Financial Headline News for Thursday 8/25

Stock were down big today due to the disappointing first time job claims and in anticipation of this weekend's potentially devastating northeastern hurricane.

Another bad week of first time unemployment claims as today's figure came in 12,000 more than was projected.

Warren Buffett invested $5 billion on Bank of America and made a $280m profit stake in just 24 hours.

Here are the top financial stories of the day:

1) Stocks sink, ending a three-day rally; Dow off 170-From the AP

Stock indexes fell sharply soon after trading began Thursday and then bounced around near their bottoms the rest of the day, ending a three-day rally.

Indexes in both the U.S. and Europe sank after Germany's main stock index, the DAX, suddenly dipped 4 percent. Traders struggled to explain the dive. The Dow Jones industrial average closed down 170.89 points, or 1.5 percent, to close at 11,149.82. It had been up 85 points the first few minutes of trading.

Bank of America Corp. jumped 9 percent on news that Warren Buffett will invest $5 billion in the troubled bank. BofA had lost half its value this year as investors worried about its need to raise capital and its growing liabilities related to subprime mortgages. BofA stock was up 26 percent early, to $8.80, and closed at $7.65, up 66 cents.

Other banks also rose after the billionaire investor gave his backing to Bank of America. Morgan Stanley gained 2.7 percent and Citigroup Inc. 4.8 percent. BofA and American Express Co. were the only two of the 30 companies in the Dow to rise.

This week's trading has been marked by a series of sudden reversals. Robert Stein, a money manager responsible for $1.2 billion at Astor Asset Management, said questions about the economy have made investors uncertain and the stock market more volatile. Gains made one day have disappeared the next, or even in the same day.

"We're not seeing anything that's convincingly bearish enough to call another recession, but nothing optimistic enough to suggest that a recovery is going to regenerate," Stein said.

Friday could be another day of big swings as Federal Reserve Chairman Ben Bernanke gives a highly anticipated speech at a conference in Jackson Hole, Wyo. Bernanke speaks at 10 a.m. EDT.

Earlier Thursday, the government reported an increase in the number of people applying for unemployment benefits last week. The Labor Department said applications rose to 417,000, the highest in five weeks, but the figure was inflated by a strike at Verizon that earlier this week.

The S&P 500 index fell 18.33 points, or 1.6 percent, to 1,159.27. The Nasdaq fell 48.06 points, or 1.9 percent, to 2,419.63.

The S&P, the benchmark for most money managers, has gained 3 percent this week but is still down 10 percent for the month. Thursday's drop broke a three-day rally in which the Dow gained 503 points.

Paul Zemsky, chief investment officer of ING Investment Management in New York, said this week's gains were a result of investors bargain-hunting after stocks fell too far over the past month. He also said some of the gains were caused by technical trading as investors bought shares to exit short positions, or bets that the market would continue to fall.

Zemsky expects to see more big swings as long as the fear of recession hangs over the market. "People are trying to adjust their positions to news," he said. "Once it's clear where the economy is headed, I think things will calm down."

There's plenty of speculation about whether Bernanke will offer more support for the economy. It was at the same conference last year that he laid out an argument for what became a $600 billion bond-buying program by the central bank.

Zemsky thinks there's little chance Bernanke will announce any action Friday. "There's nothing more than hope that Bernanke will drop a gift from the sky."

More than three stocks fell for every one that rose on the New York Stock Exchange. Trading volume was above average at 5 billion shares, thanks to BofA, which accounted for nearly 900 million shares.

2) Job Market Still Looks Weak-From The Wall Street Journal 

A 15-day strike at Verizon Communications Inc. fueled a surge in new jobless benefit claims last week, but the job market still looks weak after stripping out those effects.

Initial jobless claims rose by 5,000 to a seasonally adjusted 417,000 in the week ended Aug. 20, the Labor Department said Thursday. Claims filed in the previous week were revised up to 412,000 from 408,000.

Separately, an index of regional manufacturing activity by the Federal Reserve Bank of Kansas City remained flat in August despite signs of a downturn elsewhere in the U.S. The index remained at three for the month, unchanged from July, as the relatively healthy farm and energy sectors helped the region. Figures above zero indicate expansion.

Other regional manufacturing surveys suggest a slowdown in the overall economy, though jobless claims and other key indicators aren't showing substantial deterioration yet.

