Stocks Back in Rally Mode

Falling bond yields spark big bets on financials and builders.
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Updated from 4:04 p.m. EST

Stocks returned to rally mode Thursday as a sharp decline in bond yields underpinned bullish bets on financial and homebuilding shares.

Despite a 4.6% decline in

General Motors

(GM) - Get Report

, the

Dow Jones Industrial Average

gained 93.89 points, or 0.89%, to 10,640.10. The

S&P 500

rose 10.31 points, or 0.84%, to 1230.96. The

Nasdaq Composite

added 20.87 points, or 0.96%, to 2196.68. Both the Dow and the S&P 500 finished at their best levels since mid-September.

Among sectors, the Philadelphia KBW Bank Index was up 2.1%, while the PHLX Housing Sector Index rose 2.6%. The semiconductor sector index was higher by 1.1%. The S&P Retail Index gained 2.1%.

"There's a combination of factors that propelled us higher," said Peter Cardillo, chief market analyst with SW Bach & Co. "The decline in oil and the successful participation in the Treasury auction were the two biggest factors."

The 10-year Treasury climbed 18/32 in price to yield 4.57%, while the dollar rose against the yen and euro. The rally in Treasuries followed a successful auction of $13 billion of 10-year notes earlier. Overseas buyers, whose participation is viewed as crucial in holding down U.S. borrowing costs, accounted for more than half of the auction's bidding.

Paul Mendelsohn, chief investment strategist with Windham Financial, said the bond auction helped trigger the rally. "There was concern the 10-year bond yields would rise further after breaking some critical levels," he said. "But there are still buyers out there that are jumping on these Treasury notes."

The bond rally helped drown out some spotty economic data earlier. According to the Commerce Department, the U.S. trade deficit widened in September to a record $66.1 billion, from $59.0 billion in August. Economists had been calling for a deficit of $61.5 billion, according to a

Bloomberg

survey.

"The rise in oil prices was always likely to hit these numbers with a vengeance," said Ian Shepherdson, chief economist with High Frequency Economics. "The petroleum deficit duly rose by $1.4 billion. We also expected a steep drop in the aircraft account, where the surplus of $2.9 billion in August turned into a zero balance in September."

The Labor Department said U.S. import prices fell 0.3% in October while the prices of exported goods rose 0.6%. Economists expected import prices to fall by 0.2% after a 2.3% gain in September. Excluding petroleum, import prices rose 0.8% in October.

Separately, the Labor Department said jobless claims rose by 2,000 last week to 326,000. The government said 21,000 claims were related to hurricanes Katrina and Rita.

Meanwhile, the University of Michigan said that its consumer sentiment index improved to a reading of 79.9 as a preliminary figure for November from a final reading of 74.2 in October.

Crude continued a slide that has hacked about 4.5% off the December contract this week. In Nymex floor trading, crude fell $1.13 to close at $57.80 a barrel. It was trading near $62 as recently as last Thursday. Gasoline futures were down 4 cents to $1.51 a gallon.

Also, the Energy Department said that natural gas stocks rose by 61 billion cubic feet last week. Natural gas was down 29 cents to $11.38 per million British thermal unit.

The sharp decline in crude prices cut 3.4% off the Amex Oil index.

ConocoPhillips

(COP) - Get Report

,

Marathon Oil

(MRO) - Get Report

and

Occidental Petroleum

(OXY) - Get Report

all fell by at least 3.4%.

"The dramatic drop in oil stocks would be expected to give us a lift," said Barry Hyman, equity market strategist with Ehrenkrantz King Nussbaum. "But the perception is that lower energy prices are because of slowing global growth."

About 1.73 billion shares traded on the

New York Stock Exchange

, with advancers beating decliners by a 10-to-7 margin. Trading volume on the Nasdaq was 1.97 billion shares, with three stocks rising for every two that fell.

"The price action looks great, but the advance-decline action is poor considering the large gain we saw today," Mendelsohn said.

Cisco

(CSCO) - Get Report

finished lower a day after its disappointing outlook. The networking giant made $1.26 billion, or 20 cents a share, in the first quarter, down from $1.4 billion, or 21 cents a share. Revenue rose to $6.55 billion from $5.97 billion a year earlier. On a pro forma basis, latest-quarter earnings were 25 cents a share, a penny ahead of estimates.

In a conference call, Cisco said second-quarter sales will be flat to slightly up from the first quarter; analysts were looking for 2% sequential growth. The company also revealed that its book-to-bill ratio was slightly below 1 in the most recent quarter. Cisco slid by 60 cents, or 3.4%, to $17.15.

