What looked like another nasty day for U.S. stocks ended with modest gains for major indexes. Stocks closed higher Friday, erasing steep earlier losses, after the White House and Treasury Dept. said funds from the Wall Street bailout might be tapped to help stave off bankruptcies in the U.S. auto sector. Late Thursday, the U.S. Senate rejected a proposed bailout package for U.S. auto makers.
Also commanding attention Friday: The arrest of respected investor Bernard Madoff on charges of securities fraud, and government data showing drops in November retail sales and wholesale prices.
Nasdaq-listed shares outperformed the broader market.
Bonds rose in choppy trading, while the dollar index flattened. Gold and crude oil futures were lower.
On Friday, the Dow Jones industrial average finished higher by 64.59 points, or 0.75%, at 8,643.86. The broad S&P 500 index added 6.14 points, or 0.70%, to 879.73. The tech-heavy Nasdaq composite index gained 32.84 points, or 2.18%, to 1,540.72.
Major indexes in Europe finished solidly in the red, with losses of 2.47% in London, 2.80% in Paris, and 2.18% in Frankfurt. Asian equity markets finished with sizable losses, with Tokyo stocks falling 5.56%, Hong Kong down 5.48%, and Shanghai lower by 3.81%.
Next week, all eyes will be on the Federal Reserve's two-day policy meeting on Monday and Tuesday, as its policy committee sits down to discuss the Fed’s increasingly unconventional strategy for shoring up the financial markets and arresting the economy's slide. Economists currently expect the policymakers to cut the target interest rate on the overnight funds banks trade with each other from 1% to 0.5%. The trouble is, the markets may have a difficult time finding any meaning in such a cut. Since Dec. 4, overnight funds have been trading at a market rate of 0.06% -- effectively zero and nowhere near the current 1% target.
The markets will be looking for greater transparency in the Fed’s actions in recent weeks and what the target of Fed policy actually is right now. In particular, the markets want to know if the Fed is moving toward a formal program of quantitative easing, which basically floods the banking system with more funds than are required to hold the target rate at a given level. This strategy, commonly referred to as “printing money,” was last implemented by the Bank of Japan in an effort to pull the Japanese economy out of its deflationary downturn.
Thursday night, a frantic, last-ditch attempt to forge a relief package for auto industry collapsed in the U.S. Senate, dealing a giant blow to the immediate hopes of the Big Three, due to a sharp partisan dispute over the wages paid to workers at the manufacturing giants, reports the Wall Street Journal. Senate Majority Leader Harry Reid of Nevada suggested the $14 billion wouldn't be revisited until January. "It's over with," he said. Separately, General Motors (GM) reportedly has hired bankruptcy lawyers.
But on Friday, the White House said it's considering accessing funds from the Troubled Asset Relief Program (TARP) to prevent the collapse of the U.S. auto industry. The announcement marked a reversal of the Bush administration's earlier opposition to using TARP funds to aid General Motors, Ford Motor Co. (F), and Chrysler, and followed the Senate's rejection Thursday night of a $14 billion auto bailout package.
Shares of GM and Ford were lower Friday.
Bank of America (BAC) is working on a plan to eliminate 30,000 to 35,000 positions over the next three years, reflecting the pending merger with Merrill Lynch (MER) and the weak economic environment, which is affecting the level of business activity. BofA expects to have a final plan early in 2009.
Madoff, a former Nasdaq stock market chairman, was arrested on a securities fraud charge Thursday, reports the Associated Press, accused of running a fraudulent investment business that lost at least $50 billion before he confessed to senior employees it was a "giant Ponzi scheme," authorities said. Madoff, 70, the founder of Bernard L. Madoff Investment Securities LLC, maintained a separate and secretive investment-advising business that served between 11 and 25 clients and had a total of about $17.1 billion in assets under management, prosecutors said.
Late Thursday, the Securities and Exchange Commission announced a civil securities fraud charge against Madoff and said it was seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm.
Andrew M. Calamari, associate director of enforcement in the SEC's New York office, said the SEC was alleging "a stunning fraud that appears to be of epic proportions."
In economic news Friday, U.S. business inventories fell 0.6% in October, from a revised -0.4% in September (-0.2% previously), a little weaker than expected. October sales fell 3.5% following a revised -2.4% in September (-2.0% previously). Retail inventories slipped 0.1%, with autos and parts declining 0.1%; excluding autos, retail inventories declined 0.1%. The inventory-sales ratio widened further to 1.34 from 1.30 in September, and is up from 1.23 in June.
U.S. consumer sentiment improved to 59.1 in the preliminary December reading for the Reuters/University of Michigan index, compared to the 55.3 November print. The index was at 75.5 a year ago. All of the improvement was in the current economic conditions index, which rose to 69.4 from 57.5. The economic outlook index fell to 52.4 from 53.9. The 1-year ahead median inflation index sunk to 1.7% from 2.9%. The 5- to 10-year ahead index fell to 2.7% from 2.9%.
The data are better than expected, and could be a function of the drop in gas prices, as well as the economic support from myriad bailout and stimulus packages, says Action Economics.
The U.S. producer price index fell 2.2% in November, but the core index, which excludes food and energy prices, was up 0.1%. Headline PPI remained in positive territory on a year-over-year basis, up 0.4% from 5.2% in October. The core year-over-year rate slipped to 4.2% from 4.4%. The headline year-over-year rate should drop to a flat reading in December, and -0.8% by January, if current prices hold, according to Action Economics.
U.S. retail sales fell 1.8% in November, and were down 1.6% excluding autos. October's 2.8% plunge was revised down slightly to -2.9%, and the 2.2% drop ex-autos was revised to -2.4%. Those are all in the range of expectations. Sales excluding autos, gas, and building materials were up 0.5% from a revised -0.7% in October (-0.5% previously). Gas station sales declined 14.7%. Vehicles and parts sales declined 2.8%. Building materials were down 1.2%, although furniture sales inched up 0.2%. Clothing sales rose 0.8%. Electronics were surged 2.8%. Sales at non-store retailers (internet) declined 1.3%. With the mix of data that were close to expectations, the markets may not react much to the number, says Action Economics.
In other U.S. markets Friday, Treasuries traded up slightly in the afternoon after swinging widely in either direction throughout the day. The 10-year note was up 05/32 at 110-04/32 for a yield of 2.58%. The 30-year bond was up 02/32 at 127-21/32 for a yield of 3.07%.
The U.S. dollar index was higher at 83.71.
January West Texas Intermediate crude oil futures were down $1.60 to $46.38 per barrel, well above session lows. Crude futures initially plunged more than $4 a barrel on the Senate news amid fears of a prolonged recession that would cut fuel demand.
February gold futures fell $5.00 to $821.60 per ounce, slipping from two-week highs reached Thursday.