Stocks Holding to Gains

The ADP employment report shows that nonfarm private U.S. jobs climbed by 40,000 in May. The ISM's service sector data showed more expansion in May.
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Updated from 12:40 p.m. EDT

Stocks in New York continued trading in positive territory Wednesday as traders weighed relatively positive economic data against prevailing troubles in the financial sector.

The

Dow Jones Industrial Average

slipped out of the gate, but was recently up 38 points to 12,440. The

S&P 500

was up 5 points at 1383. The

Nasdaq Composite

was gaining 29 points at 2510.

The moves came after the ADP employment report showed that nonfarm private U.S. jobs

climbed by 40,000

in May, markedly better than the average economists' consensus for a 30,000 drop. The report noted, however, that this "nevertheless suggests continued weakness in unemployment" as manufacturing employment, in particular, saw its 21st consecutive monthly decline. Last month's data was revised up to 13,000 added positions.

On Friday, the Labor Department will put out its official numbers, and the two reports often differ.

"This is something of a surprise and, other things equal, it increases the chance that Friday's official payroll number will beat the current

minus 60,000 consensus," wrote Ian Shepherdson, chief U.S. economist with High Frequency Economics. But he pointed out that ADP has overstated payrolls for the past nine months straight, with an average error of 71,000, and said that "most of the labor market indicators we follow are consistent with clear declines in payrolls."

"But with such volatile data, in any given month, anything can happen," he said.

Also, the Institute for Supply Management said the non-manufacturing sector showed another expansion last month, with its ISM Services Index coming in at 51.7 -- just over the break-even point of 50. That's slightly lower than April's 52 reading, but economists were looking for a decline to 51.

Elsewhere on the economic docket, the government bumped its nonfarm productivity numbers up to 2.6% from the preliminary figure of 2.2%. That was slightly better than expected. Unit labor costs, however, rose 2.2%, more than expected.

Shares of bond insurers

MBIA

(MBI) - Get Report

and

Ambac

(ABK)

were taking a thrashing in afternoon trading after Moody's Investors Service said it's reviewing their AAA insurance financial strength ratings and may downgrade the ratings. Shares of MBIA sank 12%, and Ambac was down 17%.

Last time out, the market fell as investors grew anxious about the health of

Lehman Brothers

(LEH)

, and the major indices all closed substantially lower.

As the new session began, traders were met with fresh negative research on financials from a Merrill Lynch analyst, which said that

Countrywide Financial

(CFC)

will probably see cumulative losses rising to between $10 billion and $12 billion as home prices keep dwindling.

That, said the analyst, should translate into ever more worries for

Bank of America

(BAC) - Get Report

, which agreed to buy Countrywide a few months ago. The analyst, who also noted BofA has high exposure to consumers, cut BofA's price target by $1 to $27. BofA, a Dow component, dipped 1.9%.

Meanwhile,

The Wall Street Journal

reported that Lehman has reached out to overseas investors this week for new capital, including one in South Korea, and that Lehman bought back its own shares Tuesday. That day, the paper reported that Lehman was looking to raise $3 billion to $4 billion in order to shore up its ailing balance sheet. Shares of Lehman, which plunged in the prior session, were recently up 5% at $32.19.

Back on the corporate side,

Yahoo!

(YHOO)

president Sue Decker said at a New York advertising conference that talks with

Microsoft

(MSFT) - Get Report

were still ongoing weeks after the Internet-portal operator turned down the software giant's sweetened takeout bid. Yahoo! shares added 3%.

Last month, Microsoft announced that it was working on another deal with Yahoo! that didn't include an outright acquisition, but the company nonetheless left that possibility open. Billionaire investor Carl Icahn, who has taken a sizable stake in the company, said Yahoo! acted "irrationally" in rejecting Microsoft's overtures, has lined up 10 people to replace current directors, and reportedly aims to oust CEO Jerry Yang if he succeeds in the proxy battle.

Elsewhere, jam maker

J.M. Smucker

(SJM) - Get Report

announced it will buy out

Procter & Gamble's

(PG) - Get Report

Folgers coffee business for some $2.95 billion in stock and $350 million in assumed debt. Smucker shares were up 1%, and Procter was ticking up 1.6%.

After the last market close, clothing purveyor

Guess?

(GES) - Get Report

said its fiscal first-quarter profit soared 35% from a year earlier thanks to its international exposure, enough to top reet's expectations. The company also lifted its full-year guidance for both earnings and sales. Shares were leaping 13.4%.

Staying in earnings, homebuilder

Hovnanian Enterprises

(HOV) - Get Report

lost 8% after its second-quarter loss widened sharply to $340.7 million, or $5.29 a share, from 49 cents a share last year. The firm blamed a "persistently challenging market environment."

Home-furnishings retailer

Williams-Sonoma

(WSM) - Get Report

reported a 42% income drop to $10.4 million, or a dime a share, and sharply lowered its same-store sales forecast. The company beat analyst targets in the first quarter, but the stock was still losing 3.8%.

Returning to analyst research, Wachovia upped both

Morgan Stanley

(MS) - Get Report

and

Tyson Foods

(TSN) - Get Report

to outperform. Drugmakers

Eli Lilly

(LLY) - Get Report

and

Novartis

(NVS) - Get Report

each got an upgrade at Cowen & Co.

Cowen also lowered

Bristol-Myers

(BMY) - Get Report

to neutral from outperform, however, and hotel chain

Marriott

(MAR) - Get Report

got cut to perform from outperform at Oppenheimer.

Among commodities, crude oil lost $1.42 to $122.89 a barrel, and gold was down 70 cents at $884.80 an ounce. The U.S. dollar rose 0.1% against the euro to $1.5446 and firmed by 0.2% against the yen to fetch 105.04.

Treasury prices were backing off from early gains. The 10-year note shed 4/32 in price to yield 3.91%, and the 30-year bond moved down 6/32 in price, yielding 4.63%.

Most markets abroad were weaker. In Asia, the Tokyo's Nikkei 225 surged 1.6% overnight, but Hong Kong's Hang Seng Index lost 1%. As for Europe, the FTSE 100 sank 1.5%, and Germany's Xetra Dax was off 1.1%. The Paris Cac gave up 1.7%.