The Labor Department said the Verizon strike added at least 8,500 new jobless claims last week and another 12,500 claims in the week ending Aug. 13. "Those claims have inflated the national total," a Labor economist said.

Workers at Verizon, who weren't paid by the company during the walkout, began returning to work Monday evening. Verizon's unions had called the strike, involving 45,000 workers, to protest concessions the company is seeking on pensions, health care and job security. After the strike figures are stripped out, Thursday's report paints a mixed picture of the overall market.

"The labor market may be improving but the rate of improvement is very sluggish with layoffs remaining fairly elevated," said Steven Wood, chief economist at Insight Economics LLC.

The four-week moving average of new claims, which smooths out often-volatile weekly data, increased 4,000 to 407,500, the Labor Department said. Economists generally say the labor market is improving significantly when claims drop below 400,000, a level breached only once since April.

"We are concerned about the potential for weakening in job growth in coming months in response to recent plunging sentiment in response to market and political turmoil, but we aren't seeing it yet in the latest claims results," said Morgan Stanley economist Ted Wieseman.

Thursday's report showed the number of continuing unemployment benefit claims—those drawn by workers for more than a week—fell by 80,000 to 3,641,000 in the week ended Aug. 13. Continuing claims are reported with a one-week lag.

3) Berkshire Hathaway Invests $5 Billion in Bank of America-From CNBC

Warren Buffett's Berkshire Hathaway will invest $5 billion in Bank of America, stepping in to shore up the company in the same way he helped prop up Goldman Sachs during the financial crisis

Bank of America [BAC  7.65    0.66  (+9.44%)   ] shares jumped as high as $8.80 in Thursday trading before dropping later in the day. Shares rose 9.44 percent to close at $7.65 on Thursday.

"This helps with the credibility gap that I think has existed in the minds of some shareholders. It reiterates the point that the balance sheet is healthy. They needed an endorsement in the market and they got it," said Jon Finger, managing partner of Finger Interests in Houston.

Bank of America will sell Berkshire [BRK.A  103491.00    -2859.00  (-2.69%)   ] 50,000 shares of cumulative perpetual preferred stock with a 6 percent annual dividend, it said in a statement Thursday. Bank of America can buy back the investment at any time by paying Buffett a 5 percent premium.

Berkshire also will get warrants to buy 700 million Bank of America shares at an exercise price of just over $7.14 a share, with the ability to exercise any time in the next 10 years.

It is virtually a mirror of the deal Berkshire did with Goldman Sachs [GS  109.84    -0.47  (-0.43%)   ] in the depths of the crisis in fall 2008, except in this case the dividend is less. The Goldman deal paid Berkshire $15 a second in dividends until Goldman bought Buffett out earlier this year.

In an interview with CNBC on Thursday, Buffett said the loan was his idea and that "this isn't 2008," and that is why Bank of America is getting better terms for its loan from Berkshire than what GE and Goldman paid for similar loans during the financial crisis.

Market watchers said the deal proved again that Buffett had become something of a lender of last resort to the financial system, as he did with Goldman and also GE [GE  15.45    -0.27  (-1.72%)   ] .

(GE is a minority owner of NBC Universal, the parent of CNBC and CNBC.com.)

"This proves to the market that if the bank needs additional capital, which we don't believe they do, but if they needed to calm the market by raising capital, they could do it within 30 minutes with a quick call to Uncle Warren," said Sean Egan, managing principal of Egan-Jones Ratings.

Buffett called Bank of America Chief Executive Brian Moynihan this week and offered to make the investment, a Bank of America spokesman said, adding that the deal was negotiated and consummated in a couple of days.

Investors have battered Bank of America's stock on fears that the largest U.S. bank by assets has yet to overcome billions of dollars in problem mortgage loans.

In recent weeks, investors have sold shares, worrying that the bank might need to raise outside capital—as much as $50 billion by some estimates—to cope with losses and meet new industry capital rules.

Bank of America shares lost roughly a third of their value in August before this deal, and half their value since the beginning of the year.

Quote of the Day from Dave Ramsey.com:
In the absence of clearly-defined goals, we become strangely loyal to performing daily trivia until ultimately we become enslaved by it. — Robert Heinlein