Debt pays off for stocks
The deep freeze on corporate borrowing is showing signs of thawing, and that helped Wall Street post its third straight gain Wednesday.
Although few analysts were willing to sound the all-clear for battered markets, the mood has brightened significantly in the last few days.
The big question: Will the buyers have staying power?
The Dow Jones industrial average surged 153.56 points, or 1.1%, to 13,657.86, bringing its three-day advance to 475.95 points, or 3.6%.
The Dow and the broader Standard & Poor’s 500 index this week have recouped more than half of their recent losses.
Fears of a deepening credit crunch were eased Wednesday as a handful of major firms, including Citigroup Inc. and Kraft Foods Inc., were able to borrow by selling bonds to investors.
And interest rates on junk bonds -- crucial in the financing of many corporate buyouts -- continued to fall from four-year highs. The yield on an index of 100 junk issues tracked by KDP Investment Advisors slid to a two-week low of 8.32%, down from 8.50% on Tuesday. The yield peaked at 8.85% on July 27.
Brokerage Bear Stearns Cos., which has been slammed by losses on high-risk mortgage bonds in two of its now-defunct hedge funds, helped get the wheels turning in the corporate bond market Tuesday, when the firm issued $2.25 billion in five-year notes.
Because Bear Stearns has become a symbol of investors’ sudden aversion to risk taking, its successful note offering helped ease the way for other bond sales, analysts said.
“A lot of people were thinking that Bear Stearns wouldn’t be able to raise any money,” said Paul Hickey, a principal at investment research firm Bespoke Investment Group in Mamaroneck, N.Y.
On Wednesday, Citigroup sold $1.5 billion of 10-year bonds and Kraft raised $3.5 billion via bonds of varying maturities.
A total of $15 billion of bonds were issued Wednesday, according to a tally by Bloomberg News.
Wall Street has been reeling since mid-July as banks and investors have become wary of extending credit to many borrowers. The retreat from lending began in the mortgage market in spring amid soaring defaults on bonds backed by high-risk sub-prime home loans. The taint spread to the corporate bond market in the last two months.
Despite the trickle of bond deals this week, many analysts say the real test will come in September, when private equity firms and investment banks will need to find investors for an estimated $330 billion in bonds and loans needed to finance corporate buyouts that already have been announced.
Kingman Penniman, head of junk-bond research at KDP in Montpelier, Vt., said big investors told him this week that “they really don’t want to touch this market until after Labor Day,” when they’ll see whether overall demand for high-risk debt will revive as many Wall Street pros return from summer vacations.
The potential for more trouble in the credit arena also has left many stock investors leery, particularly of the financial-company shares that have led the market lower since mid-July.
Warren Simpson, a portfolio manager at Stephens Capital Management in Little Rock, Ark., said his firm was looking at opportunities in depressed financial stocks. “But you’ve got to be careful,” he said. “I don’t think it’s done,” he said, referring to credit-crunch worries.
Financial and housing shares were among the biggest gainers Wednesday, but analysts said that partly reflected that some “short sellers” who had bet against the stocks were closing out their bets.
In a short sale, a trader borrows stock and sells it, hoping to buy the stock back at a lower price to repay the loaned shares. If the bet is correct, the trader garners the difference between the sale price and the repurchase price.
With the plunge in financial and housing stocks in recent weeks, short sellers had racked up big paper gains. As some of those bets were closed out this week, their purchases added fuel to the market rally, analysts said.
Bear Stearns jumped $4.23 to $121.12 on Wednesday, mortgage giant Countrywide Financial surged $1.76 to $29.11 and builder KB Home climbed $2.91 to $35.97.
The market’s mood also got a boost from computer networker Cisco Systems, which late Tuesday reported a 25% jump in quarterly earnings and gave an upbeat business forecast.
Cisco rose $1.99 to $31.68, a six-year high, which helped lift the Nasdaq composite index 51.38 points, or 2%, to 2,612.98.
In the broad market, winners topped losers by more than 2 to 1 on Nasdaq and the New York Stock Exchange as trading remained very heavy.
The S&P; 500 index gained 20.78 points, or 1.4%, to 1,497.49. The Russell 2,000 small-stock index, which has fallen much more than blue-chip indexes since mid-July, rocketed 2.8%.
Some stocks recouped their recent losses and more. Among issues reaching 52-week highs were Coca-Cola, up $1.40 to $55.86; Priceline.com, up $14.47 to $79.56; and restaurant chain IHOP, up $1.48 to $67.42.
Still, trading action late in the session was a reminder of how jittery Wall Street remains. The Dow was up 191 points with 90 minutes to go, then quickly plunged into the red. Some traders said there were rumors that brokerage Goldman Sachs would make an announcement after trading ended.
As those rumors faded, buyers poured back in, and the Dow zoomed again.
The market is largely in the hands of short-term traders at the moment, said Phil Roth, veteran analyst at Miller Tabak & Co. in New York. That means sentiment could quickly shift back to bearish, he warned.
In other market action Wednesday:
* Treasury bond yields jumped as the rising stock market siphoned money away and an auction of new 10-year T-notes was greeted by somewhat tepid demand. The yield on the existing 10-year T-note rose to 4.85% from 4.77% on Tuesday.
* Crude oil prices softened. Near-term futures slipped 27 cents to $72.15 a barrel.
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