Financials Lead Stocks to a Higher Finish

Welcome to late-August trading. Can you feel the breeze blowing in your hair?

Stocks finished higher in feather-light trading Wednesday, boosted by a rise in financials and energy stocks, as well as a better-than-expected durable-goods report.

The Dow Jones Industrial Average gained 89.64 points, or 0.8 percent, to close at 11502.51. The S&P 500 added 0.8 percent, while the Nasdaq rose 0.9 percent. Trading volume on the New York Stock Exchange was about 819 million shares, less than half the daily average.

Traders are watching Tropical Storm Gustav, which is threatening to slam the Gulf Coast by Monday as a Level 3 Hurricane, as well as developments with Fannie Mae and Freddie Mac. But they're also keeping an eye on  the election polls.

"It will be interesting to see how the market reacts going into the election," said Tom Schrader, managing director for U.S. equity trading at Stifel Nicolaus Capital Markets. "Will Obama's lead continue to fade or will he drop behind? He's certainly not pro-business, so if those things did happen, the market would react favorably." 

Crude oil jumped nearly $2, settling $118.15 a barrel, due to Gustav jitters, as well as dollar weakness and tension between Russia and the West after Russia recognized breakaway regions in Georgia also supported energy prices.

Crude inventories fell by 177,000 barrels to 305.8 million barrels, the EIA reported. Analysts had expected crude supplies to jump by 1 million barrels.

Energy stocks, which make up a big chunk of the S&P, helped to buoy the market, climbing 1.2 percent. Sunoco and Valero Energy were among the biggest S&P gainers.

Atlanta Fed Presdent Dennis Lockhart offered some comforting words to the market, saying inflation should moderate through the end of the year and into next year.

Durable-goods orders, which are items such as cars and appliances meant to last three years or more, rose a surprising 1.3 percent in July amid strong aircraft sales. However, when you strip out the volatile transportation category, orders rose 0.7 percent, when analysts had expected a drop of 0.5 percent. Nondefense capital goods orders excluding aircraft, seen as a barometer of business spending, jumped 2.6 percent, the sharpest gain since April. That category was expected to drop 0.1 precent.

Boeing advanced 1.7, boosted by the 28-percent jump in aircraft orders in the July durable-goods report.

Financials rose 1.7 percent, helped by the increasing belief that Fannie Mae and Freddie Mac might not need a bailout.

Fannie Mae and Freddie Mac were the biggest gainers on the S&P 500, gaining 15 and 20 percent, respectively, after Merrill Lynch issued a note saying all this bailout talk is premature and that capital depletion at the firms is unlikely for several quarters. Merrill is at least the third big bank to say a bailout isn't inevitable. The sentiment was also echoed by Rep. Barney Frank.

A Treasury spokeswoman batted down market rumors that it would be making any announcement regarding Fannie and Freddie. The buzz was that Treasury Secretary Henry Paulson would announce a rescue package.

U.S. mortgage applications rose for the first time in three weeks as interest rates declined, the Mortgage Bankers Association reported.

Homebuilder stocks also buoyed the S&P, with Hovnanian , KB Home and Lennar all finishing up more than 8 percent.

Goldman Sachs slipped after Morgan Stanley cut its profit forecast for the firm nearly in half, saying it expects a third-quarter profit of just $1.65, compared with the prior view of $3 a share.

Meanwhile, the New York attorney general's office is probing the relationship between Fidelity Investments and Goldman Sachs over the sale of auction-rate securities, a person familiar with the investigation told the Wall Street Journal.

Lehman Brothers continued its rally, rising 5.4 percent. The brokerage has asked three private-equity firms to remain in the bidding for its asset-management division even though it hasn't decided whether or not to sell it yet, the Financial Times reported.

Morgan Stanley slashed its third-quarter estimate for Lehman to a loss of $2.80 a share from its prior view of a profit of eight cents a share.

Citigroup rose 1.6 percent. The firm may consolidate some midtown Manhattan offices and ordered employees to pare expenses such as unnecessary color copies, as the largest bank in the United States struggles to cut costs.

The FDIC reported that the number of problem banks on its watch list rose to 117