Financials lead as most stocks rise
Stocks finished mostly higher Tuesday, led by the beaten-down financial service sector. The Dow Jones industrials rose more than 130 points.
Meanwhile, yields on junk bonds rose to a five-year high. And prices of many commodities sank, slamming the brakes on record-setting rallies this month in raw materials.
The stock market initially rose sharply Tuesday, putting the Dow up more than 200 points, after billionaire investor Warren Buffett told cable channel CNBC that he had offered to sell reinsurance to troubled bond insurers.
Then the rally subsided, perhaps because Buffett said a company he controls would back only the $800 billion in municipal bonds that the troubled firms insure, not the more risky mortgage-related instruments that have caused worries about the insurers’ stability.
Stock “investors are taking this extremely positively, that this would be a boon for the bond insurers and that we are now avoiding the doomsday scenario,” in which losses caused by defaults on mortgage-linked securities make bond insurers unable to pay all their claims, said T.J. Marta, fixed-income strategist at RBC Capital Markets.
However, shares of two of the bond insurers that Buffett approached fell sharply.
The billionaire, whose investing moves are widely followed, also told CNBC that he thought stocks were in the “general range of fair value.”
The Dow rose 133.40 points, or 1.1%, to 12,373.41. The Standard & Poor’s 500 index advanced 9.73 points, or 0.7%, to 1,348.86. But the Nasdaq composite index edged down 0.02 point to 2,320.04.
The Russell 2,000 index of smaller companies rose 5.73 points, or 0.8%, to 705.48.
Advancing issues outnumbered decliners by 3 to 2 on the New York Stock Exchange.
Buffett’s offer to bond insurers may have lifted the stock market, but junk bond values tumbled, driving yields on the securities to a five-year high. A bond’s yield rises as the price of the security falls.
Investors have pulled back further in the last week from buying higher-risk bonds, on worries that a slowing or contracting economy would cause more companies to default on their debt payments.
Standard & Poor’s warned Tuesday that it expected the default rate on U.S. junk bonds to rise to 4.6% of the securities over the next 12 months -- from a 25-year low of 1.1% in the 12 months that ended in January -- as more companies had trouble making interest payments on their debt.
The yield on an index of 100 junk bonds tracked by KDP Investment Advisors rose to 9.62% on Tuesday, up from 9.59% on Monday and the highest since 2003. The yield is up from 7.69% in mid-October.
Yields on government securities also rose. The benchmark 10-year Treasury note climbed to 3.66% from 3.61% late Monday. The dollar was mixed against other major currencies.
In the commodity markets, platinum and most wheat contracts ended down after more than a week of highs. Gold prices fell after news of lower demand for the metal from India, a top buyer of bullion.
Oil prices also dropped. Crude futures fell 81 cents to settle at $92.78 a barrel.
In the stock market, an index of financial companies in the S&P; 500 climbed 1.4%. Citigroup added 40 cents to $26.21. Bank of America rallied 68 cents to $42.82. Moody’s, the world’s second-largest credit-rating company, gained $2.28, or 6.3%, to $38.61.
U.S.-traded shares of Credit Suisse Group rose $1.11 to $51.94 after Switzerland’s second-largest bank company sharply reduced its estimate of how much exposure it has to sub-prime mortgage debt.
But shares of bond insurers MBIA and Ambac Financial sank on word of Buffett’s offer to them and one other insurer. MBIA dropped $2.08, or 15%, to $11.50. Ambac tumbled $1.58, or 15%, to $8.90.
In other market highlights:
* General Motors fell 52 cents, or 1.9%, to $26.60 after announcing a fresh round of buyout offers to all 74,000 of its U.S. hourly workers represented by the United Auto Workers union. The company also reported a loss of $38.7 billion for 2007, the largest annual loss for a carmaker.
* Yahoo fell 30 cents, or 1%, to $29.57 after the Web company’s board rejected Microsoft’s $44.6-billion takeover bid. That raised speculation that Microsoft -- whose shares rose 13 cents to $28.34 -- might take its offer directly to shareholders.
* Research in Motion fell $2.97, or 3.1%, to $91.50 after the BlackBerry maker acknowledged that its network service was widely disrupted Monday.
* 99 Cents Only Stores surged 80 cents, or 9.2%, to $9.48. Higher prices helped the City of Commerce-based discount retailer’s fiscal third-quarter profit rise 7% and beat analyst expectations.
* Overseas, stocks in Europe surged on the Buffett news. Key indexes jumped 3.5% in Britain, 3.3% in Germany and 3.4% in France. In Asia, shares gained 1.4% in Hong Kong and inched up in Japan.
