Stocks Finish Higher in a Volatile Session

A late rally allowed major indexes to post gains of better than 2%. Investors weighed a new round of gloomy economic data

U.S. stocks finished higher Wednesday in a see-saw session marked by countering bouts of bargain hunting and profit taking.

Earlier in the session, major indexes sank on a fresh batch of dismal U.S. economic news -- including reports on private employment and the outlook for the service sector -- marking a partial reversal of Tuesday's closing market gains.

Indexes turned higher near midsession, only to reverse course after the release of the Federal Reserve's Beige Book report of economic conditions Wednesday afternoon renewed investor uncertainty about the economy and the market's prospects for heading higher. But the bargain hunters stepped back in late in the session to push indexes back into positive territory.

Gains in defensive issues (Coca-Cola Co. (KO), McDonald's Corp. (MCD)), biotechs (Genzyme Corp. (GENZ), Gilead Sciences (GILD)), financials (Morgan Stanley MS, Merrill Lynch MER), retailers (JCPenney (JCP)), and homebuilders (Toll Brothers (TOL) offset declines in commodities issues (Alcoa (GS)).

Traders also weighed glum earnings news from Research in Motion Ltd. (RIMM), and word from Freeport-McMoRan Copper & Gold (FCX) that it was lowering production and suspending its dividend.

Bonds were higher. The dollar index was higher. Gold futures were off. Crude oil futures turned lower.

European equity markets finished higher Wednesday, with major indexes higher by 1.07% in London, 0.44% in Paris, and 0.78% in Frankfurt. Markets in Asia closed with gains, with Tokyo stocks rising 1.79%, Hong Kong higher by 1.36%, and Shanghai climbing 4.01%.

On Wednesday, the Dow Jones industrial average finished higher by 172.60 points, or 2.05%, at 8,591.69. The broad S&P 500 index added 21.93 points, or 2.58%, to 870.74. The tech-heavy Nasdaq composite index rose 42.58 points, or 2.94%, to 1,492.38.

On the New York Stock Exchange, 21 stocks were higher in price for every 11 that declined. The ratio on the Nasdaq was 17-11 positive.

Research in Motion said it sees third-quarter revenue of $2.75 billion-$2.78 billion, vs. its previous forecast of $2.95 billion-$3.10 billion due to foreign currency effects and lower-than-estimated unit shipments of existing products. The company cut its 89 cents-97 cents third-quarter EPS forecast to 81 cents-83 cents (adjusted), which excludes the negative impact on its tax rate due to forex.

Freeport-McMoRan Copper & Gold (FCX) announced reductions in copper production and sales of 200 million pounds in 2009 and 500 million pounds in 2010 in response to the recent sharp decline in copper and molybdenum prices. The company also announced that it has suspended its stock dividend in response to weak conditions in commodity and financial markets.

General Motors (GM) submitted its restructuring plan to Congress; the automaker says 22 of 24 new vehicle launches in 2009-12 will be more fuel-efficient cars and crossovers. GM sees full compliance with the 2007 Energy Independence and Security Act; a reduction in brands, nameplates, and retail outlets; full labor cost competitiveness with foreign manufacturers in the U.S. no later than 2012. The company intends to achieve further manufacturing and structural cost reductions through increased productivity and employment reductions; and a balance sheet restructuring, supplementing liquidity through Federal assistance.

Goldman Sachs Group (GS) is weighing whether to launch an Internet banking operation, according to people familiar with the situation cited in a Wall Street Journal report. If Goldman goes ahead, the new unit will seek deposits that can be used to fund various businesses now that Goldman is a bank-holding company. The possible online bank hasn't been named yet, and many details of its operating plans are undecided. It is likely to offer a range of savings products, such as certificates of deposit, people familiar with the matter said.

American International Group (AIG) said that a financing entity created by the Federal Reserve Bank of New York, designed to mitigate AIG's liquidity issues in connection with its credit default swaps and similar derivative instruments (CDS) written on multi-sector collateralized debt obligations (CDOs), has been launched. The new entity is designed to buy CDOs on which AIG Financial Products Corp. (AIGFP) has written CDS contracts; to date, $46.1 billion of such CDOs have been purchased, with a related notional amount of CDS transactions terminated in connection with such purchases.

In economic news Wednesday, the Fed's Beige Book said that overall economic activity weakened across all Fed Districts, to no one's surprise. Declines were noted in retail sales, with vehicle sales "down significantly" in most regions. The survey said that tourism spending was "subdued" and that reports on the service sector were "generally negative" while manufacturing activity declined and new orders were soft.

Nearly all Districts said the housing markets remained weak, "characterized by reduced selling prices and low but stable sales activity". The report also said that commercial real estate markets "weakly broadly", and that lending tightened for both residential and commercial loans.

