Stocks Climb on Claims, Retail News

Indexes recouped some of their recent losses Thursday, despite news that S&P downgraded bond insurers MBIA and Ambac

Major U.S. stock indexes managed to break out of their recent funk Thursday, rallying on a decline in weekly initial jobless claims, better-than-expected May sales figures from major retailers, and news of a possible merger of wireless communications companies.

The market seemed to ignore more credit troubles. Comments from two Federal Reserve officials Thursday were a reminder of the daunting challenges faced by the U.S. financial system. Then late in the day, Standard & Poor's lowered the financial strength ratings on bond insurers MBIA (MBI) and Ambac (ABK) to AA from AAA.

On Thursday, the blue-chip Dow Jones industrial average rose 213.97 points, or 1.73%, to 12,604.45. The broader S&P 500 index added 26.85 points, or 1.87%, to 1,404.05. The tech-heavy Nasdaq composite index rose 46.8 points, or 1.87%, to 2,549.94.

Hopes are rising that "the worst may be over" for the U.S. economy, says Robert Bacarella, fund manager at the Monetta Mutual Funds. That allowed stocks to bounce back after being on a downtrend for the past several trading sessions. "This is a relief rally," he says.

On the New York Stock Exchange, 25 stocks were higher for every six in negative territory. On the Nasdaq, the ratio was 21 to 7 positive.

U.S. initial jobless claims dropped 18,000 to 357,000 last week, from 375,000 the week before. "That's much better than expected," Action Economics says, and the lowest in six weeks.

Also, retailers reported better-than-expected sales in May, which some saw as evidence that consumers were spending federal stimulus checks. For example, Wal-Mart (WMT) saw U.S. same-store sales increase 3.9% excluding fuel. Total sales rose 9.8% at the world's largest retailer. It expects same-store sales to grow 2% to 4% in June, excluding fuel.

"The downward spiral in economic activity has probably leveled off," says Peter Cardillo, chief market economist at Avalon Partners. "The market is beginning to look forward."

Traders may have been anticipating a better-than-expected May jobs report, scheduled for release on Friday morning. Economists expect the payrolls to fall another 50,000, and the unemployment rate is expected to rise from 5.0% to 5.1%.

Oil rebounded Thursday. On the NYMEX, crude oil for July delivery was up $5.87 to $128.17 per barrel. Prices jumped and the U.S. dollar fell after the president of European Central Bank said it may raise interest rates to fight inflation.

Shares in MBIA and Ambac fell after the S&P downgrade. The rating agency also placed the firms’ ratings on CreditWatch with negative implications.

“[W]e believe continuing deterioration in key areas of the U.S. residential mortgage sector and related CDO structures will place increasing pressure on capital adequacy” of the firms, said S&P in a press release.

Verizon Wireless, jointly owned by Verizon Communications (VZ) and Vodafone Group (VOD), is reportedly in advanced talks to buy regional wireless company Alltel Corp. for about $27 billion. The deal would make Verizon the U.S.'s largest wireless carrier, surpassing AT&T (T).

Just seven months ago, Alltel was bought by private equity firm TPG Capital and a unit of Goldman Sachs (GS) for $27.5 billion. But, in another sign of the credit crunch, banks that financed the deal now want to unload the debt, the Wall Street Journal reports.

Philadelphia Federal Reserve Bank President Charles Plosser said the Fed should be careful about encouraging excessive risk by continuously rescuing the financial system, and must set a clear benchmark for when its role as lender of last resort should be employed. Plosser's comments came as investors worried about the possibility that Lehman Brothers could run into trouble similar to that of Bear Stearns, whose problems prompted the Fed to orchestrate a buyout of the firm by JP Morgan (JPM).

Meanwhile, The Wall Street Journal reported Thursday that Richmond Fed President Jeffrey Lacker, in a London speech and followup interview, said lending programs the central bank has created to combat the credit crisis distort private markets, encourage risky behavior, and could endanger the Fed's independence.

Top banking regulators testified at a U.S. Senate hearing on the "state of the banking industry" Thursday.

Among stocks in the news Thursday, Costco Wholesale Corp. (COST) saw May same-store sales jump 7%, while international sales were 15% higher and total sales rose 12%.

The Gap (GAP) saw May same-store sales drop 14%, and total sales fell 8%.

Continental Airlines (CAL) says it will cut flights, reducing domestic mainline departures 16% by the end of the year, with available seat miles cut by 11%. About 3,000 employee positions will be eliminated, and 67 aircraft will be retired in 2008 and 2009.

Abercrombie & Fitch (ANF) saw May same-store sales fall 1%, as total sales rose 8%.

Monsanto (MON) is announcing a goal of doubling its 2007 gross profit by 2012.

Del Monte Foods Co. (DLM) posted earnings of 25 cents per share, vs. 18 cents a year ago, as sales rose 11%. The firm expects net sales growth of 5% to 7% in its 2009 fiscal year.

ADC Telecommunications (ADCT) posted earnings of 14 cents per share, vs. 72 cents a year ago, despite increasing revenue 16%. The firm expects sales to increase 15% to 16% this year.

Smithfield Foods (SFD) posted earnings of 1 cent per share, vs. 46 cents a year ago. Sales rose 20%, but the firm dealt with higher costs and lower live hog prices.

Major European stock indexes were mostly lower Thursday. In London, the FTSE 100 index rose 0.42% to 5,995.30. In Paris, the CAC 40 index edged down 0.16% to 4,907.06. Germany's DAX index lost 0.34% to 6,941.83.

Major Asian indexes were mixed. Japan's Nikkei 225 index fell 0.65% to 14,341.12. In Hong Kong, the Hang Seng index rose 0.55% to 24,255.29.

Treasury market

Treasury prices fell Thursday. The two-year note fell 04/32 to 100-07/32 for a yield of 2.516%; the ten-year note dropped 18/32 to 98-20/32 for a yield of 4.05%; and the 30-year bond was off 27-32 to 94-02/32 for a yield of 4.75%.

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