US stocks rebounded strongly on Thursday after MBIA (NYSE:MBI) helped alleviate some of the concerns about troubled bond insurers at the end of the worst January for equities since 1990.
Sentiment improved considerably after MBIA it had been the target of "fear-mongering" and was confident of retaining its triple-A rating.
However, after the closing bell Standard & Poors served a reminder that bond insurers' problems were not completely solved as it placed MBIA on watch for possible downgrade.
Volatile equities had slumped at the open after a spike in jobless claims added to worries about the US labour market market as consumer spending slowed.
Investors later rushed to buy into weakness after the Federal Reserve's 50 basis point rate cut raised the prospect of cheaper borrowing costs, a potential boon for financial companies and the prostrate real estate market. Energy companies remained a weak spot, however, as corporate earnings disappointed.
The S&P 500 closed up 1.7 per cent at 1,378.47 having initially fallen 1.6 per cent. The index fell 6.1 per cent in January, its worst start in 28 years.
The S&P homebuilder index enjoyed a particularly strong bounce on Thursday, rising 11.6 per cent as investors cheered Pulte Homes (NYSE:PHM)' improved liquidity position. Its shares jumped more than 20 per cent to $16.32.
The Dow Jones Industrial Average soared more than more than 450 points from its session low to close up 1.7 per cent at 12,650.36. The Nasdaq Composite also gained 1.7 per cent to 2,389.86.
"[The rebound] is primarily due to MBIA. There's a lot of short covering, especially in the homebuilders," said Tom Schrader, managing director of US equity trading at Stifel Nicolaus Capital Markets.
Stocks hit the skids in early trading after a sharp spike in weekly claims for unemployment benefit, which jumped 69,000 to 375,000, the highest level since October 2005, unsettled investor. Economists had expected about 320,000.
Although these numbers are often volatile and may have been affected by the timing of a public holiday, the uptick will renew concerns that Friday's employment report may not be as strong as hoped. Morgan Stanley cut its payrolls forecast to 90,000 from 110,000, still significantly more than than December's 18,000.
The bond insurance sector once again dominated market chatter as MBIA reported a $2.3bn fourth-quarter loss after writing down $3.5bn of credit derivatives. But the shares rallied 11 per cent to $15.50 after its chief executive said the company was best positioned to avoid a rating downgrade. Ambac Financial, a rival, climbed 6.8 per cent to $11.59.
If bond insurance losses can be contained and earnings visibility increases, many analysts think the beaten-down S&P financial sector, up 2.7 per cent on Thursday, could become an attractive investment.
Mastercard, rose 11.2 per cent to $210.09 on Thursday after fourth quarter earnings jumped nearly seven-fold. Meanwhile Bank of America (NYSE:BAC) rose 4.7 per cent to $44.18 after a hedge fund said it was seeking to block its takeover of Countrywide Financial, the mortgage lender.
Investors also bought battered consumer stocks, spurring a 4.4 per cent jump on the S&P retail index. A Deutsche Bank analyst upgraded the broadline retail sector to "neutral" from "cautious" and said said "the worst will soon be behind us". Bear Stearns upgradedNordstrom (NYSE:JWN)'s sharesprompting a gain of 5.4 per cent to $38.85.
But mixed earnings and the slowdown in consumer spending underscored the riskiness of calling a bottom in the retail stocks. Personal spending rose 0.2 per cent in December, its slowest pace in six months/
Procter & Gamble, up 0.7 per cent at $65.56, increased fiscal second-quarter earnings 14 per cent and the company raised its full-year outlook.
Burger King, up 2.9 per cent at $46.51, also beat estimates as second-quarter profit jumped 29 per cent.Mattel (NYSE:MAT) rose 10.9 per cent to $21.01 after beating quarterly profit forecasts.
In contrast, Starbucks (NASDAQ:SBUX)' cautious outlook for 2008 unnerved investors. The shares fell 1.6 per cent to $18.91.
After the close Google (NASDAQ:GOOG)'s fourth quarter profit missed expectations causing the shares, which closed up 2.9 per cent at $564.30, to slump 8.1 per cent.
Adobe Systems (NASDAQ:ADBE) fell 2.8 per cent to $34.93 yesterday after Jefferies & Co. downgraded it from "buy" to "underperform".
In energy, Cameron International dropped 6.9 per cent to $40.10 after the oil services company gavea weaker-than-expected earnings guidance. Marathon Oil (NYSE:MRO)'s fourth-quarter earnings fell 38 per cent as refining margins weakened and its shares shed 7.3 per cent to $47.21.