Investors were also cheered by hopeful news for bond insurers, though a surprising decline in January payrolls dampened the mood somewhat
Stocks finished higher Friday after a surprise $44.6 billion bid by Microsoft (MSFT) for Yahoo (YHOO) and some encouraging news for beleaguered bond insurers offset a report showing that payrolls shrank by 17,000 in January – a decline that renewed recession fears on Wall Street.
The tech deal news and labor-market downturn overshadowed what on any other day would have been top market headlines: Disappointing profits at Google (GOOG), Alcoa’s (AA) deal with a Chinese metals company to buy a stake in Rio Tinto (RTP), record profits for Exxon Mobil (XOM), and word that Motorola (MOT) may be mulling a split-up of the company. Finally, the Federal Reserve announced a plan to inject $60 billion into the banking system through two auctions in February.
On Friday, the Dow Jones industrial average gained 92.83 points, or 0.73%, to finish at 12,743.19. The S&P 500 added 16.87 points, or 1.22%, to close at 1,395.42, while the Nasdaq composite index gained 23.50 points, or 0.98%, to end the week at 2,397.37.
Activity in the broader market was positive, with 25 shares rising in price for every six that declined. Nasdaq breadth was 20-9 positive.
Recession fears have been mitigated recently by strength in financial stocks and upside in the equity market, notes S&P MarketScope.
The Dow and the S&P 500 have actually risen for two straight weeks for the first time since late November/early December, says S&P chief technical strategist Mark Arbeter, following the market’s worst January in 38 years. The S&P 500 fell 6.1% last month.
While U.S. nonfarm payrolls fell 17,000 in January, December’s figure was revised higher and November’s lower for a net increase to the previous months of positive 9,000. The unemployment rate fell from 5.0% to 4.9%, while average hourly earning rose a weak 0.2%. Average weekly hours worked fell from 33.8 to 33.7.
“The surprise decline in January employment suggests that the economy is contracting," said Ryan Sweet of Moody’s Economy.com. Economists had been expecting a gain of 75,000 to 100,000. January’s drop in payrolls was the first in five years.
John Ryding, chief U.S. economist at Bear Stearns (BSC), said the data wasn’t conclusive. “We will have to wait for the February report before drawing a conclusion on whether the economy has slipped into recession," he wrote, adding that the data still might be weak enough to push the Federal Reserve toward another half-point cut to interest rates in March.
Weak areas of the job market were manufacturing, with payrolls down 28,000, construction, off 27,000, and government, down 18,000. The service sector added 34,000 jobs.
The jobs report was only one of a series of marquee economic releases Friday. The University of Michigan reported that its consumer sentiment survey rose to 78.4 in January from 75.5 in December. The index did drop from its preliminary reading of 80.5, but was near the consensus estimate of 79. The current conditions component rose to 94.4 from 91.0 in December (but 98.1 in early January). The expectations component increased to 68.1 from 65.6 (69.1 preliminary). The rise from December contrasts with the drop seen in the consumer confidence report earlier this week.
U.S. construction spending fell 1.1% in December. The decline dwarfed expectations of a 0.4% fall and followed a revised 0.4% drop in November (previously 0.1%). Private spending fell 1.0% after falling 1.0% in November. Residential spending fell 2.8% over November and is down 20.4% over last year.
The January Manufacturing Report on Business from the Institute for Supply Management jumped to 50.7 from 48.4 in December. The market had expected 47.3. Strength in orders and production brought the overall index up strongly. Employment dropped again, in line with the January payroll report today. With most components up and the index back over 50, the ISM release contradicts the extreme weakness in other recent data, and suggests “the manufacturing sector may be in better shape than we thought", according to S&P Economics.
“This report and the December durable goods data suggest that manufacturing activity is growing at a slow pace in early 2008 rather than contracting as appeared to be the case in late 2007," wrote Bear Stearns economists in a note Friday. “This report, however, also underscores cost inflation pressures."
