Stocks ended higher as investors were encouraged by news General Motors reached a tentative union deal, and markets received a late boost on a report that billionaire investor Warren Buffett was considering taking a minority stake in Bear Stearns.
"I'm not surprised -- the stock was really oversold and was looking for an excuse to rally," said Jeffery Harte, an analyst with Sandler O'Neill. "At the end of the day I think for Bear Stearns to sell a portion of itself, there has got to be a strategic rationale to it."
The New York Times reported on its Web site that Bear Stearns was in serious talks with several outside investors, including Buffett. The Times said other companies considering taking a minority stake in the company include Bank of America, Wachovia and two Chinese companies: Citic Group and China Construction Bank.
The Dow Jones Industrial Average rose 98 points, or 0.7%, and is trading a littel more than 220 points off its record closing high of 14,000. The S&P 500 and the Nasdaq Composite saw similar gains.
The major market indexes dipped in afternoon trading on a cautious report from Goldman Sachs regarding a rival's subprime exposure.
"Any time someone like Goldman says something negative about subprime, it'll cause a few scares in the market," said Adam Tracy, director of listed trading at Thomas Weisel Partners. "The market sold off since then, but you're getting a bit of a relief rally."
Merrill Lynch shares fell after a Goldman Sachs analyst said the company faces an estimated $1.5 billion third-quarter loss on its fixed-income business, driven by $4 billion in asset write-downs connected to leveraged loans and mortgages.
Hopes for another cut in interest rates by the Federal Reserve were bolstered by data showing a larger-than-expected drop in August orders for durable goods -- manufactured items meant to last three years or more.
"People are getting more and more comfortable that the Fed is going to be there and is going to be helping out the market," said Tracy, "people are kind of getting situated before earnings season and technology got a bid with Red Hat reporting good numbers."
Shares of Red Hat rose after the software maker posted quarterly results with revenues that surpassed Wall Street estimates.
"Apparently everyone is convinced GM is good for the economy, and they think the Fed is going to cut rates again, and people think that is going to be a salve," said Dan McMahon, head of listed trading at CIBC World Markets. "I don't know if lower rates will get people to start lending money again ... there is still a lot of catch-up that needs to be done between the credit markets and the stock market."
"We had some data that came out that wasn't super, but the market seems to be shrugging it off and the Dow is moving higher," said Greg McCoach, senior analyst at The Mining Speculator, an investment newsletter. "It's not a big move up, but it's significant that the short-term, day-to-day stuff is becoming less important."
Shares of GM , the biggest U.S. automaker, led the Dow's advance with a gain of more than 5%, while shares of rival Ford Motor climbed more than 2%.
Crude oil prices continued to fall, with New York light sweet crude futures trading below $80 a barrel on the New York Mercantile Exchange.
"The other thing we have to look at besides the decline in oil prices is some short covering," said Fred Froewiss, vice president of institutional sales at RF Lafferty. "With the averages near their historic highs I think some institutional hedge funds are covering their shorts going into the end of the week."
"It does seem as if the contract agreement between the UAW and GM set the tone for a bit of a rally this morning," said Eric Kuby, chief investment officer at North Star Investment Management. "The oil stocks, with oil back over $80, are also an area of strength. As far a economic data goes, we are in an environment where bad news is good news."
The GM deal, which will have to be approved by a majority of unionized workers, allows GM to shift more than $50 billion of retiree health-care liabilities to an independent union-aligned trust fund. The tentative accord raised hopes other automakers would soon reduce their health-care costs.
Bear Stearns shares jumped on rumors the investment bank is close to selling a minority stake to another financial institution, traders said. A spokesman for Bear Stearns declined to comment.
On the Nasdaq, shares of BlackBerry device maker Research in Motion led gainers after Lehman Brothers raised its price target on the stock to $106 from $84.
Treasury prices moved lower, sending yields higher.
Shares of Chevron, whose board authorized a $15 billion share buyback over the next three years, gained.