Stocks gain on Lehman buyout talk
Wall Street jumps on talk that the firm is shopping itself to would-be buyers. Report: A sale deal struck by the Fed and Treasury will be announced soon.
NEW YORK (CNNMoney.com) -- Stocks rallied Thursday after a report about potential buyers of Lehman Brothers - including Bank of America - gave investors some reassurance at the end of a choppy session.
After the close, the Washington Post reported that the Treasury Dept. and the Federal Reserve are putting together a sale of Lehman through a group of private firms, with a deal expected to be announced this weekend. The government and the Fed also teamed up to orchestrate the rescue of Bear Stearns in March.
Also after the close, Washington Mutual sought to reassure investors that its capital position and credit outlook were stable, amid escalating worries. Following the announcement, ratings agency Fitch downgraded the company's debt rating. (Full story)
The Dow Jones industrial average (INDU) gained 165 points, or 1.5%. The Standard & Poor's 500 (SPX) index gained 1.4% and the Nasdaq composite (COMP) added 1.3%.
Whether it's Bank of America or a different firm or firms that end up purchasing Lehman may not be that important, said Michael Sheldon, chief market strategist at RDM Financial Group.
"I don't think it matters who purchases them as long as their instability or the rumor of their possible demise is diminished," Sheldon said.
Sheldon noted that the session's trading volume has been improving of late and that it will be important to see if that continues, as higher volumes can be seen as a sign of greater conviction on the part of investors.
Stocks were mostly lower through the morning as Lehman and other bank stocks tumbled on worries about their solvency. Meanwhile, a steeper-than-expected jump in the U.S. trade deficit and a weak jobless claims report added to recession fears.
While bank shares remained under pressure in the afternoon, the selloff in oil prices gave a lift to companies that benefit directly from lower fuel prices, including transportation stocks. Consumer stocks benefited too, on lower inflation expectations. Meanwhile, the S&P 500 flirted with its 2008 lows and then managed to bounce back.
But the market spiked heading into the close after the Wall Street Journal Web site reported that Lehman Brothers is actively shopping itself to potential acquirers, including Bank of America.
The report boosted a number of bank stocks, but failed to lift Lehman Brothers, which slumped almost 42% on the session.
Partly the day's advance was a function of short-covering in some of the really beleaguered sectors of the market, said Tom Schrader, managing director at Stifel Nicolaus. Short-covering refers to the process by which traders, who have sold a stock short to take advantage of a falling market, buy the stock back.
Investors were also reacting to oil prices, which settled at a 5 1/2 month low.
For the past few weeks, falling oil prices have been seen as mostly a negative, in that they reflect a slowdown in the global economy. But Thursday, investors also seemed to focus on how lower fuel prices will help transportation and consumer stocks and also impact inflation expectations.
"The commodity crunch over the last few months has been across the board, and now it's all coming back," Schrader said. "Oil is down over 30% from the highs, natural gas is down over 50% and grain prices are coming down. Inflation expectations have got to come down too."
"That's the good news," he said. "The bad news is that it also means the global economy is weaker."
Lehman Brothers: Lehman (LEH, Fortune 500) shares plunged 42% Thursday, after having recovered some of those losses at midday.
On Wednesday, the bank reported a nearly $4 billion fiscal third-quarter loss, its biggest quarterly loss since it went public in 1994. Lehman also said it will spin off part of its commercial real estate business, cut its dividend and sell a 55% stake in its investment unit, which includes profitable money manager Neuberger Berman.
Investors initially took a lackluster response to the stock Wednesday, sending it 7% lower after boosting it right after the announcement. On Thursday, both Wall Street pros and investors sent the message that the restructuring moves seemed like too little, too late.
Goldman Sachs downgraded the stock to "neutral" from "buy," while Citigroup cut it to "hold" from "buy."
Lehman has struggled this year amid mounting losses related to bad mortgage bets and its inability to raise sufficient capital to continue operating its businesses properly. (Full story)
Investors have been particularly wary of the company in the wake of the government bailout of Fannie Mae and Freddie Mac announced last weekend and the near-failure and ultimate government rescue of Bear Stearns in March.
Banking: A number of other financial firms have sparked worries about their exposure to bad mortgage loans and their ability to raise money. AIG (AIG, Fortune 500) shares - as well as those of Washington Mutual (WM, Fortune 500) and Wachovia (WB, Fortune 500) - have been battered in recent days on such concerns.
AIG initially tumbled to a more than 13-year low on reports that the CEO may consider selling the consumer finance and reinsurance units to raise money. But the stock recovered with the broader financial sector near the close of trade. (Full story).
The hammering that AIG, WaMu and others are suffering is not to be taken lightly, said Joseph Saluzzi, co-head of equity trading at Themis Trading.
"It's a 'where there's smoke, there's fire' situation with what's happening to those stocks," he said.
But the sector bounced back by the close, with WaMu adding 21%, JP Morgan Chase (JPM, Fortune 500) adding 6% and Wells Fargo (WFC, Fortune 500) adding 7% among other gainers. The Philadelphia Bank Sector index gained 2.8%.
Among other movers, airline, railroad and trucker stocks advanced as investors focused on the positive benefits of lower fuel prices. The Dow Jones Transportation (DJTA) average gained 3.4%. Also helping was railroad CSX (CSX, Fortune 500), which boosted its 2008 forecast.
Automakers GM (GM, Fortune 500) and Ford (F, Fortune 500) also gained.
Market breadth was negative. On the New York Stock Exchange, losers beat winners by eight to seven on volume of 1.45 billion shares. On the Nasdaq, decliners topped advancers by a narrow margin on volume of 2.34 billion shares.
Economy: In addition to the banking system woes, investors received two discouraging economic reports Thursday, on the trade deficit and the labor market.
The U.S. trade gap surged to $62.2 billion in July, its widest level in 16 months. Oil prices, which reached record levels in July before sliding the past two months, were the main reason for the increase. The report beat economists' forecasts for a dip to $58 billion versus a revised $58.8 billion in June.
The number of Americans filing new claims for unemployment fell 6,000 to 445,000 last week, beating forecasts for a bigger drop to 440,000, the government reported.
Fuel prices: Oil prices fell as slumping demand reflected concern about the economic outlook. (Full story).
U.S. light crude oil for October delivery settled down $1.71 at $100.87 a barrel on the New York Mercantile Exchange, the lowest close since March 24.
Oil prices have lost more than $45 a barrel since peaking at $147.27 on July 11.
Gas prices rose overnight, climbing for the second day in a row as Hurricane Ike strengthened, according to a national survey of credit-card activity.
Other markets: In global trade, European and Asian markets ended lower.
In the bond market, Treasury prices slipped, raising the yield on the benchmark 10-year note to 3.64% from 3.63% late Thursday. Prices and yields move in opposite directions.
The dollar fell versus the euro and the yen.
COMEX gold for December delivery fell $17 to $745.50 an ounce. 
