Major U.S. stock indexes finished higher on Friday, getting an injection of investor optimism about the economy on better-than-expected durable goods orders and new home sales figures, with added support from another drop in oil prices.
On Friday, the Dow Jones industrial average closed 21.41 points, or 0.19%, higher at 11,370.69. The broader S&P 500 gained 5.22 points, or 0.42%, to finish at 1,257.76. The tech-heavy Nasdaq composite index was up 30.42 points, or 1.33%, at 2,310.53.
Helping to fuel gains was Thursday's selloff, which provided investors with an opportunity to buy stocks at sharply reduced prices. But weakness in Fannie Mae (FNM), Freddie Mac (FRE), Wachovia (WB) and some other names held the market in check, S&P MarketScope said.
On the New York Stock Exchange, 18 stocks were higher for every 13 that traded lower, while on the Nasdaq the ratio was 17-11 positive.
Oil prices resumed their decline on Friday as bigger supplies are flowing in from Saudi oil fields and due to growing confidence in ample supplies amid an absence of adverse weather conditions. August WTI crude oil futures settled ng $2.23 lower at $123.26 a barrel on Friday.
Fannie Mae and Freddie Mac shares fell after their debt was put on CreditWatch Negative by Standard and Poor's Ratings Services. However, Fannie's and Freddie's senior unsecured debt ratings were affirmed at AAA/A-1+ amid expectations of imminent passage of the housing bill. But S&P said the weakness in earnings due to rising credit expenses "underscores the expected higher stress on capital and earnings the firms face over the next several quarters... the crisis of confidence regarding the agencies' capital position is also adding to the stressed business cycle and creates additional challenges for capital raising initiatives."
A U.S. Senate vote on the housing bill that would expand the government's guarantee of mortgage giants Fannie and Freddie is now reportedly slated for Saturday, July 26. The bill, which would allow the Treasury to purchase stock in the government-sponsored enterprises, was responsible for much of the strength seen in financial stocks over the past week.
Some strategists believe the housing bill will offer mostly a psychological balm, but Jack Ablin, chief investment officer at Harris Private Bank, says the effort shows that home owners' pain and suffering is not lost on Washington. "The fact that legislators are tripping over themselves to try to cobble together a rescue package suggests to me at least in the near term that the impact of housing will be mitigated," he says.
However, as with any economic policy, it could bring unintended consequences, such as a weaker dollar or, more likely, higher inflation since the Fed is essentially bailing out the GSEs by making more money available. Although it's not necessarily translating to more lending by banks, the U.S. Treasury is borrowing from U.S. trading partners, which is pushing the national debt higher and creating a surplus of dollars, he says.
A day after Ford Motor (F) took a massive $8.03 billion write-down partly on the declining value of its leasing business, Chrysler LLC announced just before the market close that it is exiting the leasing business because the company can no longer afford to offer competitive rates on loans to customers. Chrysler vehicle sales are down 22% year-to-date and leases account for 15% of the company's unit sales.
"It's all about the liquidity at Chrysler Financial," says Mark Warnsman, an analyst at Calyon Securities who follows automakers but doesn't cover Chrysler, which is privately held. "If you're going to conserve capital at Chrysler, you cut back on leasing rather than the financed portion of it."
Besides the fact that Ford Credit and GMAC have sufficient liquidity, Warnsman says he sees little motivation for Ford and General Motors' (GM) capital finance divisions to follow suit by discontinuing their leasing operations. "I view capital finance as an extension of their marketing arms. I would expect that this change will have a negative impact on Chrysler’s ability to market cars successfully."
In economic news, durable goods orders were surprisingly robust in June, rising 0.8% instead of the expected 0.4% decline on strong military spending on the wars in Afghanistan and Iraq. Durable goods orders climbed 0.1% in May. Excluding demand for defense equipment, the orders rose a more modest 0.3%, but excluding transports, orders were up 2% from the prior month.
New home sales fell 0.6% in June to an annualized rate of 530,000, better than the 1.4% decline to an annualized rate of 505,000 that had been anticipated. New home inventories improved slightly from a 10.4 month supply of homes to a 10-month supply.
