Stocks Bounce Back; Investors Sort Out Subprime Fracas

NEW YORK (MarketWatch) -- U.S. stocks were solidly higher at midday Wednesday, as hopes for a strong second-quarter earnings season momentarily banished worries that the deterioration of the subprime mortgage sector has spread to other arenas of the economy.

The Dow Jones Industrial Average last was up 58 points at 13,560.

Among Dow components, financial stocks were in focus as investors tried to sort out which institutions might be impacted in the near future by the subprime issue. American Express Co. last was off 0.3% at $60.63, but JP Morgan Chase was up 0.8% at $48.28.

Top Dow gainers included Aloca Inc. , up 0.6%, and Caterpillar Inc., , up 1%, posting its third straight daily gain.

The biggest drag on the average was Verizon Communications , which was off 0.4%. after reports that a new Federal Communications Commission ruling will create new competition for the telecom.

The S&P 500 last was up almost 7 points at 1,516 and the Nasdaq Composite 6 points higher at 2,645.

Volume was slightly light. There were 698 million shares traded on the New York Stock Exchange, where rising stocks outnumbered those under pressure by nine to six. About 947 million shares traded in the Nasdaq market, with seven stocks traded higher for every six lower.

Wednesday's gains followed a sell-off on Tuesday when Moody's Investors Service downgraded almost 400 subprime residential mortgage-backed securities and Standard & Poor's threatened to lower ratings of more than 600 similar assets.

In addition to sending stocks sharply lower, the subprime worries also sent the dollar to an all-time record low against the euro and to its weakest level against the pound since 1981.

Worries about the contagion from the subprime market remained in the forefront of investors' minds on Wednesday, but were offset by corporate profit optimism.

"Equity people have been trained to buy on every dip," said Peter Boockvar, an equity strategist at Miller Tabak.

"Whether the gains hold, we will see, but investors still hope that second-quarter earnings will come in strong enough to trump the concerns about subprime," Boockvar said. "Who knows if this will last, but that is what is going on right now."

Art Hogan, chief market strategist at Jefferies & Co, said, "The overarching concern is the extent to which subprime concerns are spreading throughout the financial system. On some days like yesterday we are overcome by fears. But, on other days, it seems as if things won't be so bad.

"It is still too early to call the season disappointing, but we didn't get the great start we wanted," Hogan said.

Stocks in action

The recovery in the broader market extended to the financial sector, where many stocks were dented the day before by the subprime worries.

Bear Stearns Cos. , the owner of two hedge funds that nearly collapsed due to their subprime exposure, was up 0.9% at $139.25 as Goldman Sachs Co. gained 0.1% to $217.33.

Analysts are uncertain whether General Electric Co., which took a $500 million first-quarter charge for subprime mortgage losses, may have suffered further losses in its second quarter, according to The Wall Street Journal online edition. However, the company earlier the company assured investors the problem was contained. GE results are due on Friday.

GE stock last was up 0.1% at $37.94.

Chevron Corp. late Tuesday said it expects higher oil and gas prices in the second quarter, along with strong refining margins and profits from the sale of its stake in Dynegy. However, the company also said its performance should be impacted by refinery outages and a weaker dollar.

The stock last was 1.1% higher at $89.92.

Gerdau Ameristeel Corp. said late Tuesday that it agreed to buy Chaparrl Steel Co. for $4.22 billion. The deal price represents a 13.6% premium over Tuesday's closing price of $75.69Gerdau Ameristeel stock fell 6.9% to $14.61.

Alcan has begun negotiations for a merger agreement with Rio Tinto PLC , as it seeks to fend off a hostile bid from Alcoa , according to a report in The Globe and Mail newspaper. The stock rose 2.5% to $88.28.

Liz Claiborne Inc. said it is selling 16 of its 36 apparel brands and plans up to 800 job cuts. The stock rose 0.9% to $37.57.

Other markets

The dollar remained under siege early Wednesday, after suffering numerous blows this week related to the fact the fed funds rate has stood still for more than a year, while foreign rates have been rising, diminishing the dollar's competitive edge.

The pound last traded at $2.0325, a bit below its overnight high of $2.0351, its highest level since 1981. The euro was only slightly below its all-time high of $1.3774, last trading at $1.3764. The dollar stood at 122.14 yen, after falling below 121 yen overnight for the first time in two months.

The benchmark 10-year Treasury note was under pressure, after staging a brisk rally on Tuesday due to the subprime concerns. Treasurys generally receive safe-haven inflows in times of economic uncertainty.

The benchmark note last was down 11/32 at 95-196/32 with a yield of 5.075%.

Gold backed off its recent gains. The front-month contract last was 90 cents lower at $663.50 an ounce.

Crude futures were slightly higher after the Energy Department reported the first decline in six weeks of crude inventories. The drop was unexpected. Crude for August delivery was off its prior lows, up 9 cents at $72.90 a barrel.

By Leslie Wines