to significant inflation pressures from manufacturing," he added.
Initial jobless claims rose 6,000 to 371,000, slightly higher than the expected 370,000 level, in the week ended May 10. Initial claims have revealed volatile swings over the last two months, although figures over the last two weeks have been fairly close with the April average of 365,000. Continuing claims jumped 28,000 to 3.06 million, which leaves this series hovering at a new four-year high.
The National Association of Realtors said that homebuilder sentiment continued to weaken in May, with the NAHB/Wells Fargo Housing Market Index falling one point to 19 from 20 in April and just one point above the record low of 18 reached in December 2007.
Ritholtz thinks the economic data has actually indicated more serious problems than the headline figures would suggest. Instead of lots of layoffs, companies are cutting hours, he says, citing recent research from Merrill Lynch that the 0.3% decline in the average work week in April is equivalent to cutting 400,000 jobs.
He also says "people are anticipating far too much benefit from the stimulus checks" and "putting way too much faith in the Fed's ability to guide a carrier to a soft landing," which won't be easy given the enormous amount of leverage to be unwound.
Oil prices fell on profit-taking by funds after oil futures broke below an important range of $125 to $125.20 per barrel, Action Economics said. After ranging between $126.50 and $120, June WTI crude oil futures settled 17 cents per barrel lower at $124.05. Meanwhile, nationwide gasoline prices hit a new record high of $3.78 per gallon before closing lower Thursday.
Prices initially had risen after UBS AG and Sanford C. Bernstein & Co. raised their 2008 price forecasts to reflect the 30% jump in oil since the year began, with further aid from a gasoline pipeline explosion in Nigeria, according to Bloomberg News.
Another factor that may be weighing on oil prices is an expected vote by the U.S. Senate to close a legal loophole that would prevent traders from adding to positions in futures contracts on alternate exchanges after reaching their limits on the New York Mercantile Exchange, CNBC Business News reported. The Senate's proposed Consumer-First Energy Act also includes a proposal to mandate higher cash collateral for energy-futures trading and call for greater oversight of overseas trading. The bill could come to a vote by Memorial Day.
Among other stocks in the news Thursday, Agilent Technologies Inc. (A) shares rose after the company reported second-quarter GAAP EPS of 47 cents per share on a 10% revenue gain, at the high end of its outlook. Adjusted EPS of 51 was just above the top of the company's guidance of 46 to 50 cents per share. The maker of electronic and medical measurement devices sees third-quarter revenue of $1.44 billion to $1.49 billion and adjusted EPS of 52 to 56 cents, with fourth-quarter revenue expected to rise 8% to 17% from a year ago and adjusted EPS of 62 to 66 cents. S&P raised its estimate and target price and reiterated its hold rating.
CTrip.com International Ltd. (CTRP) shares fell on concerns over the impact of China's devastating earthquake on the company, which is a leading travel service provider in China. The company posted 52% higher net income in the first quarter on a 47% revenue rise on Thursday and expects second-quarter net revenue to grow by about 30%.
Major European indexes were trading mixed Thursday. In London, the FTSE 100 index rose 0.58% to 6,251.80. In Paris, the CAC 40 index inched up 0.04% to trade at 5,057.51, while Germany's DAX index was down 0.03% at 7,081.05.
In Asia, Japan's Nikkei 225 climbed 0.94% to end at 14,251.74, while Hong Kong's Hang Seng index slipped 0.08% to 25,513.71.
Treasuries were higher on Thursday in response to the weaker economic reports. The 10-year note moved up in price to 100-16/32 for a yield of 3.81%, and the 30-year bond climbed to 97-06/32 for a yield of 4.55%.