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Stocks Claw Way Higher

Robert Holmes

Wall Street perked up late Friday and closed higher as the prospect of a potential blockbuster deal in the tech sector and unexpectedly strong manufacturing data overshadowed a horrid report on U.S. employment and more worry over bond insurers.

The Dow Jones Industrial Average added 92.83 points, or 0.73%, to 12,743.19, and the S&P 500 tacked on 16.87 points, or 1.22%, to 1395.42. The Nasdaq Composite advanced 23.50 points, or 0.98%, at 2413.36, despite an 8.6% drop in shares of Google (GOOG Quote).

The winning session punctuated a strong week for the major averages. The Dow climbed 4.4%, and the S&P 500 added 4.9% for the week. The Nasdaq advanced 3.7% over the five sessions.

Volume and breadth were firm to end the week. On the New York Stock Exchange 4.54 billion shares changed hands, as advancers topped decliners by nearly a 4-to-1 margin. Volume on the Nasdaq reached 3.06 billion shares, with winners beating losers 2 to 1.

The session's action was influenced by a number of significant news events. One of them was Microsoft's (MSFT Quote) disclosure it has made an unsolicited bid to acquire Yahoo! (YHOO Quote) for $31 a share, roughly a 62% premium above Thursday's closing price.

Yahoo! soared 48% to finish the day at $28.38, while Microsoft headed 6.6% lower to $30.45.

Meanwhile, the Institute for Supply Management said its manufacturing index surprisingly rose to a reading of 50.7 last month from 48.4 in December. Readings above 50 indicate that manufacturing activity is expanding, a welcome sign to those concerned over recession prospects.

"After the horrible Philly Fed survey and the drop in the Chicago [purchasing managers' index] this is something of a relief, though we very much doubt it means the ISM has bottomed out," said Ian Shepherdson, chief economist with High Frequency Economics.

While on many days those developments might spur buying, the Labor Department's nonfarm payrolls report, which showed that the U.S. economy unexpectedly lost 17,000 jobs in January, dampened the mood. Economists had anticipated growth of 65,000 jobs.

The unemployment rate dipped to 4.9% from 5% last month, and average hourly earnings rose 0.2%.

As expected, job growth in the prior two months was revised. November payrolls data were taken lower by 55,000 and December's number was modified higher by 64,000, a total net revision of 9,000 additional jobs.

"It's a good thing we had the Microsoft news or we'd be in bad shape today," said Paul Mendelsohn, chief investment strategist with Windham Financial. "These data indicate the economy is really struggling. We've already had the Federal Reserve drop interest rates, so we know they're attacking the problem. But any way you look at this, we're losing jobs and this scores one in the recession column."

U.S. Treasury prices rose following the employment report. The 10-year note was up 1/32 in price, dropping the yield 3.59%. The 30-year bond gained 6/32 in price to yield 4.31%.

"The movement in bonds indicates that traders believe additional rate cuts are coming," said Robert Pavlik, chief investment officer with Oaktree Asset Management. "The payroll report is certainly a huge disappointment and will strengthen the recession argument, thus the expectation of further rate cuts increases."

Google's latest earnings report, released after the previous close, was eclipsed by the Microsoft and Yahoo! news. The Internet search giant missed fourth-quarter earnings targets by a penny. Google's net revenue also fell short of the Thomson First Call estimate, and shares tumbled $48.40, or 8.6%, to $515.90.

Also on the negative side, Moody's said it was reviewing its stance on bond insurers, including MBIA (MBI Quote) and Ambac Financial (ABK Quote), and that downgrades would likely follow.

Earlier, CNBC reported that a consortium of banks would join forces to bail out the troubled bond insurers, saving them from near-certain downgrades. The insurers' triple-A ratings are key to their ability to write new business, and any downgrades would lower the ratings on debt securities that are already insured and may force additional writedowns by owners of the instruments.

Last time out, the major stock averages closed out a dismal month on a high note, as the Dow Jones Industrial Average rallied from a near-200 point decline to finish up 207 points, or 1.7%, at 12,650.

The S&P 500 and the Nasdaq also finished into the black. The S&P 500 gained 22.69 points, or 1.68%, to 1378.50, and the Nasdaq advanced by 40.68 points, or 1.74%, to 2389.86.

Elsewhere on the economic docket, the Census Bureau said that construction spending fell a greater-than-expected 1.1% in December. Also, the University of Michigan consumer confidence index rose to a reading to 78.4 in January from 75.5 in December.

Several other earnings releases were in focus, with two oil titans reports ahead of the opening bell. Dow component Exxon Mobil (XOM Quote) posted a record annual profit of $40.6 billion, while Chevron (CVX Quote) also reported a sharp increase in earnings to beat the Thomson First Call consensus. Both were trading higher in the premarket session.

Still, Exxon was lower by 45 cents, or 0.5%, at $85.95. Chevron was off 76 cents, or 0.9%, at $82.49.

In other M&A news, Alcoa (AA Quote) and Aluminum Corp. of China said they have acquired a 12% stake in Rio Tinto (RTP Quote), setting up a showdown with Rio suitor BHP Billiton (BHP Quote). Rio Tinto jumped 8.4%. Both Alcoa and BHP Billiton also ended up on the day.

Commodity prices were sinking. Crude oil fell $2.79 to end at $88.96 a barrel, and gold futures slid $14.50 to close at $913.50 an ounce.

Overseas markets were mostly higher. Hong Kong's Hang Seng jumped 2.9%, while Japan's Nikkei 225 slid 0.7%. Among European bourses, the Paris CAC 40, London's FTSE 100 and Germany's Xetra Dax were all higher by at least 1.5%.