Stocks Enjoy Santa Claus Rally

Strong earnings from Research in Motion and news that Merrill Lynch might get a cash infusion from a Singapore fund helped spark buying ahead of the holiday weekend

Santa Claus arrived on Wall Street early on Friday, as the major indexes all rose at least 1.5% ahead of the Christmas holiday. Strong profits from Research in Motion (RIMM) and news that Merrill Lynch (MER) may be getting a cash infusion helped spark the buying. There was also stronger than expected spending data, while investors seemed to overlook inflation signs.

Friday's session was also marked by quadruple witching -- when the monthly stock and index option expirations coincide with the quarterly expiration of stock and index futures contracts. Also traders are leaving for the Christmas holidays.

On Friday, the Dow Jones industrial average jumped 205.01 points, or 1.55%, to 13,450.65. The broader S&P 500 index was gained 24.34 points, or 1.67%, to 1,484.46. The tech-heavy Nasdaq composite index climbed 51.13 points, or 1.94%, to 2,691.99.

New data showed U.S. personal income rose 0.4% and spending surged 1.1% in November, far larger increases than economists were expecting.

But the report also raised inflation fears. Drew Matus at Lehman Brothers said in a note that inflation data grew materially worse in the month of November, with the core PCE deflator rising by a solid 0.2% and now running at 2.2% year-over-year. It was just 1.9% three months ago, and the three month annualized rate has accelerated by 1.0%, and the rise is likely to make the Fed less willing to cut rates as the inflation outlook remains poor, Matus said.

"We continue to expect the Fed to cut rates in January but evidence that inflation is accelerating into December could prompt a change even if financial market turbulence continues," Matus wrote.

U.S. consumer sentiment was revised up to 75.5 in December in the final reading on the University of Michigan report, vs. the 74.5 preliminary figure. But that's below the 76.1 final data for November.

NYMEX February crude oil futures spiked $2.14 to $93.20 a barrel as the latest economic reports showed the economy still has strength as consumers still buying. Thus, there is still demand for oil even though inflation still alive, says S&P.

In the troubled credit waters, the Super-SIV plan is dead, according to a report in the Wall Street Journal Friday. The plan was originally proposed by the Treasury and involved Citigroup(C), Bank of America (BAC) and J.P. Morgan (JPM), but has struggled to achieve its original $100 billion funding goal and been rendered obsolete by these banks shifting the SIV assets back on to their own balance sheets, notably Citigroup.

"The news is neither good nor bad per se, since deep-pocketed MidEast and Asian investors have stepped up on a unilateral basis to take large stakes in various institutions with their massive dollar reserves," wrote Action Economics on Friday.

Among stocks in the news Friday, Research in Motion (RIMM) reported earnings of 65 cents per share, vs. 31 cents a year ago, as revenue rose sharply. The firm expects fourth quarter earnings of 66 to 70 cents per share. A Bear Stearns analyst upgraded the stock from peer perform to outperform. RIM shares jumped nearly 11% to $118.63.

Merrill Lynch (MER) may get a $5 billion capital infusion from Temasek Holdings, the investment fund controlled by the Singapore government, as Merrill battles losses from the credit crisis, the Wall Street Journal reports.

Circuit City Stores (CC) reported a $1.26 loss per share in the third quarter, vs. a 12-cent loss a year ago as sales fell 3.1% and the company incurred a $102.8 million tax expense. The electronics retailers' results were worse than expected. The shares plunged nearly 29% to $4.75 -- a new 52-week low.

Keycorp (KEY) expects a loss in the fourth quarter of 5 cents per share. The bank expects to add to reserves for loan losses, volatility on the credit markets and other expenses.

Micron Technology (MU) reported a loss of 34 cents in the first quarter, vs. 21 cents a year ago.

European indexes finished higher Friday. In London, the FTSE 100 index was up 1.4% to 6,434.1. Paris' CAC 40 index rose 1.7% to 5,602.77, and in Germany the DAX index moved 1.7% higher to 8.002.67.

In Asia, Tokyo's benchmark index, the Nikkei 225, was up 1.5% to 15,257. In Hong Kong, the Hang Seng index jumped 2.26% to 27,626.92.

Treasury Market

Treasuries suffered big losses as strong November personal consumption, along with a higher core prices component, eased fears of economic recession and stoked concerns over inflation. The data contributed to an asset allocation shift into equities, which added pressure on bonds.

The 10-year note sank 30/32 to 100-22/32 for a yield of 4.16%. 30-year bond dropped 52/32 to 106-27/32 for a yield of 4.57%. The spike higher in the 10-year yield today suggests the uptrend from early December could have higher to go in the weeks ahead.

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