×

Lehman Speculation Buoys Financial Stocks

Stocks advanced Friday after a double shot of soothing comments from Federal Reserve Chairman Ben Bernanke and the Oracle of Omaha, Warren Buffett.

The Dow Jones Industrial Average was up more than 1 percent. The S&P 500 and Nasdaq were also higher.

A pullback in oil prices also helped to boost sentiment. Light, sweet crude fell below $118 a barrel, after finishing above $121 on Thursday.

Bernanke called the recent decline in commodity prices and stabilization of the U.S. dollar "encouraging," in opening remarks at the Fed symposium in Jackson Hole, Wyo. These developments "should lead inflation to moderatelater this year and next," Bernanke said in prepared remarks.

Those remarks were so soothing to the market that they sent the CBOE Volatility Index below 20 and to its lowest level since early June.

Meanwhile, Warren Buffett weighed in on everything from the dollar to Fannie Mae and Freddie Mac during an interview with CNBC. Buffett said he has no bets against the dollar and thinks stocks are more attractive now than a year ago. He also said Fannie Mae and Freddie Mac "are too big to fail," but shareholders could "lose a lot of money." (Read more from the interview in the Buffett blog.)

Fannie and Freddie shares fluctuated throughout the morning as short sellers continued to press the stocks. Short selling occurs when a buyer borrows stock at a higher price, betting it will decline, then buying it back at the lower price to profit from the difference.

Fannie and Freddie stocks have been battered throughout the week, suffering declines of more than 20 percent two days this week, amid speculation that they may be taken over by the Treasury and the stocks wiped out.

A collapse of Fannie and Freddie could spark panic selling in the market but market pros say thatmay be just what the market needs to hit rock bottomand get back on the road to recovery.

Financials blazed the trail amid speculation of a possible takeover of Lehman Brothers.

Lehman shares shot up more than 10 percent after Korea Development Bank said Lehman was a possible acquisition target. The news comes after a newspaper reported on Thursday that Lehman sought to sell up to a 50 percent stake to China's biggest brokerage, CITIC Securities, or Korea Development Bank but the two Asian companies walked away after deciding the asking price was too high.

Shares in Lehman have plunged more than 75 percent this year, leaving the bank worth some $9 billion at this week's valuations. CEO Dick Fuld has come under fire recently from everyone from Ladenburg Thalmann analyst Dick Bove to CNBC's Jim Cramerfor not acting swiftly enough to shore up the bank's balance sheet. Given the firm's inability to convince Wall Street that its liquidity is stable, Bove said the firm is ripe for a hostile takeover and slapped the stock with a "buy" rating on that basis. Citigroup also has a "buy" rating on Lehman.

Meanwhile, the U.S. economy could be in danger from another property-related downturn. Commercial real-estate loans are now looking vulnerable, the New York Times reported.

On the earnings front, Gaptopped expectations after the bell Thursday, with margins improving.

AnnTaylor also surpassed forecasts and backed its full-year outlook as tight control of inventories helped offset falling sales at the women's clothing chain.

Stocks in Europe were higher, with London leading the way after the government's revised figures said the UK economy remained flat in the second quarter. That opened the door to the possibility of an interest-rate cut. Trading on Asian markets was mixed.

NEXT WEEK:

MONDAY: Existing-home sales; Reports from Chicago, Dallas Fed branches; Earnings from China Unicom
TUESDAY: ICSC chain-store sales; Case-Shiller home-price index; New-home sales; Richmond Fed report; consumer confidence; Fed minutes; Census bureau releases 2007 stats; Earnings from Smithfield Foods, Big Lots
WEDNESDAY: Weekly mortgage applications; durable goods; Fed's Lockhart speaks; weekly crude inventories; Report from Chicago Fed; Earnings from American Eagle, Dollar Tree
THURSDAY: Jobless claims; GDP, corporate profits; natural-gas inventories; Earnings from Sears Holdings, Tiffany and Dell
FRIDAY: Personal income and spending; Chicago manuf. report; consumer sentiment; farm prices

Send comments to cindy.perman@nbcuni.com.