Stocks higher despite drop in new home sales

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NEW YORK -- Stocks rose modestly Thursday as investors bet that a steep decline in August new home sales will give the Federal Reserve another reason to cut interest rates.

The market's gains were small, though, with Wall Street also concerned that data showing severe economic weakness could signal the possibility of a recession.

The Commerce Department reported that sales of new homes plunged 8.3% in August to a seasonally adjusted annual rate of 795,000 units, the lowest level in seven years. The snapshot of the slumping housing market was worse than expected -- economists surveyed by Thomson/IFR anticipated, on average, a drop of 4.6%.

Ongoing problems in the housing industry were also reflected by KB Home, which said it expects the industry will continue to suffer through next year. The Los Angeles-based home builder reported before the opening bell that it swung to a loss in the third quarter.

The U.S. economy was a little softer during the second quarter than earlier estimated, according to a government report. The Commerce Department said gross domestic product expanded at a 3.8% annual rate in the second quarter -- less than the previously reported 4% increase.

However, there was some strong news about the nation's labor force. Jobless claims fell 15,000 to 298,000 in the week ended Sept. 22 -- the lowest level since May and an indication the labor market is still healthy.

These reports followed others issued this week that suggested the economy remains sluggish, which could persuade policymakers to lower rates further after last week's half-point cut. Lower rates make cash cheaper to borrow, so they tend to fuel spending and merger-and-acquisition activity.

The Dow Jones industrial average rose 19.18, or 0.14%, to 13,897.33.

Broader indexes also advanced. The Standard & Poor's 500 index rose 3.79, or 0.25%, to 1,529.21, and the Nasdaq composite index rose 6.81, or 0.25%, to 2,705.84.

Bonds were little changed. The yield on the 10-year Treasury note was at 4.62%, the same as late Wednesday.

The New York Fed appeared to be taking no chances in keeping cash available in the markets Thursday. It injected a larger-than-normal $38 billion through various types of repurchases -- including ones that accepted mortgage-backed collateral -- into the U.S. banking system as the end of the month approaches.

In corporate news, a group of investors led by private equity firm J.C. Flowers & Co. told student lender SLM Corp., or Sallie Mae, that it no longer wants to complete a $25 billion buyout. The group said the current economic environment and legislation being signed by President Bush on Thursday make the terms no longer acceptable. The investors said they are willing to discuss terms, though.

Sallie Mae rose $3.44, or 7.6%, to $48.45.

KB Home posted a third-quarter loss, but it was narrower than analysts expected. Its shares rose 53 cents, or 2.2%, to $24.62.

The dollar was mixed against other major currencies, while gold prices edged higher.

Crude oil prices rose as a tropical depression near Mexico raised concerns about possible disruptions to oil and gas production. A barrel of light sweet crude rose $1.32 to $81.62 on the New York Mercantile Exchange.

Advancing issues outnumbered decliners by about 2 to 1 on the New York Stock Exchange, where volume came to 254.5 million shares.

The Russell 2000 index of smaller companies was up 2.66, or 0.33%, at 811.78.

In European trading, Britain's FTSE 100 rose 0.90%, Germany's DAX index rose 0.48%, and France's CAC-40 rose 0.84%.

In Asia earlier, Japan's Nikkei index and Hong Kong's Hang Seng Index each rose 2.40%.
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