Foreclosure filings rose 14% in the second quarter from the prior qurater, the eighth consecutive quarterly climb, and more than doubled from the same period a year earlier, according to real estate data firm RealtyTrac. Home foreclosure filings reported on 739,714 U.S. properties in the second quarter includes default notices, auction sale notices and bank repossessions.
The Reuters/University of Michigan consumer sentiment index rebounded from a 28-year low to 61.2 in July, where most economists had expected no change from the 56.4 reading in June.
Next week's economic reports will likely steal some of the thunder from earnings, with the Consumer Confidence Index due out on Tuesday, the first release of second-quarter Gross Domestic Product coming out on Thursday and the July employment data slated for Friday.
Clothing retailers came under pressure on Friday with Abercrombie & Fitch (ANF) shares dropping after an 8-K filing to the Securities and Exchange Commission that said Chief Financial Officer Michael K. Kramer plans to resign, effective Aug. 18, 2008. Banc of America downgraded the stock to neutral from buy.
Shares of Crocs (CROX) plunged 45% after the footware company cut its second-quarter revenue forecast to $218 million to $223 million from a prior range of $247 million to $258 million. It also slashed its earnings outlook to three to seven cents from 42 to 47 cents a share, with the new estimate including a portion of the previously announced pre-tax charge associated with the shutdown of its Canadian manufacturing operations. Crocs now sees a modest revenue decline for all of 2008 and breakeven earnings. Robert W. Baird downgraded the stock to neutral from outperform.
Among other stocks in the news on Friday, Eastman Chemical (EMN) shares fell after the company posted a second-quarter profit from continuing operations of $1.53 a share, vs. $1.32 a year ago, on a 4% rise in revenue. The results exclude accelerated depreciation costs and asset impairments and restructuring charges. Eastman expects similar results in the third quarter, excluding gains and charges in both periods related to strategic actions. S&P maintained its buy rating on the stock.
Riverbed Technology (RVBD) shares rose after the company posted better-than-expected non-GAAP earnings of 13 cents a share in the sedcond quarter, vs. 16 cents a year ago, as a higher cost of revenue offset a 51% revenue increase. Standard & Poor's maintained its hold opinion, while Baird upgraded it to outperform from neutral.
Juniper Networks (JNPR) shares advanced after the company reported non-GAAP earnings of 28 cents a share for the second quarter, vs. 20 cents a year ago, on 32% higher revenue. S&P maintained its hold opinion, while Friedman Billings Ramsey upgraded the stock to outperform from market perform and Citigroup upgraded it to buy from hold and added the stock to its Top Picks Live list.
Western Digital (WDC) shares fell after the hard disk drive manufacturer reported flat earnings of 94 cents a share for its fourth quarter as higher costs, expenses, charges and an absence of income tax benefit offset a 46% gain in revenue. S&P reaffirmed its hold rating, but Needham downgraded the stock to buy from strong buy.
Cepheid (CPHD) shares plummeted after the molecular diagnostics company reported a non-GAAP loss of six cents a share for the second quarter, vs. a five-cent loss a year ago, as gross margin pressure offset a 55% gain in revenue. The company sees a non-GAAP loss of seven to 10 cents for the full year on revenue of $173 million to $177 million. RBC Capital downgraded the stock to underperform from outperform.
Senate Republicans voted down a bill aimed at curbing oil speculation, which garnered only 50 "yes" votes instead of the 60 votes required to move the bill forward. The House may consider its own anti-speculation legislation next week, Reuters said, but that's just before Congress adjourns for a month-long recess.
Major European indexes traded mostly lower Friday. In London, the FTSE 100 index slipped 0.18% to 5,352.60. In Paris, the CAC 40 climbed 0.67% to 4,377.18, while Germany's DAX index edged down 0.06% to 6,436.71.
In Asia, Japan's Nikkei 225 lost 1.97% to end at 13,334.76, while Hong Kong's Hang Seng index fell 1.50% to 22,740.71.
Treasuries dropped as equities got a boost from surprisingly strong economic reports and lower oil prices. The 10-year note moved down to 98-07/32 for a yield of 4.10% and the 30-year bond dropped to 95-03/32 for a yield of 4.68%.