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Oil's Drop Boosts Stocks; Fannie Falls

Stocks rallied Friday as a more than $4 a barrel drop in oil prices helped offset the drag of Fannie Mae's earnings miss.

Crude oilclosed at $115.20 a barrel, a three-month low, as the dollar surged and worries about a global slowdown dragged down expectations for demand. Crude lost 7.9 percent this week.

The dollar rallied to a five-month highagainst the euro as the European Central Bank's cautious statement on economic growth Thursday suggested the U.S. wasn't the only country facing a tough economic slowdown.

"It looks like the dollar has turned a corner … obviously tied into falling commodity costs," Tim Mole, head of CFDs from SVS Securities, told "Worldwide Exchange."

On the economic front, nonfarm productivity rose 2.2 percentin the second quarter, below the 2.5 percent expected and the 2.6 percent logged in the first quarter. Unit labor costs rose just 1.3 percent, sharply lower than the revised 2.5 percent increase in the first quarter.

Wholesale inventories rose 1.1 percent in June to a seasonally adjusted $435.85 billion, following an upwardly revised 0.9-percent increase in May.

The Nasdaq outperformed the broader market, led by United parent UAL , which got a boost from the lower oil prices.

General Motors led Dow gainers after the auto maker announced a $900 million restructuring effort.

Fannie Mae shares tumbled more than 7 percent after the largest U.S. home-financing source reported a loss of $2.3 billion, missing Wall Street's already lowered expectations. It was Fannie's fourth straight quarterly loss. The company also said it would slash its dividend by more than 85 percent and take other steps to firm up its capital position.

"The financial crisis isn't over," Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vt., told Reuters. The credit "side of the market still has long ways to go if we work under the theory that the minimum of liabilities here are going to be $1 trillion and could be as high as $2 trillion."

Helping to curb losses in the broader market, bond insurer MBIA reported a massive rise in income to $1.7 billion, from $211.8 million a year earlier, that it attributed to $3.3 billion in pretax unrealized gains on insured credit derivatives due to wider spreads on credit default swaps on MBIA Insurance.

Meanwhile, the toxic debt securities routinely blamed for spreading the effect of the credit crunch worldwide could be regaining favor as money managers, such as BlackRock and PIMCO, start to pick up the assets at bargain prices.

This comes as Citigroup is set to buy back more than $7 billion worth of auction-rate securities from thousands of investors around the world as part of a settlement with federal and state regulators. Merrill is expected to be the next bank to settle, while UBS could face $25 billion securities buyback, according to a published report.

Still to Come:

FRIDAY: Earnings from Berkshire Hathaway after the bell

Send comments to cindy.perman@nbcuni.com.