Markets & Finance

Stocks Rally on Claims, Dividend News


Good news arrived from first-time unemployment filings, the credit markets and a few big Dow leaders. Oil closed at a record, above $80 per barrel

Major U.S. stock indexes moved solidly higher Thursday following a better-than-expected reading on a key labor market indicator and bullish news involving three members of the Dow Jones industrial average: McDonald's (MCD), General Motors (GM), and Microsoft (MSFT).

More good news came from early signs that the crisis on credit markets is easing, just ahead of a Federal Reserve meeting Sept. 18 where an interest rate cut is considered likely. Traders also watched crude oil hit a record high, closing above $80 for the first time ever.

On Thursday, the Dow Jones industrial average rose 133.23 points, or 1%, to 13,424.88. The broader S&P 500 index rose 12.39 points, or 0.84%, to 1,483.95. The tech-heavy Nasdaq composite index added 8.99 points, or 0.35%, to 2,601.06.

On the New York Stock Exchange, 19 stocks gained in price for each 14 that fell, but on the Nasdaq breadth was flat.

U.S. jobless claims gave some hope Thursday to a market shocked by a poor August jobs report. For the week of Sept. 8, jobless claims rose 4,000 to 319,000, while the previous week's numbers were revised lower to 315,000. Economists had been expecting jobless claims at 325,000, but last week's numbers were barely above the 2007 average. That prompted hopes that the economy is not slowing as quickly as some fear.

The good news for credit markets came in the area of commercial paper, which is short-term funding used by corporations. The Federal Reserve said Thursday that outstanding commercial paper fell just $8.2 billion in the last week. The rapid decline in commercial paper had alarmed the markets as investors refuse to buy up riskier debt, causing a credit crunch. Asset-backed paper, hit the hardest, has declined an average of $47 billion, but in the last week that slowed to $21.6 billion. Other forms of paper saw increases.

"While some of this may be a function of expectations of a decisive move by the Fed next week, it may also be partly a reflection of simply improved sentiment and suspicions that the blow-out was excessive," wrote Marc Chandler, a strategist at Brown Brothers Harriman & Co.

For the first time ever, crude oil closed the trading day above $80 per barrel. October NYMEX crude was up 18 cents to $80.09 per barrel. "Strong demand and shrinking inventories" are sending crude prices higher, Action Economics says. Exxon Mobil (XOM) stock rose 1.1% on Thursday.

Many on Wall Street are eagerly waiting for the Federal Reserve meeting on Sept. 18. The main debate is whether the Fed cuts the federal funds rate by a quarter- or half-percentage point. The futures market currently expects two quarter-point rate cuts by the October meeting.

It's a "balancing act" for the Fed, says John Merrill, chief investment officer of Tanglewood Capital Management. On the one hand, the Fed wants to alleviate economic weakness, particularly in the housing sector. "It wouldn't take much for it to spiral out of control," Merrill says. On the other hand, the Fed must worry about inflation pressures over the long-term, and prevent a quick, chaotic decline in the U.S. dollar.

The euro hit a record high against the U.S. dollar on Wednesday. On Thursday, it was valued at $1.3881, slightly off the record. Meanwhile, the price of gold was falling after a recent run-up. Gold was trading at $717.90 per ounce, down $2.80.

Among stocks in the news on Thursday, McDonald's gained 6% after hiking its 2007 dividend by 50%, to $1.50 per share.

Fellow Dow member Microsoft also lifted its dividend, increasing its quarterly payout by 10% to 11 cents. The shares were higher by 0.8%.

General Motors (GM) jumped 10% Thursday after the stock was reportedly upgraded to a buy by Citigroup analysts. Also, the Wall Street Journal reports the prospects have improved for a deal with the United Auto Workers to create a health care trust fund.

First Horizon National Corp. (FHN) will cut half its mortgage sales force by reducing support staff and closing underperforming mortgage branches. The shares dropped 0.64%.

Countrywide Financial Corp. (CFC) says its mortgage loan fundings fell 17% in August and average daily mortgage loan application activity fell 12%. But the mortgage company said it is able to borrow an additional $12.0 billion from its lenders to fund its operations. The shares gained 13.9%.

In other corporate news, Dick's Sporting Goods (DKS) announced a two-for-one stock split. Shares were 0.4% higher.

Select Comfort Corp. (SCSS) says third quarter sales aren't improving enough to meet analysts' estimates of earnings of 27 cents per share. The company will spend an extra $37.6 million to buy back 2.3 million shares of its stock this quarter. The stock fell 8.6% Thursday.

European equity indexes traded higher Thursday. In London, the FTSE 100 index gained 0.91% to 6,363.9. Germany's DAX index added 0.84% to 7,535.97. In Paris, the CAC 40 index rose 1.05% to 5,565.97.

In Japan, the Nikkei 225 index finished higher by 0.15% to 15,821.19. In Hong Kong, the Hang Seng index was up 0.93% to 24,537.02. The Shanghai composite index rose 1.95% to 5,273.59.

Treasury Markets

Treasuries fell as investors shifted into equities. The 10-year note slid 19/32 to 102-03/32 for a yield of 4.49%, and the 30-year bond tumbled 32/32 to 103-00/32 for a yield of 4.75%.

Steverman is a reporter for BusinessWeek's Investing channel.

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