Wall Street stocks closed higher on Wednesday buoyed by a decision by General Motors workers to end their strike.
Stocks were given a late boost by a New York Times report that Bear Stearns is in “serious talks” with outside investors including Warren Buffett about selling a 20 per cent stake in the firm.
But Sallie Mae, the biggest provider of student loans, fell 2.7 per cent to $45.01 in late trading after it said the consortium led by JC Flowers which had agreed to acquire it for $25.3bn, or $60-a-share, was now planning to walk away from the deal. Sallie Mae said it “intends to pursue all remedies available to it”.
The S&P 500 had another choppy session but closed strongly, 0.5 per cent higher at 1,525.42. The Dow Jones Industrial Average was 0.7 per cent higher at 13,878.15. The Nasdaq Composite index was up 0.6 per cent at 2,699.03 as technology stocks continued to attract buyers.
Despite the rumours around Bear Stearns elsewhere there was mixed news for the investment banking sector on Wednesday.
Merrill Lynch fell 0.5 per cent to $71.75. An analyst at Goldman Sachs cut his price target on the stock, estimating that the bank may face a $1.5bn third-quarter loss on its fixed-income business because of $4bn in asset write-downs linked to leveraged loans and mortgages.
In economic news, orders for durable goods fell 4.9 per cent in August, more than an expected decline of 3.1 per cent. It was the first fall in orders since May. Orders for non-defence capital goods excluding aircraft fell by 0.7 per cent.
The disappointing figures followed a raft of negative data on housing sales and consumer confidence and helped to reinforce market expectations of a further cut in interest rates.
The futures market is calculating an implied 86 per cent probability of a 25 basis point cut on October 31, up from 80 per cent a week ago.
The rally in stocks since the Federal Reserve last week cut interest rates by 50 basis points has been accompanied by a 36 per cent decline in the Chicago Options Board volatility index.
Vix, often referred to as “Wall Street’s fear gauge”, is a closely watched index of option volatility. Prior to the Fed’s meeting last week, Vix was trading above a reading of 26, but on Wednesday was down 4.9 per cent at 17.69
Vix peaked at 37.5 on August 16 when selling of stocks intensified amid credit and money market worries. At its current level however, Vix is almost 50 per cent higher than at the start of the year.
The outlook for Vix is caught between two trading dynamics said William Strazzullo, chief market strategist at BellCurve Trading. “The market is returning to its old highs – from July – and should prices stay in the established range, volatility should decline.” But, as the benchmarks approach this year’s highs, the risk of a new wave of selling increases, as traders cash in gains and that could spark a rise in Vix, say analysts.
The outlook for corporate earnings was in focus after a report predicted earnings for the S&P 500 would rise by 2.4 per cent in the third quarter, the lowest gain for more than five years. “Uncertainty over liquidity and the impact of the housing slump has spread into corporate earnings causing a drastic increase in market volatility that hasn’t been seen since 2002,” said Howard Silverblatt, senior index analyst at Standard & Poor’s.
“In addition, because Standard & Poor’s expects a down third quarter from financials – which is the largest sector component of the S&P 500 – the impact on the overall index will not be difficult to see. You can’t have a good earnings period without financials.”
Ford gained 6.4 per cent to $8.88. Investors expect the company to use GM’s settlement with the UAW as the basis for its own negotiations with workers.
Timberland expects third-quarter sales to decline by a low double-digit percentage and full-year sales to fall by 5 per cent. Its shares were down 8.1 per cent at $18.58.
Second-quarter profit at Red Hat rose 64 per cent. The maker of open-source software closed 5.3 per cent higher at $19.89.
Energy stocks were sluggish after the Department of Energy said crude inventories rose by 1.8m barrels to 320.6m barrels last week, ahead of expectations. Crude oil prices were choppy closing 77 cents higher at $80.30.
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