The agriculture and energy sectors, bright spots until recently, also softened as commodity prices declined. The survey said that signs of labor market slowing were evident in most Districts, and demand for temporary staff declined. Wage and price pressures were subdued.

The Institute for Supply Management's U.S. non-manufacturing composite index fell to a new record low at 37.3 in November after dropping 5.8 points to 44.4 in October as the pace of decline in the service sector accelerated (the index was 52.4 a year ago). The business activity index fell to 33.0 from 44.2. Weakness was broadbased: The employment index dropped over 10 points to 31.3 from 41.5. New orders fell to 35.4 from 44.0. Export orders plunged to 34.5 from 50.0. Prices paid were 36.6 from 53.4, less than half of the 84.5 high for the year set in June. The manufacturing and non-manufacturing index was 37.2 versus 43.8 in October.

The U.S. ADP private payrolls survey showed a 250,000 decline in jobs in November after a revised -179,000 in October (-157,000 previously). Construction jobs declined 44,000 on the month and have dropped for 24 consecutive months. Manufacturing jobs declined over 100,000, while service producing jobs fell 92,000.

"The ADP figure of -250,000 for November is actually a tad less weak than we had assumed, though it is certainly in line with the assumption of accelerating job losses in November," says Action Economics.

The ADP data precede November job figures due Friday from the U.S. government, which also are expected to be weak.

U.S. third-quarter nonfarm productivity growth was revised up to 1.3%, above the median of 0.9% from the preliminary figure of 1.1%. Output growth was revised down to -7.8%, however, from -1.7%, the largest drop since the first quarter of 1991. This left a downward revision in the unit labor cost gain to 2.8% from 3.6%, following a bigger second-quarter downward revision to -2.0% from -0.1%.

Challenger Grey & Christmas reported announced U.S. job cuts climbed 61% in November to 181,700 compared to October and are up 148.4% year-over-year (the largest increase since January, 2002). For the year to date, announced job cuts have totaled 1.057 million, up 46% over the same period last year.

Not surprisingly, notes Action Economics, financial companies paced the declines with over 91,000 in cuts for the month. Retail followed with over 11,000 reductions, with computer and electronic firms adding a combined 15.35,000. Challenger also noted announced hirings rose 3,700 to 11,200.

The Mortgage Bankers' Assn. reported a record surge in its mortgage applications index, up 112.1% in the week ended Nov. 28 to 857.7 (the highest level since March 21). The spike "suggests the Fed's latest program of buying [mortgage-backed securities] might just do the trick and unlock the credit markets," says Action Economics.

In other U.S. markets Wednesday, Treasuries rose modestly on the back of the weak November ISM services report and poor ADP employment numbers. The 10-year note rose 09/32 in price to 109-14/32 for a yield of 3.66%. The 30-year bond was up 12/32 to 125-13/32 for a yield of 3.17%. Treasuries are benefiting from speculation that the Federal Reserve will purchase Treasuries in order to provide liquidity to frozen credit markets.

The U.S. dollar index was higher at 86.94.

January West Texas Intermediate crude oil futures finished the session off 17 cents to $46.79 per barrel after traders more closely examined the U.S. government inventory data. Headlines looked bullish for oil, says S&P MarketScope, with the EIA report showing crude oil supplies fell 456,000 barrels to 320.4 million barrels in the week ended Nov. 28, distillate stocks eased 1.7 million barrels and gasoline stocks dropped by 1.5 million barrels. However, a closer look at the report revealed that the draw was due to weak refinery runs as refiners cut operations, according to Bill O'Grady of Confluence Investment Management. "The whole key to this is consumption. Weak demand from the U.S. and China is particularly concerning," he says.

February gold futures were lower at $768.80 per ounce.

Among Wednesday's other stocks in the news, Omnivision Technologies (OVTI) posted a second-quarter GAAP loss of 10 cents per share, vs. 36 cents EPS one year earlier, on a 29% revenue decline. Based on current trends, the company sees third-quarter revenues of $80 million-$100 million, and a GAAP net loss per share of 24 cents-37 cents. Baird downgraded the shares to underperform from neutral.

Infineon Technoilogies AG (IFX) posted a fourth-quarter net loss of €763 million, vs. a €280 million loss one year earlier, on a 2.3% revenue rise. The company notes charges in the fourth quarter in connection with its cost-reduction program. It sees fiscal 2009 first-quarter revenues down 30% compared to the prior quarter, total segment profit negative in the quarter, with a total segment profit margin of negative mid-to-high teens percentage, mainly due to the sharp revenue decrease and low capacity utilization. It sees fiscal 2009 revenues down at least 15% from fiscal 2008, with total segment profit to decrease significantly.

Marvell Technology Group (MRVL) reported third-quarter non-GAAP EPS of 23 cents, vs. 14 cents one year earlier, on a 4.3% revenue rise. Wall Street was looking for EPS of 20 cents-21 cents.

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