Stocks Bounce Back

A report from S&P said an end to subprime pain "is now in sight," even as a Carlyle fund collapsed. Gold topped $1,000 per ounce

by Ben Steverman

Despite a wave of bad news on the credit markets and economy, stocks bounced back Thursday on hopes that the end of the credit crisis is in sight.

A report from Standard & Poor's estimated that global losses from subprime debt could hit $285 billion, but added "the end of write-downs is now in sight for large financial institutions." (Read the S&P Ratings report here).

Major stock indexes started the day with losses of almost 2% after news that a large fund was facing collapse, a report that retail sales fell in February and a surge in commodity prices, with oil hitting $110 per barrel and gold pushing past $1,000 per ounce, both records.

But by the end of trading on Thursday, the S&P report had pushed buyers back into the market. The Dow Jones industrial average rose 35.5 points, or 0.29%, to 12,145.74. The broader S&P 500 index gained 6.71 points, or 0.51%, to 1,315.48. The tech-heavy Nasdaq composite index was up 19.74 points, or 0.88%, to 2,263.61.

On the New York Stock Exchange, 18 stocks moved higher for every 13 that fell in price. The ratio was 18 to 12 positive on the Nasdaq. The thrifts and mortgage finance industry jumped 6.12% on hopes the subprime crisis would end sooner rather than later.

Also Thursday, U.S. Treasury Secretary Henry Paulson unveiled several proposals to reform the credit markets, to alleviate the current turmoil and prevent a similar credit crunch from happening again. "Regulation needs to catch up with innovation and help restore investor confidence," Paulson said.

The credit crunch looked ready to claim another victim, Carlyle Capital Corp., which was reportedly near collapse on Thursday as it defaulted on almost $17 billion dollars in debt. The fund, which saw the value of its mortgage investments plunge, is managed by U.S. private equity firm the Carlyle Group.

The Paulson speech and the Carlyle news coincided with worries that credit markets might not get enough relief from a Federal Reserve plan, announced earlier in the week, to pump $200 billion into the financial system, said Ryan Sweet of Moody's Economy.com. "Credit headaches have turned into migraines," he said.

The record prices for gold and oil were blamed on a falling dollar. The U.S. dollar fell below 100 Japanese yen on Thursday for the first time in 13 years.

On NYMEX, crude oil futures traded 25 cents higher to $110.17 per barrel. Gold futures backed off the $1,000 mark, but still rose $13.30 higher on Thursday to $993.80 per ounce. The dollar moved back above 100 yen, ending at 100.68 yen, a 1.1% drop.

In economic news Thursday, U.S. retail sales fell 0.6% in February, a 0.2% drop if auto sales are excluded. January's sales figure was revised higher, but December's were adjusted lower. Auto sales fell 1.9%, gas station sales were 1% lower, and food and beverage sales fell 0.2%. declined 1.9%. Gas station sales fell 1.0% but and are up 25.7% year-over-year. "The decline in [retail sales] over the last three months underscores the weakness of the consumer and is a further indication of an economy in recession," said John Ryding, chief U.S. economist at Bear Stearns.

U.S. jobless claims, a closely watched barometer of the job market, didn't change last week, remaining at 353,000. Also, U.S. import prices rose 0.2% in February, while export prices rose 0.9%. Prices of petroleum imports fell 1.5% last month, but are still up 60.9% over the past year.

Among stocks in the news, Bear Stearns (BSC) fell 7.44% on Thursday and is down 28.6% in the last five days as the brokerage house fights rumors that it is in financial trouble. Even though the firm's CEO strongly denied bankruptcy rumors on Wednesday, some hedge funds and other traders are reportedly nervous about entering long-term trades with Bear Stearns.

Time Warner's (TWX) AOL unit will acquire Bebo, a global social media network for $850 million.

Electronic Arts (EA) began a $2 billion offer for Take-Two Interactive Software (TTWO), a move that could be the start of a $26-per-share hostile bid for the video game maker.

Countrywide Financial (CFC) reports that average daily mortgage loan application activity was $1.9 billion in February, vs. $2.6 billion in January. Mortgage loan funds in February were $26 billion, up 17% from the month before. The lender's mortgage loan servicing portfolio was $1.48 trillion, up from $1.6 billion from January.

Target (TGT) says it is in negotiations to sell an an interest in its credit card receivables for $4 billion.

The Carlyle collapse seemed to spook European investors Thursday. In London, the FTSE 100 index was down 1.45% to 5,692.40. In Paris, the CAC 40 index lost 1.42% to 4,630.19. Germany’s DAX index fell 1.5% to trade at 6,500.56.

Asian indexes also lost ground. Japan’s Nikkei 225 index dropped 3.33% to 12,433.44. In Hong Kong, the Hang Seng index plunged 4.79% to 22,301.64.

Treasury market

The optimism of the S&P report also had an effect on the Treasury market, where investors who had been running for the safety of government debt reversed course by midday on Thursday. By the end of the day, the 10-year note had fallen 29/32 to 99-20/32 for a yield of 3.55%, while the 30-year bond tumbled 39/32 to 98-14/32 for a yield of 4.47%.

Steverman is a reporter for BusinessWeek's Investing channel.