Next week, investors will be looking at reports on December factory goods orders (Monday), the January ISM Non-Manufacturing index (Tuesday), MBA mortgage applications and preliminary fourth-quarter productivity (Wednesday). Initial jobless claims will arrive Thursday, along with December NAHB pending home sales and consumer credit\. Wholesale trade data will be released Friday.
Microsoft’s unsolicited bid prices Yahoo shares at $31. That’s a 62% premium over Thursday’s closing price, but it is below the level Yahoo shares hit in October. Yahoo said it will evaluate the proposal, which one analyst, at Stifel Nicolaus, rates at more than an 80% chance of success.
“This deal would give the combined company formidable scale and create a viable competitor to Google," said Ryan Jacob, portfolio manager of the Jacob Internet Fund, which owns Yahoo stock.
Yahoo shares rose 48% on news of the bid, while Microsoft fell 7%.
Tech investors were also pondering the prospects of one of Yahoo and Microsoft’s fiercest competitors. Google (GOOG) reported surprisingly weak earnings late Thursday. Google posted profits of $4.43 per share, vs. $3.91 per share as revenue rose 51%. But shares were down nearly 9% as investors were spooked by revenue and profit numbers that didn’t quite meet expectations, as well as worries that an economic slowdown may hurt online ad spending.
Google chief executive Eric Schmidt tried to reassure analysts: “We have not yet seen any negative impact from the rumors of a possible recession," he said.
Ambac Financial (ABK) shares rose 13% Friday after a CNBC report that said eight large banks have joined forces to seek a rescue plan for the troubled bond insurer, citing a person familiar with the talks.
Among other stocks in the news Friday, Alcoa (AA) announced a partnership with Aluminum Corp. of China to buy a 12% stake in Rio Tinto (RTP). Alcoa will contribute $1.2 billion.
Motorola (MOT) said it is exploring the structural and strategic realignment of its businesses “to better equip its Mobile Devices business to recapture global market leadership and to enhance shareholder value." Alternatives may include the separation of Mobile Devices from its other businesses. Separately, Carl C. Icahn said he is “pleased" that Moto is exploring a separation of the Mobile Devices unit.
In energy markets Friday, March WTI crude oil futures fell $2.79 to $88.96 per barrel as a weaker than expected jobs report indicated the U.S. economy was close to a recession, which in turn, would reduce demand for oil and other commodities.
Still, the record oil prices in recent months have clearly helped oil company profits. Exxon Mobil (XOM) reported earnings of $2.13 per share, vs. $1.76 a year ago, as revenue rose 30%.
Chevron (CVX) posted earnings of $2.32, vs. $1.74 a year ago, as revenues also rose 30%.
Also in the news Friday, United Parcel Service (UPS) boosted its regular quarterly dividend to 45 cents per share, from 42 cents per share.
Capital One Financial (COF) raised its quarterly dividend from 2.7 cents to 3.75 cents per share, and announced a $2 billion stock buyback plan.
Beazer Homes USA (BZH) says it will stop its mortgage origination service immediately, and end a related mortgage services relationship with Homebuilders Financial Network. It says it has entered a deal with Countrywide Financial (CFC), which will become the preferred mortgage provider to the homebuilder’s customers.
Manpower (MAN) posted earnings of $1.63 per share, vs. $1.15 a year ago, as revenue rose 20%. It expects earnings of 78 to 82 cents per share this quarter.
European stock indexes rallied Friday. In London, the FTSE 100 index added 2.54% to 6,029.20. In Paris, the CAC 40 index rose 2.22% to 4,978.06. Germany’s DAX index was up 1.71% to 6,968.67.
Asian markets were mixed Friday. Japan’s Nikkei 225 index fell 0.7% to 13,497.16. In Hong Kong, the Hang Seng index rose 2.85% to 23,123.58.
Treasuries rose on back of an unexpected 17,000 decline in January nonfarm payroll jobs. The 10-year note edged up 03/32 to 105-16/32 for a yield of 3.58%. The 30-year bond rose 12/32 to 111-18/32 for a yield of 4.30%.