Major U.S. stock staged a huge rally Friday to cap a wild week of trading. Traders ignored a larger than expected loss from mortgage finance giant Fannie Mae (FNM), focusing instead on a fresh plunge in crude oil prices and a big move higher for the U.S. dollar.
On Friday, the Dow Jones industrial average rose 302.89 points, or 2.65%, to 11,734.32. The broader S&P 500 index added 30.25 points, or 2.39%, to 1,296.31. The tech-heavy Nasdaq composite index rose 58.37 points, or 2.48%, to 2,414.10.
On the New York Stock Exchange, 24 stocks gained in price for every seven that fell. The ratio on the Nasdaq was 19-8 positive. Trading was slow.
The dollar surged, and the euro skidded, as oil and gold futures plunged on the perception a slowing global economy could reduce demand for commodities. Copper, wheat, and corn futures also fell. Bonds, which surged Thursday on a strong Treasury refunding auction, were mixed.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman, declared the U.S. dollar has stopped its long slide because of evidence that European and Japanese economies are slowing. "The dollar’s multi-year bear market is over and given the trending nature of the currency market, a new bull market has begun," he wrote in a note Friday.
On the NYMEX, crude oil for September delivery settled at $115.20 per barrel, 21% off its record high above $147 on July 11. Oil's slide came despite news that it will take at least two weeks to repair the Turkish section of a BP (BP)-led pipeline that was sabotaged earlier this week.
Miller Tabak strategist Tony Crescenzi says "the recent decline in commodity prices has resulted in a capital flight out of numerous asset classes whose fate was linked to commodity prices and into dollar-based assets."
On Friday, Fannie Mae reported a second-quarter loss of $2.54 per share, vs. earnings per share of $1.86 one year earlier, as credit-related expenses (provision for credit losses plus foreclosed property expense) offset a 5.0% revenue rise. The government-sponsored enterprise cited challenging housing and mortgage market conditions, and credit performance. The also company slashed its 35-cent quarterly dividend to 5 cents, and said its core capital of $47 billion has exceeded regulatory requirements.
Offsetting Fannie's gloomy news was a report from MBIA (MBI), which posts second-quarter EPS of $7.14, vs. $1.61 one year earlier. The bond insurer noted that current-quarter results were driven primarily by $3.3 billion in pre-tax unrealized gains on insured credit derivatives due to wider spreads on credit default swaps on MBIA Insurance Corp. The company resumed its share buyback.
In economic news Friday, productivity in the nonfarm business sector rose 2.2% in the second quarter, slightly weaker than the 2.5% market consensus. On a four-quarter basis, productivity is up 2.8%. The 4.3% rise in hourly compensation means that unit labor costs rose a modest 1.5% over the last four quarters, showing no inflationary pressure from labor costs. Manufacturing productivity dropped 1.4% in the quarter because of a sharp drop in output, but remains up 2.6% from a year earlier.
"Overall, productivity growth remains healthy," wrote S&P Economics in a note Friday.
U.S. wholesale inventories increased 1.1% in June, above the 0.9% that markets had expected. The 0.8% increase in inventories in May was revised up a bit to a 0.9% gain. Wholesale sales rose an even larger 2.8% in June, while May sales was upwardly revised to 2.2% (previously 1.6%). Strength in sales was dominated by petroleum, up 12.7%, a function of the big price gains in June. The inventory-sales ratio fell to a record low of 1.06 from 1.08.
The greenback's advance is largely attributable to market expectations of a bottom in
U.S. short-term interest rates, coupled with a diminishing likelihood of further European Central Bank (ECB) rate hikes, says S&P global equity strategist Alec Young. In addition, the ECB dropped its hawkish policy bias highlighting growing risks to economic growth.
Germany and Japan are expected to report economic contraction in their gross domestic product reports next week.
In the U.S., economists are expecting reports next week on exports and imports on Tuesday, business inventories and retail sales on Wednesday, consumer prices on Thursday and the Empire State Index, consumer confidence and industrial production data on Friday.
The bulk of second quarter earnings season is now complete, with just 10% of the S&P 500 index still yet to issue profit reports. Nineteen companies in the index issue results next week.
Among other stocks in the news Friday, McDonald's Corp. (MCD) posted an 8% increase in July global comparable-store sales and a 16% increase in its systemwide sales for its worldwide restaurants. The company posted a 6.7% rise in July U.S. comparable-store sales.
Hormel Foods (HRL) expects third-quarter EPS to be in the range of 37-39 cents, citing higher than expected feed and fuel input costs at its Jennie-O Turkey Store segment. The meat processor adjusted its 2008 EPS guidance to $2.22-$2.28, vs. previous guidance of $2.30-$2.40.
Live Nation (LYV) reported better-than-expected second-quarter EPS of 2 cents, vs. 15 cents one year earlier, as higher costs offset an 18% revenue rise. Wall Street was looking for a 20-cent loss.
Sprint Nextel (S) says it is no longer pursuing the private placement of cumulative perpetual convertible preferred stock, and remains committed to paying down debt and strengthening its balance sheet. The company reiterated its forecast for free cash flow to improve substantially in the second half.
Merrill Lynch & Co. (MER) announced that effective January 15, 2009, and through January 15, 2010, it will offer to buy at par auction rate securities sold by it to its retail clients.
According to an Associated Press report, UBS (UBS) reached a $19.4 billion agreement to buy back bonds in the biggest settlement yet over claims that banks misled investors to buy auction-rate securities, the Massachusetts Secretary of
State's office said. The agreement has been reached between UBS Financial Services Inc. and the federal SEC and regulators in several states, including Massachusetts and New York.
Beazer Homes USA (BZH) posted a third-quarter loss from continuing operations of $2.85, vs. a $3.09 loss one year earlier, as lower home construction and land sales expenses offset a 40% revenue decline. Wall Street was looking for a loss of $2.01.
99 Cents Only Stores (NDN) posted a first-quarter loss of 2 cents per share, vs. 4 cents EPS one year earlier, on slightly lower same-store sales and 4.1% higher total sales. The company said first-quarter sales grew more slowly than anticipated.
Major European stock indexes rose Friday. In London, the FTSE 100 index gained 0.77% to 5,489.20. In Paris, the CAC 40 index added 0.77% to 4,491.85. Germany’s DAX index rose 0.28% to 6,561.65.
Major Asian indexes ended mixed on Friday. Japan’s Nikkei 225 index gained 0.33% to 13,168.41. In Hong Kong, the Hang Seng index fell 0.99% to 21,885.21.
Treasury prices were mixed Friday. The 10-year note was off at 100-19/32 for a yield
of 3.93%, while the 30-year bond was higher at 99-14/32 for a yield of 4.53%.