Investors endured another wild ride Thursday as positive weekly jobs data and a big chemicals merger vied with a late surge in oil prices and more pressure on financials.
Major U.S. stock indexes finished higher, managing to claw their way back up from a quick reversal to the downside after oil prices on the New York Mercantile Exchange settled nearly $5 a barrel higher. Concerns about the solvency of the country's biggest backers of home mortgages -- Freddie Mac (FRE) and Fannie Mae (FNM)-- waned slightly on reassuring comments by Treasury Secretary Henry Paulson before Congress, but the fact that there's no end in sight to the housing slump threatens to push those stocks down further.
On Thursday, the Dow Jones industrial average rose 81.58 points, or 0.73%, to 11,229.02. The broader S&P 500 gained 8.71 points, or 0.70%, to end at 1,253.39. The tech-heavy Nasdaq composite index advanced 22.96 points, or 1.03%, to finish at 2,257.85.
On the New York Stock Exchange, 16 stocks gained ground for every 15 that traded lower, while on the Nasdaq the ratio was 16-13 positive, as bargain hunting and investors' enthusiasm toward a merger between Rohm and Haas (ROH) and Dow Chemical (DOW) helped lift the market out of earlier weakness, S&P MarketScope said.
A 64% jump in Rohm and Haas shares after the specialty chemical company agreed to be acquired by Dow for $78 a share, plus gains in other selected stocks, countered steep drops in MGIC Investment (MTG), whose debt rating was downgraded by Moody's Investors Service and Freddie Mac (FRE) and Fannie Mae (FNM), which slid to 15-year lows on worries about the possibility of them failing.
If completed, Dow would become the world's largest specialty chemicals producer and derive 70% of its sales from specialty chemicals.
The market remains skittish amid mounting fears about liquidity crises at financial firms. Shares of Lehman Brothers Holdings (LEH) took a beating THursday, putting in a fresh 52-week low at $15.63 before bouncing to end 12.4% lower at $17.30. The selloff in the stock continued even after PIMCO chief investment officer Bill Gross, in an interview on CNBC, denied a rumor that the bond house was reducing its risk to Lehman. SAC Capital also said it continues to take counterparty risk with the investment bank. Also weighing on Lehman shares were worries about its exposure to Freddie and Fannie.
After being hammered on Wednesday on mounting worries about their ability to raise cash, Freddie and Fannie shares continued to tumble Thursday on remarks by former St. Louis Federal Reserve President William Poole, who said the housing agencies were "technically insolvent." Fannie shares were down another 13.8% and Freddie shares dropped 22%.
The market listened to today's testimony by Fed Chairman Ben Bernanke and Treasury Secretary Paulson before the House Financial Service Committee on financial market regulatory restructuring. Paulson said Fannie and Freddie are adequately capitalized and need to continue to play an important role in U.S. housing markets in the future. But he also said that investment banks and other finnacial institutions should not expect to be bailed out by the Federal Reserve or any other arm of the U.S. government if market discipline is to be effective in constraining risk.
Exacerbating market concerns about Fannie and Freddie was news that U.S. home foreclosures rose 53% in June compared to a year ago and that bank seizures nearly tripled, according to data from RealtyTrac cited by a Bloomberg report. That's one out of every 501 households in some stage of foreclosure and suggests that the top in the foreclosure cycle has not been reached, according to RealtyTrac.
According to the Wall Street Journal, the Bush administration has held talks about what to do in the event Freddie and Fannie falter, even though officials don't expect them to fail and no rescue plan is imminent. But the discussions have become more serious recently given the mortgage companies' financial woes, the newspaper reported.
The plunge in Fannie amnd Freddie shares this week has sparked questions about how willing the Treasury Department would be to step in and bail out the quasi-governmental entities if their credit losses become too large for them to cover.
"If you’re an investor and you’re bailing out, you’re signaling 'I don’t believe the Treasury will step in and stabilize [the price] at the point at which it currently is," says Walter O'Haire, senior analyst at Celent, a Boston-based financial research and consulting firm.
The Treasury has been evaluating solutions to the financial crisis for several months but so far has been reluctant to step in and actually act. "The steep drop in Fannie and Freddie might be the trigger that forces their hand to make a decision," says O'Haire.
Investment strategists say they see scant chance of a sustainable rally in stocks until investors are convinced that the banks have ample capital to stay afloat with no sign of an end to the housing and credit slumps in the U.S.
Among other stocks on the move, General Motors (GM) fell to a new 54-year low, finishing 6.2% lower at $9.69 on worries that the automaker may seek bankruptcy protection. CEO Rick Wagoner denied the rumors and said liquidity isn't an issue, with the company sitting on $24 billion in cash at end of the first quarter and access to another $7 billion if it needs it. He also said that except for the Hummer, General Motors isn't considering eliminating any more product lines.
General Electric (GE) said Thursday that it is considering a spinoff of its lighting and appliance divisions, confirming what many analysts have been speculating about in recent weeks. The conglomerate reports earnings on Friday.
Wachovia (WB) says it appointed Robert K. Steel, who most recently served as Under Secretary for Domestic Finance for the U.S. Dept. of Treasury, as WB's new CEO, president and member of the board of directors, effective immediately. WB also says it expects to report an after-tax loss available to common stockholders of $2.6-$2.8 billion, or $1.23-$1.33 per share, for second quarter, excluding goodwill impairment charges.
Boeing (BA) advanced on an announcement that second-quarter results will include a charge of about 22 cents a share on previously acknowledged delays on its Airborne Early Warning & Control program. Boeing continues to expect to earn $5.50 to $5.85 a share this year, as company-wide performance and productivity are expected to offset the AEW&C charge by yearend.
In economic news, U.S. initial claims unexpectedly plunged 58,000 to an annualized rate of 346,000 in the week ended July 4 after a seasonal distortion before the retooling season. The retooling should have produced higher claims readings for both of the last two weeks, though the timing of the July 4 holiday may have added an additional twist, Action Economics said. Perhaps some suppliers were able to retool early because of lost production from the American Axle strike, and perhaps the strike led to an unusual number of workers re-opening an earlier claim. Action Economics believes claims will return to the 380,000 area by early August, and reaffirmed its forecast for a 60,000 drop in nonfarm payrolls for July, after the 62,000 decline seen for both May and June.
August WTI crude oil futures gained momentum after breaking through a critical technical resistance level of $138 and settled $5.61 higher at $141.65 a barrel on Thursday.
Despite growing concerns about demand destruction, oil prices drew support from Iran's testing of more missiles in the Persian Gulf, news that Nigerian rebels may resume their insurgency efforts next week and a refinery outage in Texas. Wednesday's crude inventories report from the Energy Information Administration showed a larger-than-expected drop of 5.84 million barrels in the week ended July 4, and increases in gasoline and distillate supplies.
Major European indexes were trading lower Thursday. In London, the FTSE 100 index fell 2.22% to 5,406.80. In Paris, the CAC 40 shed 2.49% to trade at 4,231.56, while Germany's DAX index was down 1.28% at 6,305.00.
In Asia, Japan's Nikkei 225 closed 0.12% higher at 13,067.21, and Hong Kong's Hang Seng index edged up 0.07% to end at 21,821.78.
Treasuries continued to trade lower despite a reversal in equities to the downside on a late resurgence in oil prices. The 10-year note eased 03/32 to 100-16/32 for a yield of 4.81%, while the 30-year bond fell 07/32 to 99-06/32 for a yield of 4.42%.