U.S. stocks gain on Fed talk, M&A news

By Kate Gibson, MarketWatch

NEW YORK (MarketWatch) - U.S. stocks on Thursday tried and mostly succeeded in bouncing back from the prior day's credit crisis-fueled losses, with concerns about the viability of government-sponsored mortgage buyers Fannie Mae and Freddie Mac offset by a large takeout bid in the chemical sector and a 10% rise in shares of Alcoa Inc.

"Freddie Mac is already insolvent and Fannie Mae is running on fumes," said Len Blum, managing director of Westwood Capital.
But in testimony to Congress, Treasury Secretary Henry Paulson assured that the two entities remain well capitalized. See full story.

Up and down throughout the session, the major indexes found firmer footing late in the day, with the Dow Jones Industrial Average churning higher in the final hour of trade, rising 81.58 points, or 0.7%, to 11,229.02.
Of the blue-chip index's 30 components, 19 closed with gains, led by aluminum producer Alcoa Inc. , which ended with a 9.7% gain as aluminum prices hit their highest level on record after China said it would cut its production of the metal by up to 10% to save energy. See full story.
The S&P 500 climbed 8.71 points, or 0.7%, to 1,253.39, with materials leading sector gains, up 3.5%, supported in part by Dow Chemical Co.'s agreement to buy Rohm & Haas Co. for $15 billion.
Shares of Dow lost 4.2%, while Rohm & Haas rallied 64.2%. Read full story.
The energy sector was the second best performing sector on the S&P, up 2.9%, as crude oil prices jumped over $5 to end above $141 a barrel, as geopolitical tensions in oil-rich countries such as Nigeria and Iran intensified. See Futures Movers.
Consumer discretionary fronted declines among the S&P's 10 industry groups, down 2.3%. J.C. Penney Co. Inc. led the declines among retailers, down 10.1%.
Wal-Mart Stores Inc. tilted lower despite exceeding expectations in offering sales results for June. See full story.
Chart of FRE
Weighing on financials, shares of large mortgage buyers Fannie and Freddie fell for a third time in four days, raising worries about the viability of the publicly traded government-sponsored mortgage buyers.
"It's getting to the point where the U.S. government is going to have to explicitly back these two companies or let them fend for themselves," said Peter Boockvar, equity strategist at Miller Tabak.
"I don't think financials can recover until we know what real estate is worth. Right now, if you buy a financial institution stock, you're buying a black box."
Shares of Fannie fell 13.8% while shares of Freddie declined 22%. Read full story.
Investment banks were also hit, with Lehman Brothers Holdings Inc. advanced 22.96 points, or 1%, to 2,257.85.
Volume on the New York Stock Exchange came to 1.5 billion, with decliners just ahead of advancers. On the Nasdaq, 973.7 million shares traded, and advancers outran declining issues 5 to 4.
Hill talk
In testimony before the House Financial Services Committee, Federal Reserve Chairman Ben Bernanke and Paulson called for regulatory revamping and legislation to strengthen oversight of investment banks. See full story.
Earlier Thursday, stock futures were little changed after the government said weekly jobless claims fell to the lowest level since April. Read Economic report.
While "Fannie and Freddie, Paulson and Bernanke [were] the big story all day long," jobless claims are reflective of important, underlying themes "that consumers are hurting and companies aren't hiring," said Terrin Griffiths, economist and industry analyst at the California Credit Union League.
With continuing claims at their highest level since December 2003, the 5.5% unemployment rate is unlikely to recede in July, said Griffiths. "If anything it will start edging up," she added.
U.S. foreclosures slipped 3% from May levels but are up 53% from the previous year, RealtyTrac reported. Listen to report on foreclosures.
U.S. stocks stumbled on Wednesday, with financials pacing the retreat as worries grow about the financial health of Fannie and Freddie. And, worries about tech bellwether Cisco Systems ahead of next week's earnings also weighed. End of Story
Kate Gibson is a reporter for MarketWatch, based in New York.