By Renae Merle and Christopher Twarowski
Washington Post Staff Writers
Friday, July 11, 2008

Stocks gained some ground yesterday but not before enduring a volatile day of trading in which the major indicators plummeted twice and oil prices surged more than $5 a barrel.

The Dow Jones industrial average advanced 81.58 points, or 0.73 percent, to close at 11,229.02 yesterday. Hours earlier, it had fallen sharply into negative territory as oil prices spiked more than $3 a barrel in a matter of minutes.

"Today you had to come into work on Wall Street wearing a neck brace," said Ed Yardeni, chief investment strategist for Yardeni Research.

Economists pinned the market's early volatility on Dow Chemical's acquisition of a rival and Wal-Mart's report of higher June same-store sales. At the same time, investors shrugged off a drop in initial jobless claims last week. Analysts called the figures a seasonal glitch and said the unemployment trend remained negative.

Mortgage industry giants Fannie Mae and Freddie Mac suffered a third day of significant loses this week even as federal regulators attempted to temper concerns about the companies' stability. In a note to investors yesterday, UBS questioned whether the $5.5 billion in capital Freddie Mac plans to raise would be enough and whether both companies continued to trade at their lowest levels in years. Freddie Mac of McLean lost 22 percent yesterday, while D.C.-based Fannie Mae lost 13.8 percent.

The Standard & Poor's 500-stock index gained 8.70, or 0.70 percent, to 1253.39. The tech-heavy Nasdaq composite index gained 22.96, or 1.03 percent, to close at 2257.85.

"It was a crazy day," said Todd Leone, managing director of equity trading at Cowen & Co. "What took the market down was Fannie and Freddie, and then we were still rocking back, and then the oil came in and knocked the market down, and the market still rallied back. So I think today was a very good day for the market, and hopefully we'll keep it up."

The market was buoyed by Dow Chemical's $18.8 billion deal to buy Rohm and Haas, the world's largest producer of acrylic-paint ingredients. The deal is being financed by equity investments of $3 billion from Warren E. Buffett's holding company Berkshire Hathaway and $1 billion from the Kuwait Investment Authority. Rohm and Haas shares soared 64 percent to close at $73.62.

The price of a barrel of crude oil for August delivery settled at $141.65, up $5.60 or 4.1 percent, on the New York Mercantile Exchange.

Economists provided disparate reasons for the spike.

Some attributed it partly to fears of a Middle East conflict involving Iran, which yesterday reportedly conducted the second test-firing this week of missiles capable of striking Israel. Iran has the second-largest oil reserves in the world.

"I guess there are some parties out there that think that some type of conflict is inevitable because of this latest event, or it's drawing closer, it'll be more difficult to avoid," said John Lonski, chief economist for Moody's Investors Services.

Analysts also cited reports that a militant group in Nigeria, another major oil exporter, had sent an e-mail calling off a cease-fire beginning Saturday.

Some analysts also suggested that the afternoon surge in oil prices could have been the result of a quirk of automatic trading.

Joseph Brusuelas, chief U.S. economist at California-based Merk Investments, said oil prices had dropped to a level that triggered an automatic "buy" order, sending prices up.

American International Group tumbled $2.15, to $23.99, after Moody's Investors Service lowered its rating on AIG's mortgage insurance subsidiary.

Lehman Brothers fell $2.44, to $17.30.

Wachovia fell $1.16, to $13.13, after the bank named a new chief executive.