By Jennifer Yousfi
After starting the month with the three worst New Year trading days since 1904, U.S. stocks ended January with solid gains.
But it was another whipsaw day for investors on Wall Street yesterday (Thursday): Stocks plunged at the open, but reversed course and moved marginally into positive territory by midday. All three key U.S. indices were up about 1% at 2 p.m., and then investors seemed to ignite the afterburners, sending share prices higher to post solid gains for the day and to end a lousy month on a positive note.
The blue-chip Dow Jones Industrial Average Index obliterated early losses and soared 207.53 points, or 1.67%, to end the day and the month at 12,650.36. The tech-laden Nasdaq Composite Index raced upward 40.86 points, or 1.74%, to close at 2,389.86. And the broader Standard & Poor's 500 Index leaped 22.74 points, or 1.68%, to close at 1,378.55. The S&P had been down 1.6% in early trading.
In overseas trading early yesterday, markets were mixed as Japan's Nikkei index gained 247.44 points, a 1.85% increase, while Hong Kong's Hang Seng index dropped 197.95, a 0.83% decline. In Europe and the United Kingdom, indices had initially dropped across the board – and held those losses for much of the day – but recovered in late afternoon trading as the U.S. stocks battled back from their own deep early morning slides.
Down in the Dumps at the Open
Ahead of the opening bell, the losses on stock futures more than doubled and stocks slumped right out of the gate today as two economic reports released early yesterday morning fueled ongoing recession fears.
The U.S. Labor Department announced that initial claims for state unemployment benefits reversed a declining trend to reach 375,000, a 27-month high. In a separate report, the U.S. Commerce Department announced consumer spending advanced at an anemic 0.2% rate in December, a month that includes much of the all-important holiday shopping season.
"The one thing that's propping up the economy is decent labor markets,” Greg Woodard, a portfolio strategist at Fairport, NY-based money manager Manning & Napier, told Bloomberg News. "If you see that turn down, then people are certainly going to increase their probabilities of a sustained downturn.”
Worries about bond insurers from earlier in the week spilled into trading early yesterday, helping force down share prices at the open. Investors fear that bond insurers Ambac Financial Group Inc. (ABK) and MBIA Inc. (MBI) face credit downgrades – which will also affect the ratings on the bonds that they insure. The two companies will lose more money than they're currently predicting from guarantees they sold on complex mortgage-related securities, Bill Ackman, a longtime critic of the bond-insurance industry, told MarketWatch.com on Wednesday.
But in a conference call yesterday – during which it addressed fourth-quarter losses of more than $2 billion – MBIA was able to stem worries, thanks to some upbeat chatter from the company's chief executive officer.
Some "feisty words from bond insurer MBIA CEO  appear to be lending some support to stocks after concerns about rating downgrades [Wednesday],” Action Economics wrote in a research note.
Peter Boockvar, an equity strategist at Miller Tabak, told MarketWatch.com that the MBIA conference call helped financial stocks and is "helping lift most everything else.”
MBIA shares were up $1.54 each, or 11.03%, by the end of the day, after being higher by 7.1% to $14.95 the early afternoon. Ambac closed at $11.59, up 74 cents a share, or 6.82%.
Before the conference call, the S&P 500 had extended its January tumble to 9.1% – which would have been the biggest decline for the month in the index's 80-year existence, according to Bloomberg News.
The benchmark still lost more than 6% for the month, the worst start to a year since 1990. The so-called January Barometer Theory holds that the first month determines if stocks rise or fall for the year. The indicator has been accurate 75% of the time, according to the Stock Trader's Almanac [For a related story on the January Barometer Theory, please click here].
Ross to the Rescue?
Further fueling the finance sector's gains were ongoing rumors that well-known billionaire and noted "vulture investor” Wilbur L. Ross Jr. is considering a bid for MBIA rival Ambac Financial.
Ross, 69, is respected as a highly shrewd financier and an expert on distressed-company investments. Ross made his fortune buying into such distressed industry sectors as coal, steel and textiles; he pruned waste, boosted productivity, cleaned up their balance sheets and often installed new management. With all that done, he then sold the shares and reaped hefty profits.
With the financial sector's subprime-induced credit crisis, Ross is among the turnaround strategists who are reportedly sifting through financial-services companies in search of bargain-basement investments. Most recently, Ross was recruited by a consortium led by Richard Branson's Virgin Group, which is looking to buy out Northern Rock PLC (PINK: NHRKF), the beleaguered British bank.
Northern Rock shares went into a freefall last autumn when it revealed that the Bank of England has given it an emergency line of credit, to keep it from having to jettison the mortgage business.
According to the MarketWatch report, Ambac has become a "poster-child” for the subprime-induced bond-insurance debacle. The New York-based Ambac saw its shares plunge by nearly 85% over the past six months, and the Fitch credit-rating agency has taken away the firm's "AAA” rating – essentially a death sentence and a corporate bankruptcy invitation for a bond-insurer.
That may well be a scenario that Ross can't resist.
Market Reverses Losses, Fuels Broad Rally: Techs Up
Most sectors were able to reverse all of this morning's losses to post gains by mid-day: But then the broad indices rallied. The Dow was up 124.53 points to reach 12,567.3 in late-morning trading, with 17 of the 30 stocks that make up the index trading higher.
Money Morning Investment Director Keith Fitz-Gerald – a veteran trader and global investor – attributed the big turnabout to "a short-covering rally ignited by pit traders.”
While Fitz-Gerald said that – depending upon the volume – one of two things drove the reversal and run for higher ground:
- There's still a lot of collateralized debt obligations (CDOs) in the marketplace right now, and it's likely that several institutions are selling into the rally to generate future redemption requests or margin calls.
- Or that all the "major shops” are viewing this as a short-squeeze, which can fuel this kind of "whipsaw” market move.
Even so, energy-sector stocks were hit hard early on as the price of crude oil dropped for the first time in nearly a week. Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) both posted morning losses. But they both rallied and finished the day in positive territory. The S&P 500 Energy Index ended the day up 0.3 percent, fueled by Exxon's gain.
News and Related Story Links:
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Wilbur L. Ross Jr.
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