U.S. Stocks Rally On Oil, Fed And Prospect Of Lehman Takeover

NEW YORK (MarketWatch) -- U.S. stocks rallied Friday, but still fell on the week, with sentiment boosted by falling oil prices and talk that Lehman Brothers may be acquired, while a speech by Federal Reserve Chairman Ben Bernanke confirmed the Fed sees inflation moderating this year.

The Dow Jones Industrial Average jumped 197 points, or 1.7%, to end at 11,628, with 28 of its 30 components gaining ground, led by financials stocks J.P. Morgan Chase , American Express , Citigroup and Bank of America .

The Dow posted a 0.3% weekly drop after being battered earlier this week on concerns about the fate of mortgage giants Fannie Mae and Freddie Mac , and about distress at investment firm Lehman Brothers.

But Friday, shares of Lehman leapt 5% after a Korean bank in talks with the troubled Wall Street firm was quoted as saying that one of the options on the table was an outright acquisition.

"The market is rising not so much on Mr. Bernanke's speech but renewed hope that Lehman Brothers may have a buyer," said Peter Cardillo, chief market economist at Avalon Partners.

Adding to the upbeat sentiment in the market, investment guru Warren Buffett told CNBC he believes stocks are more attractive than they were a year ago and that he wouldn't bet against the dollar.

Among Dow components in the spotlight, Boeing shares rose 3% after the Journal reported that the company may withdraw its bid for a tanker contract if it's not given more time by the Pentagon to prepare. A venture between Northrop Grumman and EADS is the rival for that contract.

The Journal also reported that Verizon is close to choosing Google as its search provider on mobile phones. Shares of Verizon rose 2%, while those of Google rose nearly 1%.

The S&P 500 index gained 14 points, or 1.1%, to 1,292, while the Nasdaq Composite rose 34 points to end at 2,414.

For the week, the S&P fell 0.5% and the Nasdaq sank 1.5%.

By sector on Friday, financials led the gains on the S&P, rising 2.9%, followed by consumer discretionary, up 2.4%, and industrials, up 1.5%. Energy was the only sector ending in the red, off 2.4%, as crude-oil futures fell back sharply after a surge in the previous session.

Trading volumes remained light, with 888 million shares exchanging hands on the New York Stock Exchange and 550 million shares trading on the Nasdaq stock market. Advancing issues topped decliners by nearly 3 to 1 on both the NYSE and the Nasdaq.

Bernanke's soothing words

Fed's Bernanke sent a soothing message to global markets Friday, saying inflation was on track to moderate in coming months, triggering a rally in stocks on speculation the Fed will keep interest rates low for now.

"There wasn't anything in his speech to alter expectation for steady [interest] rates over the medium term," analysts at Action Economics said.

Concerns about the fate of mortgage giants Fannie Mae and Freddie Mac were also cast aside for the moment by the broad market, even as shares of Freddie Mac slumped another 11%.

The Wall Street Journal reported Friday that Freddie Mac executives are sounding out private-equity firms and other investors about buying new common or preferred shares, though there's reluctance from investors amid fears the U.S. Treasury will nationalize the company.

Stocks had ended Thursday with a mixed performance, as a nearly 5% rise in crude-oil futures helped energy exploration firms advance.

But crude-oil futures fell back sharply Friday, with a stronger U.S. dollar weighing on dollar-denominated commodities prices. Crude for October delivery lost 5.4% to end at $114.59 a barrel on the New York Mercantile Exchange.

On the corporate front, the Gap shares rose 5% after the retailer late Thursday reported a 51% profit rise and lowered its capital-spending forecast.

King Pharmaceuticals launched a $1.4 billion, or $33 a share, bid for Apharma .

Pacific Sunwear of California slumped 25% on a cautious second-half outlook.

TNT shares rose in Amsterdam as The Times of London reported speculation that United Parcel Service may make an offer for its Dutch rival this weekend.

Also on the M&A front, Aon said it is paying $1.4 billion for U.K. re-insurer Benfield.

By Nick Godt