Roubini Remarks Spark Rally Despite CIT Woes

Stocks got a dose of good medicine from the man they  call Dr. Doom.

After flat trading through the afternoon, major indexes picked up steam for a strong Thursday finish after bearish economist Nouriel Roubini, said the worst was over. "The free fall of the U.S. economy has stopped," he said at a conference in New York. "The economy is still contracting, but slowly." He added that the government may need to supply a second round of stimulus funding late this year or in early 2010.

Major indexes picked up sharply ahead of more earnings from major companies. The Dow Jones Industrial Average closed up 95 points at 8711. The Nasdaq gained 22 at 1885 and the S&P 500 picked up 8 to finish at 941.

J.P. Morgan Chase (JPM) reported surprise results to the upside Thursday morning. The bank said it earned $2.72 billion, or 28 cents a share, during the second quarter, compared with $2 billion, or 53 cents a share, in the year-ago period. The bank also recorded record revenue of $28.62 billion in the second quarter. Analysts had expected J.P. Morgan to earn 6 cents a share on revenue of $25.9 billion.

The afternoon rally overrode concerns about the health of another lender. CIT (CIT), the commercial lender facing the threat of bankruptcy, said bailout talks with the federal government had failed, leaving the company with few options and shrinking cash reserves. Bankruptcy appears to be a likely option, as the company appears unable to secure sufficient outside funding, CreditSights analyst David Hendler said.

Earnings were a mixed bag. Harley Davidson (HOG) missed second-quarter estimates, but traders welcomed cost-cutting plans. Marriott (MAR) posted Q2 results in line with Street estimates, but the hotel firm issued disappointing full-year guidance. Google (GOOG) and IBM (IBM) are scheduled to announce results after the close.

Citigroup (C) and Bank of America (BAC) report tomorrow, rounding out the picture for major financial institutions, whose stability is a key pillar of the economic and market recoveries.

Former Treasury Secretary Hank Paulson testified before a Congressional committee that he did not threaten Bank of America (BAC) Ken Lewis in the course of urging the Charlotte-headquartered bank in its takeover of Merrill Lynch last autumn.

The housing market also cast a shadow over markets. The number of U.S. households on the verge of losing their homes surged by nearly 15% to more than 1.5 million homes as more Americans lost their jobs, RealtyTrac announced Thursday. Foreclosure filings rose more than 33% in June compared with the same month last year and were up nearly 5% from May, the foreclosure listing service said.

European markets closed up Thursday, bouyed by J.P. Morgan earnings and positive guidance from Electrolux (ELUXY) and Novartis (NVS).

In Asia, stocks closed up for the third straight day as traders welcomed signs of strong economic growth in China and positive U.S. manufacturing data. China's gross domestic product grew 7.9% in the second quarter from a year earlier, the government statistics bureau reported. 

Oil prices rallied after Roubini's positive comments. Crude traded on the Nymex rose 4 cents to $62.06 in afternoon activity.