Possible Lehman Savior, Inflation Forecast Bump Stocks Up At End Of Week

NEW YORK — Wall Street capped a volatile week with sharp gains Friday as oil prices tumbled and after Federal Reserve Chairman Ben Bernanke said inflation pressures are likely to moderate. The Dow Jones industrial average rose nearly 200 points.

Speculation that Lehman Brothers Holdings Inc. could be sold helped buoy the financial sector and the overall market. Analysts warned this week that the investment bank could book large write-downs for bad debt. But reports Friday that Korea Development Bank is considering buying the company sent investors rushing for the stock. Lehman rose 69 cents, or 5 percent, to $14.41 but finished well off its highs of the session.

Investors also appeared cheered by an inflation forecast from Bernanke who said at the Kansas City Fed's annual economic symposium that inflation pressures should moderate this year amid tepid economic growth. But he also added that the inflation forecast remains "highly uncertain."

John Massey, senior portfolio manager at AIG SunAmerica Asset Management, said investors are encouraged by Bernanke's comments on interest rates and by the possibility of a buyer for Lehman.

"We're seeing the potential for maybe another white knight," he said, referring to prospects of a deal to acquire all or part of the investment bank.

The health of the financial sector and rising inflation are two of the market's greatest concerns. Although Bernanke refrained from making predictions about inflation, the market was mollified when light, sweet crude plunged $6.59 to settle at $114.59 a barrel on the New York Mercantile Exchange, after surging by more than $5 a barrel on Thursday.

The Dow rose 197.85, or 1.73 percent, to 11,628.06, near its highs of the session.

Broader stock indicators also rose. The Standard & Poor's 500 index rose 14.48, or 1.13 percent, to 1,292.20, and the Nasdaq composite index rose 34.33, or 1.44 percent, to 2,414.71.

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The run-up Friday left stocks with mostly modest losses for the week that again saw a series of triple-digit moves in the Dow. The Dow is down 0.27 percent, the S&P 500 is off 0.46 percent and the technology-heavy Nasdaq is down 1.54 percent.

Bond prices pulled back as investors rushed from the safety of government debt to stocks. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.87 percent from 3.83 percent late Wednesday.

The dollar rose against other major currencies, while gold prices fell.

Massey cautioned against making too much of the market's moves given the light volume this week. With traders squeezing in late-summer vacations, Wall Street has shown erratic trading. The Dow industrials lost more than 300 points over Monday and Tuesday before ending moderately higher Wednesday and finishing mixed Thursday.

"The light volumes are really sort of the reasons behind why you've got some outsize moves. I think the issues over all for the economy and the market are fairly well understood," he said. "The market is of this mind-set that we're going to continue to be flattish to down."

He doesn't expect the stock market to more accurately reflect investor sentiment until after Labor Day, when trading volumes should pick up. Until then, he'll be looking next week at readings on consumer confidence and unemployment to determine where the economy might be headed.

Remarks Friday from Bernanke and investor Warren Buffett appeared to dim Wall Street's hopes that mortgage financiers Fannie Mae and Freddie Mac might be able to get by without a government bailout. While such a move could help prop up the government-chartered companies, which together hold or back nearly half the nation's mortgage debt, it could also wipe out shareholder equity.

While Bernanke didn't mention them by name he said he said one of the critical questions facing the country is how to strengthen the financial system and guard against the "moral hazard" of companies making risky choices thinking that the government will ultimately offer a safety net.

Buffett said on CNBC that Fannie and Freddie are too big to fail but that shareholder equity in those companies can be lost.

Fannie Mae rose 15 cents to $5, while Freddie Mac fell 35 cents, or 11 percent, to $2.81.

Linda Duessel, the equity market strategist at Federated Investors, said the financial sector is key to a broader recovery on in stocks, which are down more than 10 percent this year.

"We need to absolutely find a bottom in financials to really believe that the bear can be behind us," she said, referring to the pullback in stocks since last fall.

While most sectors gained ground Friday, some materials companies pulled back as commodity prices fell. United States Steel Corp. fell $5.44, or 3.9 percent, to $133.76, while miner Freeport-McMoRan Copper & Gold Inc. declined $3.06, or 3.3 percent, to $90.60.

In corporate news, Gap Inc. rose 87 cents, or 4.6 percent, to $19.88 after reporting late Thursday that profits in the most recent quarter rose 51 percent from a year earlier, thanks to tight inventory and cost control.

