Stocks Push to Stay Positive

Stocks are trading with modest gains as the White House and Treasury explore more options for U.S. automakers.
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Updated from 2:02 p.m. EST

Stocks on Wall Street advanced into slightly positive territory Friday afternoon as it seemed more likely U.S. automakers would receive temporary, alternative life support from the federal government.

The

Dow Jones Industrial Average

was up 39 points at 8604, and the

S&P 500

was edging higher by 2.5 points at 876. The

Nasdaq

also up 26 points at 1533.

A federal rescue plan for Detroit's

Big Three automakers

failed to pass the Senate late Thursday after the United Auto Workers union refused Republicans' demand for aggressive wage reductions. The House had already approved the plan to provide aid to

Ford

(F) - Get Report

,

General Motors

(GM) - Get Report

and

Chrysler

.

The Senate voted 52-35 against the bailout in a procedural vote. It needed 60 votes to pass.

According to Washington officials, the bill might not resurface until the new year.

Chrysler and GM, though, have said they might have mere weeks of sustainability left. Even before the vote failed,

GM

hired advisers to help it decide whether to file for bankruptcy, according to a report in

The Wall Street Journal

Thursday night.

"It would have been a stop-gap measure for a few months, not a bailout," says Michael Strauss, chief economist and market strategist, Commonfund. "But Washington officials are politicians, and unfortunately they focused on a political agenda, not a solution to the problem."

In response to the bill's failure, the White House said it might now be willing to use money drawn from the $700 billion Wall Street bailout, known as the

Troubled Asset Relief Program

(TARP). The

Treasury

also said it's prepared to pitch in.

"The systemic effect of what

letting the automakers file for Chapter 11 would produce is pretty dangerous," says Strauss, noting the third-party implications and how those in turn would effect competitors, the rest of the industry and the economy.

Investors reacted to the likelihood of the automaker aid throughout the week and into Friday. "The market sold off pretty heavily

Friday morning on worries that we wouldn't have anything happen, there was some recovery on the fact that you're putting them in intensive care until January -- now you're left with a lot of uncertainty," says Bill Stone, chief investment strategist at PNC Wealth Management.

Stone says that the longer the measure is put off, the better the chance that the automakers are going to get help. We're unlikely to see any positive economic data between now and year-end, and as numbers deteriorate lawmakers will be more encouraged to avoid the grave economic consequences of letting these companies fail, he says.

In other autos news, No. 2 Japanese automaker

Honda

(HMC) - Get Report

said it's making more production cuts in North America as it adjusts to lower demand. Shares of the company, which is striking production by another 119,000 vehicles after a lesser cut earlier this year, were losing ground on Friday.

Also, auto and mortgage finance company

GMAC

was trying Friday to raise enough capital to become a bank holding company, and thus qualify for some of the money allocated under the U.S. Treasury Department's $700 billion Troubled Asset Relief Program (TARP).

GMAC, which hoped to swap cash, preferred stock and new debt securities in exchange for $38 billion of its outstanding notes, extended its self-imposed deadline to 5 p.m. EST. The

Federal Reserve

has required GMAC to, among other things, achieve a minimum amount of total regulatory capital of $30 billion in connection with its application. As of Wednesday, GMAC was not able to obtain a sufficient amount of total regulatory capital. If it cannot do so by Friday's deadline, it will withdraw its application and explore other options.

A smattering of economic data also hit the market early Friday. Retail sales fell 1.8% in November overall and 1.6% excluding automobiles, while the consensus was for greater declines of 2% and 1.8%, respectively.

The so-called control group, which is made up of retail sales excluding sales of automobiles, gasoline and building materials,

increased

0.5%. This figure plays a prominent role in estimations on quarterly data on personal consumption expenditures, Tony Crescenzi, chief bond market strategist for Miller Tabak, wrote on his

RealMoney.com blog

.

"It is obvious what is happening here: the fall in the price of gasoline has increased consumer purchasing power substantially," says Crecenzi.

Strauss agrees that, in an interesting twist, the sharp drop in energy prices may be providing help to other areas of nondiscretionary spending. "There were some interesting rebounds in a period of extremely challenging economic conditions," he says.

Moreover, according other data released on Friday, the University of Michigan Consumer Sentiment index increased to 59.1 from 55.3.

Consumer sentiment is still structurally weak, but this bounce "is impressive given how horrendously bad the labor markets have been," says Strauss. Again, the reason likely stems back to inflation expectations and the fact that consumers were paying less gas and heating oil.

"There may be an aspect of consumer confidence in middle America or industries that aren't tertiary to the financial and housing markets -- people in those areas might feel a bit better on a weekly basis because they're spending less for gasoline," he says.

Meanwhile, the Producer Price Index, which measures prices of goods at the wholesale level, fell 2.2%, slightly more than economists had predicted. The core PPI increased 0.1%, in line with expectations.

The biggest news on Wall Street Friday morning, however, was the arrest of market-maker

Bernie Madoff

on charges of securities fraud. The SEC alleges that the 70-year-old Wall Street fixture lost some $50 billion of client money in what amounted to a giant Ponzi scheme.

"Did we need to lose anymore confidence in the financial system?" Stone asks. "I don't know how much it's hurting -- but it's not helping."

In company news, late Thursday,

Bank of America

(BAC) - Get Report

said it will cut up to 35,000 jobs over the next three years, including some from newly acquired investment bank

Merrill Lynch

(MER)

. Earlier in the day, the Labor Department reported the number of new claims for jobless benefits increased in the week ended Dec. 6 to a 26-year high.

Shifting to commodities, crude oil was rising 27 cents to $46.55 a barrel. Gold was edging up 30 cents to $820.80 an ounce.

Longer-dated U.S. Treasury securities recently creeping upward in price. The 10-year was rising 5/32to yield 2.6%, and the 30-year added 1.5/32, yielding 3.1%. The dollar was weaker against the euro and the yen, and recently stronger against the pound.

Overseas, European markets were down -- the FTSE in London and DAX in Frankfurt gave up 2.2% and 2.8%, respectively. In Asia, Japan's Nikkei and Hong Kong's Hang Seng both ended lower.

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