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Oil Drop, Cisco Outlook Boost Stocks

Wednesday, 6 Aug 2008 | 5:17 PM ET

Stocks advanced Tuesday, building on the prior session's rally, as a drop in oil prices and encouraging outlook from Cisco helped offset disappointment in Freddie Mac's results.

The Dow Jones Industrial Average rose 40.30, or 0.4 percent, to close at 11656.07. The S&P 500 gained 0.3 percent, and the tech-heavy Nasdaq jumped 1.2 percent.

"There's been so much pessimism that I think this market is about ready to turn," said Nadav Baum, managing director of investments at BPU Investment Group in Pittsburgh. "When you have a big rally like you did yesterday and the market doesn't give anything back today -- that tells you something," Baum said.

Oil prices are down, people have more disposable income and there are some really good bargains out there. "If you're a five-year, long-term investor, you don't get a lot of opportunities like this," Baum said. "As long as you're willing to weather the volatility, you should be buying some stocks," he said.

Baum cited Johnson & Johnson and CNBC parent General Electric among the high-quality equities that are looking attractive, as well as long-term growth stories such as Research In Motion and Apple Computer .

The big relief for the market has been the decline in oil prices.

Light, sweet crude shed 59 cents to settle at $118.58 a barrel after the EIA reported a larger than expected crude build: Inventories jumped by 1.614 million barrels last week to nearly 297 million barrels. Analysts polled by Reuters had expected an increase of just 300,000.

Crude is now down more than $6 from where it ended last week, at $125.10 a barrel.

The Dow was split down the middle, with half of the 30 components finishing higher and half lower. The biggest gainers were Caterpillar , Microsoft and Chevron . The biggest decliners, General Motors , American International Group , and American Express .

Techs outperformed the broader market as the sector got some support fromsolid numbers from Ciscoafter the bell Tuesday. The company, which makes equipment that directs Web traffic, beat expectations and backed its long-term outlook saying it expects the economic slump to be short. Cisco CEO John Chambers went so far as to say that he had "very strong" confidence in the company's forecast for long-term revenue growth of 12 to 17 percent.

Shares of storage giant EMC ended off 1 percent, after earlier falling more than 5 percent when Chambers said Cisco isn't in any big deal talks right now. There had been speculation that Cisco might be interested in buying EMC.

Microsoft rose 3.1 percent after the software giant

Freddie Mac shares fell more than 19 percent after the company reported it lost $1.63 a share, about three times as big as the loss of 53 cents a share analysts had predicted. The company said it's doubling its provisions for loan losses to $2.5 billion since the end of the first quarter and that it will slash its dividend by as much as 80 percent.

Freddie Mac and Fannie Mae , known as government-sponsored enterprises, hold or guarantee nearly half of the $12 trillion in U.S. mortgages, and have taken a huge hit from the housing downturn. The government has pledged to support both companies through loans and the purchase of stock if necessary.

Shares of Fannie Mae fell 15 percent. The S&P 500 financial-sector index lost 1 percent.

"Freddie Mac was not a vitamin pill this morning. It clearly wasn't good news," Stephen Massocca, co-chief executive at San Francisco-based investment bank Pacific Growth Equities, told Reuters. "When you lower the dividend, people get out of the stock for that reason."

Lehman Brothers shares rose 1.1 percent after a prominent U.S. banking analyst said the brokerage may sell $30 billion to $50 billion in securitiesto raise fresh capital and slash its dividend by as much as 90 percent.

Time Warner shares finished slightly lower after the media conglomeratereported its profit slipped 26 percent, dragged down by its AOL unit. The company said it will splinter off AOL's dial-up Internet and advertising business by early 2009, underscoring its plan to focus on creating content instead of distributing it.

The long commodities, short financials trade has been unwinding but some commodity stocks rebounded today, helped by miner Xstrata's $10 billion takeover bidfor platinum producer Lonmin.

Shares of miner Freeport McMoran jumped 11 percent and fertilizer producer Mosaic rose 2 percent.

Still to Come:

WEDNESDAY: Earnings from AIG
THURSDAY: Jobless claims; existing-home sales; consumer credit; Earnings from Barr Pharma, Toyota
FRIDAY: Productivity; wholesale trade; Earnings from Berkshire Hathaway

Send comments to cindy.perman@nbcuni.com.

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