King Pharmaceuticals Inc. said it is prepared to take its bid for Alpharma Inc. directly to shareholders after the company rejected King's $1.4 billion buyout overture. King disclosed the $33 a share offer publicly for the first time Friday. Alpharma surged $10.47, or 44 percent, to $34.51, while King rose 95 cents, or 8.5 percent, to $12.19.

Advancing issues outnumbered decliners by about 3 to 1 on the New York Stock Exchange, where consolidated volume came to a light 3.62 billion shares compared with 3.94 billion shares traded Thursday.

The Russell 2000 index of smaller companies rose 12.35, or 1.70 percent, to 737.60.

Overseas, Japan's Nikkei stock average fell 0.68 percent. Britain's FTSE 100 rose 2.52 percent, Germany's DAX index rose 1.69 percent, and France's CAC-40 advanced 2.23 percent.

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The Dow Jones industrial average ended the week down 31.84, 0.27 percent, at 11,628.06. The Standard & Poor's 500 index finished down 6.00, or 0.46 percent, at 1,292.20. The Nasdaq composite index ended the week down 37.81, or 1.54 percent, at 2,414.71.

The Russell 2000 index finished the week down 15.77, or 2.09 percent, at 737.60.

The Dow Jones Wilshire 5000 Composite Index _ a free-float weighted index that measures 5,000 U.S. based companies _ ended Friday at 13,185.26, down 86.62 points, or 0.65 percent, for the week. A year ago, the index was at 14,896.21.

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On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

Comments

[elpollo]

Inflation is just a stalking horse - it's deflation that has the banksters sh*tless. Only one American out of 100 has a clue how the fractional reserve system manufactures and destroys quasi money. Of course, you have to be 90 to remember how horrible deflation was - assuming you can remember anything.

[justdo3043]

Greatest financial system hmmm more like a sand castle......as credit continues to disappear it's like waves softening ruining the foudation until it falls in......can you afford of home without a mortgage loan?....can a business expand without financing?......lets hope for the best

[iambusto]

see people are already complaining against too little credit. a few months back about too much credit. a decade back, too little credit.

people are never happy.

[themodernleader]

Our greatest economic system in the world is now to be under foreign ownership. Congratulations, all formal and informal American leadership. When will the shackles be emplaced and the endentured servant designation become a stark reality? And our new leaders. What will they grant us besides draconian religion and slave working and living conditions?
Hope for this bankrupt economy will keep reappearing to bolster the stock market until after the election. The cover up of our empty treasuries must be disguised until after we have voted for continuing corrupt leadership.

[ajax2]

Anyone who bought stocks based on the Fed inflation forecast, needs therapy. The Fed has never acknowledged the raging inflation, and reported last year's inflation at 2.3 %. I guarantee you that was a lie.

[aishas11]

so would you recommend buying lehman stocks based on the buyout rumor or not? despite the fed inflation forecast, a stockholder obviously stands to gain some income if shares are bought before the tentative korean buyout

[taoist]

This is so much crap! 1 month ago everything was sh*t, now before the election oil retreats and the market is up and everyone is so up beat unless you eat, drive, and have a home. Bah Humbug!

[kellygrrrl]

great. so Lehman is going to be owned by the Koreans.

welcome to the garage sale of our nation

[iambusto]

of course its great.

would you rather have govt. bail out one more company. If Koreans want to buy this bank, and investors are getting a fair offer, the transaction should go through. If you own shares in LEH and dont want the sale, vote against it.

[julescator]

Unfortunately, the government is going to bail our Fannie Mae and Freddie Mack! That will cost us billions but at least the ceo of freddie mack made $20 million. Oh you can bet we will pay for this and for the war in Iraq and all the money we owe China. Don't get your hopes up.

[darthdarcy]

Actually I was hoping for the total collapse of our economic system, as that may be the only way to kill this beast we've become....to bad there's always tomorrow...!

150 banks teetering on the edge 80 of them almost sure to fall, keep voting Republican America you deserve everything they have to offer..!

[WorkingClass]

I agree totally. Let it burn.

[long333]

Just out of curiosity what do you get if the economic system fails? Do we turn to you or something?

[sandiegoconservative]

No, she'll just complain when she realizes she is part of the proletariat and her dream of an oppressive state of socialism is reached. Then there will be no one to listen.