Stocks Finish Modestly Higher

Credit worries returned to the spotlight Monday, this time involving insurance giant AIG. Investors also weighed higher oil prices

Major U.S. stock indexes closed higher Monday, led by gains in issues tied to oil, semiconductors, household products, retailing, and casinos. Trading was thin and choppy, with economic uncertainty keeping the buying activity in check.

Indexes recovered from earlier losses sparked by credit worries involving insurance giant American International Group (AIG). Shares of the insurance giant plunged 12% Monday after its auditors raised concerns about the valuation of derivatives in its portfolio.

Oil stocks were among the biggest winners in Monday’s session, after crude shot higher on news of the shutdown of a major Valero Energy (VLO) refining plant in Delaware and Venezuela’s threats to cut off its oil exports to the U.S.

Stirrings of M&A activity caused some early volatility, reports S&P MartketScope.

On Monday, the Dow Jones industrial average finished with a gain of 57.88 points, or 0.48%, to 12,240.01, with weakness in AIG limiting gains for the blue-chip benchmark. The broader S&P 500 index added 7.84 points, or 0.59%, to end the session at 1,339.13. The tech-heavy Nasdaq composite index rose 15.21 points, or 0.66%, to close at 2,320.06.

The better tone in the Nasdaq was supported by the earlier rejection of Microsoft's (MSFT) $45 billion bid for Yahoo (YHOO), and news that Motorola (MOT) and Nortel Networks (NT) are considering combining some of their wireless operations, says Action Economics. Strength in Apple (AAPL) shares after an analyst upgrade of the stock also lifted sentiment.

Activity in the broader market was marginally positive, with 16 shares advancing in price for every 15 that declined on the New York Stock Exchange. Nasdaq breadth was 15-14 positive. Technical analysts are looking for the market to establish a bottom, says S&P MarketScope, but expect major indexes to test their recent lows first.

The Dow industrials will be getting a bit of a makeover next week. On Monday, Dow Jones announced that Bank of America (BAC) and Chevron (CVX) will replace Altria Group (MO) and Honeywell International (HON) in the blue-chip benchmark, effective with the opening of trading on Feb. 19.

Shares of AIG fell 11% Monday after the company said in a Form 8-K filing that it has been advised by its independent auditors that they have concluded that at December 31, 2007, AIG had a "material weakness in its internal control" over financial reporting and oversight relating to the fair value valuation of its super senior credit default swap portfolio. The company says it should clarify and expand its prior disclosures relating to methodology and data inputs used to determine fair values of this default swap portfolio in respect of multi-sector CDOs.

The AIG news sparked a 9.2% drop in the S&P Multi-line Insurance index on Monday.

The market received news that Yahoo will reject the surprise $44.6 billion buyout offer by Microsoft. The news means Microsoft may either raise its offer or launch a hostile bid for Yahoo. The Financial Times reports Yahoo is trying to restart merger talks with AOL, owned by Time Warner (TWX), as a defense against the Microsoft bid.

Also, airlines Delta (DAL) and Northwest (NWA) are reportedly in talks, and Motorola and Nortel are contemplating a joint venture.

Market players were treated to some diverging views on the health of the economy Monday. Goldman Sachs economist Jan Hatzius said in a note Monday that “There is no longer much doubt in my mind that the US economy is now in recession.”

U.S. Treasury Secretary Henry Paulson, a former Goldman hand, had a different view. Paulson told the G7 weekend meeting in Tokyo he believes the U.S. will continue to post economic growth and "if you are growing, you are not in a recession."

Traders continue to look for more evidence that the economy is slowing, but there was little new data on Monday. The market will have to wait until Wednesday to get its first big releases of the week: January retail sales and business inventory figures for December. Initial jobless claims and an estimate of the December trade gap arrive on Thursday, while data on import prices and industrial production will be closely watched on Friday.

March WTI crude oil futures rose $1.82 to $93.59 per barrel Monday following a report

that Valero shut its Delaware refinery because of a power failure caused by high winds. Valero is in the process of restarting the units. Some buying was sparked by reports Venezuelan President Hugo Chavez threatened to halt oil exports to the U.S. after Exxon Mobil (XOM) took action to freeze $12 billion of oil assets.

Among other stocks making headlines in Monday's session, Hasbro (HAS) saw strong sales in the fourth quarter, posting earnings of 84 cents per share, vs. 62 cents a year ago, as revenue rose 16%.

Google (GOOG) plans to partner with Chinese online music provider to offer free music downloads.

Loews Corp.-Carolina Group (CG) reported earnings of $1.18 per share, vs. $1.26 per share, as higher expenses offset a 2.1% rise in sales for the tobacco firm.

Darden Restaurants (DRI) said it sees third-quarter EPS from continuing operations of 78-80 cents (including costs and adjustments). It also said that through Feb. 10, Red Lobster, Olive Garden and LongHorn Steakhouse's combined U.S. same-restaurant sales for the thirds quarter were up 1.2% over the comparable prior-year period.

E*Trade Financial Corp. (ETFC) expects to generate $80 million by selling the assets of its RAA Wealth Management business to PHH Investments.

MBIA (MBI) is the subject of an SEC filing showing Warburg Pincus LLC owns a 16.5% stake in the troubled bond insurer.

European stocks ended lower Monday as the European Central Bank indicated it is not in a hurry to cut interest rates. In London, the FTSE 100 index was off 1.32% to 5,707.70. In Paris, the CAC 40 index fell 0.57% to 4,682.70. Germany's DAX index shed 0.35% to 6,743.54.

In Hong Kong, the Hang Seng index dropped 3.64% on Monday, to 22,616.11. The Japanese market was closed.

Treasury market

Treasuries traded modestly higher in Monday afternoon, reflecting renewed concerns over the health of the financial sector. These worries stemmed from news of losses in AIG's credit-default swap portfolio and media reports about speculation of an executive shakeup at the insurer. The 10-year note rose 07/32 in price to 98-01/32 for a yield of 3.62%, while the 30-year bond climbed 10/32 to 99-16/32 for a yield of 4.40%.

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