Stocks End Mostly Higher

Optimism over better-than-expected jobs and factory orders reports appeared to trump worries about resurgent oil prices and a Countrywide credit downgrade

Major stock indexes finished mostly higher on Friday, as stocks managed to rebound from selling caused by S&P Ratings' downgrade of Countrywide Financial's (CFC) debt to junk. The downgrade showed that financial problems haven't disappeared and the economy may still be in a possible recession.

Soaring crude oil prices and weakness in shares of Sun Microsystems (JAVA) derailed an early morning surge on better-than-expected April jobs figures, a surprise jump in factory orders in April and some positive earnings reports.

On Friday, the Dow Jones industrial average closed 48.20 points, or 0.37%, higher at 13,058.20. The broader S&P 500 index rose 4.56 points, or 0.32%, to 1,413.90. The tech-heavy Nasdaq composite index fell 3.72 points, or 0.15%, to 2,476.99.

The Dow ran into resistance at 13,125, S&P MarketScope noted, while the Nasdaq found resistance at 1,423. On the New York Stock Exchange, 17 stocks were higher in price for every 13 that declined. Trading breadth on the Nasdaq was 15-12 negative.

Bonds were lower on the jobs and factory orders data. The dollar was up, but off session highs. Gold futures were higher despite the dollar’s strength as oil futures spurted.

Standard & Poor's Ratings Services cut its ratings on Countrywide and its Countrywide Home Loans unit to BB+ from BBB+ on Bank of America's disclosure in a May 1 filing to the Securities and Exchange Commission that it may not guarantee $38 billion in Countrywide debt as part of its proposed merger with the mortgage lender.

"What Bank of America is signaling is that there is still a lot of risk in that business and they’re not going to stand behind and backstop it," says Art Hogan, chief market analyst at Jefferies & Co. in Boston.

The next big wave of adjustable rate mortgage resets is slated to occur between May and July, which could spark another round of delinquencies in mortgage payments and spell more trouble for the structured products market, warns Joe Battipaglia, market strategist at Stifel, Nicolaus & Co. in Philadelphia. That's also playing into BofA's stance on Countrywide's debt, he says.

A plunge in Sun's shares paced the Nasdaq’s decline. The company posted a GAAP loss of four cents per share, vs. a seven-cent profit a year ago, on slightly lower revenue. The net loss included charges related to the acquisition of MySQL, which reduced earnings by about four cents per share. Sun plans to cut up to 2,500 jobs. Bear Stearns downgraded the stock to peer perform from outperform.

While a fairly strong first-quarter earnings season deserves part of the credit for repairing some of the damage done to the equities market before the Bear Stearns bailout, Hogan at Jefferies says he expects the focus to shift to macroeconomic events such as the direction of commodity prices.

In the short to medium term, the strength of the dollar is likely to help commodity prices pull back and "that could be the next catalyst that takes us to a higher level," he says. "But it may not play out immediately. It may take weeks instead of days."

On the economic data front Friday, nonfarm payrolls dropped 20,000 in April, a pleasant surprise to a market that was braced for a much bigger loss of 73,000 jobs. The unemployment rate slipped back to 5.0% from 5.1% instead of ticking up to 5.2% as had been expected.

Manufacturing jobs dropped 46,000 and construction jobs fell 61,000, partly offset by an 81,000 increase in the private service industry, led by a 52,000 gain in Education & Health. Government payrolls increased 9,000.

The workweek contracted slightly to 33.7 hours, which matched expectations, after the stronger-than-expected 33.8 hours in March. Hourly earnings climbed just 0.1% rather than the anticipated 0.3% increase. The household employment measure surged 362,000.

Despite the better-than-expected payroll headline and drop in the unemployment rate, Action Economics said the report has lowered its forecasts for personal income and industrial production.

The data fit comfortably with the Fed's shift at this week's policy committee meeting to a more cautious stance and the smaller quarter-point easing in the Fed funds rate. The reduced drop in payrolls, the outright decline in the unemployment rate to 5.0% and the restrained 0.1% wage gain have diminished both economic and inflation risk, though the weak hours-worked figures suggest there will still be significant weakness in the remaining monthly figures for April, and the Fed is far from out of the woods on inflation risks, Action Economics said.

Factory orders jumped 1.4% in March, sharply above market expectations of a flat report. Durable orders were revised upward to plus 0.1% from the negative 0.3% reported last week. Nondurable orders (and shipments) rose 2.6%, in part because of an 8.7% jump in petroleum and products, which is price-caused. But even excluding petroleum, nondurable orders were up 1.1%. Factory shipments rose 1.1%, and were up 1.6% excluding transportation. A 0.9% increase in inventories adds to the support for first-quarter growth.

The data are much stronger than expected, and suggest a better trajectory for manufacturing going into the second quarter.

In spite of the better-than-expected numbers, "it's evident that the economy is decelerating, but the jury is still out on how much more deceleration we’re going to witness and what effect it will have on [corporate] profits," says Stifel's Battipaglia. He expects stocks to stay within a fairly narrow range and thinks they may be at the upper end of that range now.

The Federal Reserve announced Friday additional efforts to deal with the global credit crisis, in coordination with the European Central Bank and the Swiss National Bank. The Fed said it was boosting the amount of emergency reserves it supplies to U.S. banks to $150 billion in May, from the $100 billion it supplied in April. The efforts are designed to increase reserves so that banks won't hesitate to lend to consumers and businesses, which would make the current economic slowdown even more severe.

Although M&A activity has been muted since the credit crisis took hold, expectations of an economic recovery could change that.

As of the market close, Microsoft (MSFT) had not made a hostile takeover offer for Yahoo Inc. (YHOO), which the Wall Street Journal said could come as early as Friday. The software giant is reportedly willing to raise the unsolicited bid it made in February from around $29.48 -- based on Microsoft's closing price on May 1 -- to about $33 per share, while Yahoo is believed to be holding out for an offer worth roughly $37 per share.

Oil futures, which had fallen the past three days, soared Friday on what appeared to be technical buying. June WTI crude oil futures were up $3.79 per barrel to $116.31. Dealers cited by S&P MarketScope say they had expected June WTI crude futures to rebound from the $110 level back to $115, but not in one day.

Among the stocks in the news on Friday, shares of KBR (KBR) rose 5.9% after the engineering and construction company spun off from Halliburton (HAL) reported improvement in first-quarter earnings to 58 cents from 17 cents per share a year ago on a 24% revenue increase.

Dolby Laboratories (DLB) shares ended 10.7% higher after the audio technology designer posted earnings of 49 cents per share, vs. 34 cents in the second quarter of 2007, on a 34% revenue rise. Dolby sees 2008 revenue of $585-$615 million and EPS of $1.47-$1.57.

European stock indexes finished higher Friday. In London, the FTSE 100 index jumped 2.11% to 6,215.50. In Paris, the CAC 40 index rose 1.46% to 5,069.71 and in Germany, the DAX index gained 1.36% to trade at 7,043.23.

Asian indexes finished higher. Japan's Nikkei 225 index climbed 2.05% to 14,049.26. In Hong Kong, the Hang Seng index advanced 1.89% to 26,241.02.

Treasury Market

Treasury bonds continued to fall in price on the back of only moderately weaker jobs data and strength in equities. The 10-year note was lower at 97-03/32 for a yield of 3.86%, while the 30-year bond was off at 96-23/32 for a yield of 4.58%.

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