Stocks Don't Sweat 'Stress,' Close Up

Financials lead the market higher a day before the official release of bank 'stress tests.' Integrated oil companies also finish higher.
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Updated from 4:22 p.m. EDT

Stocks in New York closed modestly higher Wednesday with financials out in front, particularly those whose capital needs were in the stress test discussion.

The

Dow Jones Industrial Average

climbed 101.63 points, or 1.2%, to 8512.28, while the

S&P 500

rose 15.73 points, or 1.7%, to 919.53. The

Nasdaq

edged up 4.98 points, or 0.3%, at 1759.10.

The day started on a positive note, as ADP estimated that there were 492,000 jobs lost in the private sector in April, well below the 645,000 expected and a downwardly revised 708,000 in March.

Financials were at the forefront of advances. The Financial Selects Sector SPDR, which tracks the financial stocks in the S&P 500, and the KBW Bank Index were higher by 8% and 11.5%, respectively, a day before the release of the so-called stress test results.

Bank of America

(BAC) - Get Report

and

Citigroup

(C) - Get Report

were up 17.1% and 16.6%, respectively, leading the Dow.

Bank of America was in the news on reports it could need to raise $34 billion, far more than the $10 billion originally rumored, according to

The New York Times

and various media. Bank of America shares were more than 10% lower early but reversed completely before the open.

There seemed to be some confusion over whether it would have to be "fresh capital" among reports. The

Times

reported, however, that regulators' demands could be met through the conversion of preferred to common shares. Citi made such a move earlier this year, although it is dilutive to existing common shareholders.

Paul Nolte, director of investments at Hinsdale Associates, downplayed the significance of converting preferred shares into common stock, calling it an accounting sleight of hand. "You're moving it from one end of the balance sheet to another," he said.

"I think the reason the stock is rising is because of the economic data," said Nolte. "If we're looking at a better economy, then maybe the stress test isn't that stressful."

The government is set to release the already-delayed results of the tests in some capacity on Thursday, but reports on which banks are and are not suspected to need capital were already plentiful.

Those reportedly in need include Bank of America, Citi,

Wells Fargo

(WFC) - Get Report

,

PNC

(PNC) - Get Report

,

Regions Financial

(RF) - Get Report

,

Capital One

(COF) - Get Report

and

KeyCorp

(KEY) - Get Report

, among others.

If it's any indication of how the market is taking the news of the prospective amounts these banks were short, all of those stocks were sharply higher, with KeyCorp rising 16.7% to $7.69, for instance.

Those that were rumored to be OK, including

Goldman Sachs

(GS) - Get Report

,

Morgan Stanley

(MS) - Get Report

,

American Express

(AMEX)

and

JPMorgan Chase

(JPM) - Get Report

, were also higher.

"The thing has kind of been a joke since they announced it," says David Hefty, CFP and CEO of Cornerstone Wealth Management about the stress tests. "You can't do that under public scrutiny because if they actually come out with honest feedback and allow the public to see it, it would cause a massive negative reaction." Instead, Hefty says, expectations are for "a middle-of-the-road fluff document, that says 'yes, things are bad, but it's not going to be

that

bad.'"

Banks will have six months to execute plans to raise any capital needed for the worst-case scenario of the stress tests, although

Federal Reserve

Chairman Ben Bernanke has said the Fed expects economic conditions to bottom out and "turn up" later this year.

"The one thing that's most disturbing is that they won't allow these 19 banks to fail," says Hefty, arguing that the failure of certain businesses is part of corporate evolution.

Federal Deposit Insurance Corp. Chairman Sheila Bair called for a new system of supervision preventing institutions from taking on excessive risk and effectively becoming "too big to fail" as the Senate Banking Committee considered to regulate systemic risk on Wednesday.

"In a properly functioning market economy there will be winners and losers, and some firms will become insolvent and should fail," said Bair. "Actions that prevent firms from failing ultimately distort market mechanisms, including the market's incentive to monitor the actions of similarly situated firms."

When it comes to financial institutions, Bair argued that bigger isn't necessarily better. "As institutions grow in size and importance, they not only take on a risk profile that mirrors the risk of the market and general economic conditions, but they also concentrate risk as they become the only important counterparties to many transactions that facilitate financial intermediation in the economy," she said.

In addition to reporting who needs more capital, the government is also expected to

release guidelines

on how banks that borrowed TARP funds can pay them back on Thursday,

The Wall Street Journal

reported.

Away from the banks,

Walt Disney

(DIS) - Get Report

surged 11.8% to $25.87, after it topped Wall Street first-quarter profit forecasts. Earnings did little for the technology sector, though.

Garmin

(GRMN) - Get Report

fell 14.9% to $21.83 after

missing first-quarter expectations

, although

Cisco

(CSCO) - Get Report

shares were lower by 0.1% ahead of its after-the-bell earnings report.

Stocks overseas were mostly higher. In Europe, the FTSE in London and the Dax in Frankfurt rose 1.2% and 0.6%, respectively. In Asia, Japan's Nikkei and Hong Kong's Hang Seng closed higher by 1.7% and 2.5, respectively.

The dollar was recently weaker against the pound and yen, but stronger against the euro. Longer-dated Treasuries were recently mixed. The 10-year was rising 2/32, yielding 3.15%, while the 30-year was dropping 10/32, to yield 4.09%.

Elsewhere, gold rose $6.70 to $909.70 an ounce, while a report from the Energy Information Administration fueled crude oil prices, which gained $2.50 to $56.34 a barrel.

The EIA said crude inventories increased by 600,000 barrels last week, while analysts had anticipated a buildup of more than 2 million barrels. Gasoline inventories declined by 200,000 barrels, but distillate stockpiles, such as heating oil and diesel, increased by 2.4 million barrels.

Oil and gas stocks also moved up.

BP

(BP) - Get Report

was up 2.9%,

Chevron

(CV)

gained 3.6%,

ConocoPhillips

(COP) - Get Report

was higher by 2.9%, and

Exxon Mobil

(XOM) - Get Report

was higher by 1.4%.