ISM Services Report Boosts Stocks
Stocks shot higher Wednesday after a better-than-expected reading on the services sector.
Major U.S. indexes had already been moving higher after an encouraging outlook from Cisco's CEO and an upgrade on Fannie Mae. The Dow Jones Industrial Average had been up 50 points, then shot up to a 100-point gain after the ISM report. The Nasdaq and S&P 500 index also rose.
Investors are also looking out for a deal to ensure bond insurer Ambac keeps its triple-A rating. Rumors of the deal helped stocks recover somewhat in Tuesday's session.
The ISM reported its nonmanufacturing index, which measures the performance of the services sector, rose to 49.3 for February from 44.6 in January. It was the second straight month the index was below the key 50 mark, which indicates contraction in the sector, but the increase pushed the index very close to 50.
In other economic news, new factory orders fell 2.5 percent in January, in line with expectations and the first decline since August, the Commerce Department reported. Durable-goods orders dropped 5.1 percent, after two straight monthly increases, largely due to transportation. Nondefense capital goods orders excluding aircraft, a closely watched gauge of business spending, declined 1.5 percent.
Private employers slashed 23,000 jobs from their payrolls in February, ADP reported. Economists had expected to see a 20,000-job gain, according to a Reuters survey. The report rattled futures slightly amid speculation that it points to a decline in the Labor Department's employment payroll number, due out Friday. But the ADP report has been criticized as too volatile and unreliable.
U.S. nonfarm productivity, or hourly output per worker, grew at a 1.9 percent annualized rate in the fourth quarter, up slightly from the previous estimate of a 1.8 percent pace. Labor costs, a gauge of inflation and profit pressures, grew more than expected.
Treasury Secretary Henry Paulson told a House panel Wednesday that U.S. economic growth has slowed considerably, and will continue to be weak this year, but "our long-term fundamentals are solid." Paulson was speaking to the panel about the fiscal 2009 budget.
Energy stocks ticked higher as oil jumped above $103 a barrelfollowing a report that the U.S. crude supply declined.
U.S. crude stockpiles dropped by 3.1 million barrels last week, a stark contrast to the 2.4-million increase analysts had expected, the Energy Information Administration reported. Earlier, an OPEC delegate said the organization decided to leave output unchanged as expected.
Intel and Pfizer will be in focus as both have analyst meetings today.
Pfizer , which is grappling with generic competition for many of its products, is turning to Asia and emerging markets to drive growth, the company said in a press release ahead of its meeting with analysts. The world's largest drug maker also plans to set up a new unit focusing on cancer drugs.
Intel rattled techs on Tuesday, lowering its gross margin forecast for the current quarter, citing falling prices of flash-memory chips used in portable electronic devices such as digital cameras and MP3 players. Several analysts cut their price targets on the stock.
Techs recovered by the end of the day after Cisco CEO John Chambers said there will be "bumps" for the networking-gear maker but they'll be short-lived. His outlook hasn't changed since the company's last conference call in early November.
Yahoo advanced after the company said it will extend the deadline for nominating board members, a move to buy more time and explore alternatives to Microsoft's $41 billion offer for the Internet company.
Retail Stocks Ring Up Gains
Retail stocks were some of the day's strongest gainers.
Discount retailer Big Lots and BJ's Wholesale Club beat expectations. BJ's also offered an encouraging outlook for the first quarter.
Some of the only stocks to sit out the retail rally were Costco Wholesale and Staples .
Costco said before the bell that its second-quarter profit rose from a year earlier, in line with expectations.
Staples on Tuesday reported its quarterly profit was flat, as expected, as international sales helped offset a slowdown in North American stores.
February same-store sales reports are due out from major retailers on Thursdsay. Sales at specialty apparel chains are expected to have dropped 1.9 percent, down from a 5.4 percent increase in January, according to research by MasterCard's SpendingPulse. Sales of women's clothing, which tend to drop off first in a downturn, are expected to show a slip 0.2 percent, better than January's 2.2 percent decline.
Financials Gain Some Ground
The troubled financial sector edged cautiously into positive territory after a brokerage upgrade on Fannie Mae and anticipation of an Ambac bailout.
Morgan Stanley upgraded its rating on Fannie Mae, the largest provider of funding for U.S. home loans, to "equal weight" from underweight," saying it expects results for both Fannie Mae and Freddie Mac to be "significantly stronger" in 2009. Still, the brokerage favors No. 2. Freddie because Fannie posts bigger derivatives losses than Freddie when interest rates decline and Freddie has been faster than Fannie in cutting back on purchases of delinquent loans.
The beaten-down financial sector has been tossed around as a good place to find some bargains. The latest talk is that some regional banks, which had nothing to do with the current mortgage crisis but were dragged down by association, are good buys.
"We like the regional banks," David Dietze, chief investment strategist for Point View Financial Services, told CNBC. He recommends buying a package of regional banks through an exchange-traded fund such as KBW Regional Banking. He notes the yield on KRE has jumped from 5 percent in October to 7 percent recently. "The rubber band is stretching," Dietze said. "I'm not sure when, but eventually, that's going to be a profitable long-term investment."
While everyone else is talking about small banks, Christopher Zook, CEO of CAZ Investments, said he likes Bank of
America . The big bank has "massive earnings power" Zook said, and, thanks to its purchase of Countrywide, "it's a company that will be there to pick up the pieces that have been left over in the mortgage business."
Housing, meanwhile, received a bit of good news, with mortgage applications rising for the first time in four weeks as lower rates began to take hold.
WEDNESDAY: Fed beige book; Pfizer and Intel analyst meetings
THURSDAY: Weekly jobless claims; Retailers' Feb. sales reports; ECB and BOE rate decisions; Disney shareholder meeting
FRIDAY: February jobs report
Send comments to Cindy.Perman@nbcuni.com.