Another tech heavyweight,

Dell

(DELL) - Get Report

, reported earnings after the bell Thursday. For the third quarter, the company earned $606 million, or 25 cents a share, down from $846 million, or 33 cents a share, a year ago. Revenue rose to $13.9 billion from $12.5 billion a year earlier.

Excluding charges, Dell earned $944 million, or 39 cents a share, matching analysts' forecasts, according to Thomson First Call. The computer maker expects a fourth-quarter profit of 40 cents to 42 cents a share, on revenue of $14.6 billion to $15 billion. Dell finished the session up 19 cents, or 0.7%, to $29.21.

Optical networker

JDSU

(JDSU)

rose after posting a first-quarter loss of $16.2 million, or a penny a share, on sales of $258.3 million. The loss matched estimates while the top line was about $8 million stronger than expected. JDSU fell by 10 cents, or 4.3%, to $2.24.

Yahoo!

(YHOO)

has dropped out of the bidding for

Time Warner's

(TWX)

AOL unit, leaving

Google

(GOOG) - Get Report

and

Microsoft

(MSFT) - Get Report

to battle for the online property. A Yahoo! spokeswoman told

The Wall Street Journal

that the company "passed" after hearing AOL's terms.

General Motors said in an

SEC

filing that it must restate earnings for 2001 after discovering accounting mistakes involving the treatment of supplier credits. It estimated the overstatement at as much as $400 million, although the final amount hasn't been determined. GM was the Dow's worst-performing component, losing $1.12, or 4.6%, to close at $23.51.

In other earnings,

Whole Foods Market

(WFMI)

posted fiscal fourth-quarter earnings of $9.1 million, or 13 cents a share, down sharply from $28.2 million, or 45 cents a share, a year ago. Results included share-based compensation costs as well as a charge due to hurricane damage. The Thomson First Call consensus was for EPS of 53 cents. Sales rose 20% to $1.1 billion.

Whole Foods also said it will increase its quarterly dividend by 20%, payable on Jan. 23. The company also will pay a special one-time dividend of $4 a share at that time. In addition, the company announced both a $200 million stock buyback plan as well as a 2-for-1 stock split, effective Dec. 17. Shares of Whole Foods were lower by $7.12, or 4.9%, to $139.66.

Target

(TGT) - Get Report

reported third-quarter earnings of $435 million, or 49 cents a share, falling from $531 million, or 59 cents a share, a year ago. Revenue rose 11.9% to $12.21 billion from last year. The Thomson First Call average estimate was for earnings of 45 cents a share on revenue of $12.14 billion.

Target said it was no longer confident that second-half earnings would top its previous target of $1.50 a share. The retailer also announced an increase to its stock buyback program by $2 billion. Shares of Target were up $2.29, or 4.1%, to finish the session at $58.85.

Rival

Wal-Mart

(WMT) - Get Report

was one of the best-performing stocks on the Dow. Shares rose 1.7% to $49.13.

Late Wednesday,

Nvidia

(NVDA) - Get Report

posted third-quarter earnings of $65.3 million, or 36 cents a share, up from $25.9 million, or 15 cents a share, a year ago. Revenue grew to $583.4 million from $515.6 million last year. Results matched the Thomson First Call average consensus.

The earnings report earned Nvidia an upgrade from Global Crown Capital, which raised the stock to overweight from neutral. The firm also assigned a $46 stock price target. Nvidia lost $1.29, or 3.7%, to $33.49.

Movie Gallery

(MOVI)

swung to a third-quarter loss of $12.5 million, or 39 cents a share, compared with a profit of $9.2 million, or 29 cents a share, a year ago. Excluding items, the company would have earned 16 cents a share in the quarter. Revenue climbed to $572.4 million from $189.9 million a year earlier. Analysts expected EPS of 6 cents on revenue of $585.5 million, according to Thomson First Call.

The video rental chain also offered fourth-quarter guidance below analysts' projections. Movie Gallery added 18 cents, or 2.9%, to $6.46.

Among ratings moves,

Mills Corp.

(MLS)

was downgraded by three firms after the company swung to a third-quarter loss from a year ago, forcing the company to miss the Thomson First Call average estimate. Morgan Stanley, J.P. Morgan and Deutsche Securities all cut the stock after the earnings disappointment. Mills dropped $2.42, or 5.8%, to close at $39.50.

Overseas markets were mostly higher with London's FTSE 100 losing 0.2% to 54271 and Germany's Xetra DAX adding 0.1% to 5015. In Asia, Japan's Nikkei rose 0.1% overnight to 14,081, while Hong Kong's Hang Seng rose 0.3% to 14,633.