U.S. stock indexes spiked higher in the last hour of trading Thursday, in an excessively volatile session focused on the rumors swirling about the fate of troubled investment bank Lehman Brothers (LEH). The Dow Jones industrial average erased a 170-point loss amid market buzz that Lehman, which is fighting for survival, is looking for a white knight to help it bolster its tattered balance sheet.
On Thursday, the Dow Jones industrial average finished with a gain of 164.79 points, or 1.46%, to 11,433.71. The broader S&P 500 index added 17.01 points, or 1.38%, to 1,249.05. And the tech-heavy Nasdaq composite index ended the day up 29.52 points, or 1.32%, to 2,258.22.
S&P MarketScope notes there was buying in the materials, consumer discretionary and transportation sectors, while investors kept a wary eye on Lehman and others in the ailing financial sector. On the New York Stock Exchange, 18 stocks fell in price for every 14 that advanced. The ratio on the Nasdaq was 15-13 negative. Trading was active.
Lehman Brothers shares plunged nearly 42% to 4.22 even after CNBC reported that CEO Richard Fuld was "actively shopping" a sale of the entire firm. The Wall Street Journal reported that Bank of America (BAC) is in talks to buy Lehman Brothers, but said that any deal is far from certain.
Lehman shares came under heavy selling pressure all day Thursday amid worries about the firm's ability to raise capital. Goldman Sachs (GS) downgraded its rating on the shares to neutral from buy. Citigroup (C) and Merrill Lynch also reportedly downgraded the stock.
On Wednesday, Lehman posted a preliminary third quarter loss of $5.92 per share on net revenue of negative $2.9 billion. It also reported gross mark-to-market adjustments of negative $7.8 billion, said it would slash its annual dividend to 5 cents, spin off to shareholders $25-$30 billion of its of commercial real estate portfolio, and sell a majority interest in its investment management division. Lehman noted that it was committed to exploring all strategic options.
Traders also attacked Merrill Lynch (MER) and Washington Mutual (WM) on Thursday. Merrill shares ended down nearly 17%, but Washington Mutual rebounded late in the session and ended up 22%.
S&P Equity Research said Thursday morning that WaMu shares fell on what it believes are doubts about the company’s viability. Ladenburg Thalmann suspended its neutral rating on the stock until there is some clarification as to what was in Memorandum of Understanding WaMu reportedly received from the Office of Thrift Supervision earlier this week.
In the energy markets, crude oil fell below $101 a barrel, but gasoline futures jumped as Hurricane Ike moved into the Gulf of Mexico. Hundreds of personnel were removed from platforms and rigs as a precaution as the storm appears headed toward Texas, skirting the bulk of the energy infrastructure in the Gulf. But the storm could curtail refining action, as Texas is home to 26 refineries. October West Texas Intermediate crude oil futures fell $1.71 to $100.87 a barrel -- the lowest close since March 24. October reformulated gasoline futures were up 9.29 cents to 275.45 cents.
Uncertainty about the U.S. economy and the November election was also weighing on sentiment, according to S&P MarketScope. The U.S. trade deficit widened sharply to $62.2 billion in July after narrowing to a surprising $58.8 billion in June (revised from $56.8 billion). Markets expected the deficit to come in at $58.0 billion. However, excluding petroleum, the trade deficit narrowed to $18.8 billion vs. a $21.5 billion gap in June. Imports surged 3.9% following a 2.1% increase in June. Exports climbed 3.3% after a 3.7% jump in June, with solid gains the prior two months. The trade deficit with China widened to $24.9 billion in July compared to -$21.4 billion previously.
"The July reading was much wider than markets expected, to likely cause some profit taking on the dollar and add more disappointments to stock markets," notes S&P Economics.