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Stocks advanced after a government report cast positive light on the labor market and helped offset recessionary worries. Investors are betting that a big drop in new home sales and a weak reading on GDP growth will make the Federal Reserve more likely to cut interest rates further.

The Dow Jones industrial average closed up 34.79 or 0.25% to 13,912.94, the broader S&P 500 closed up 5.96 or 0.39% to 1,531.38, and the tech-fueled Nasdaq composite closed up 10.56 or 0.39% to 2,709.59. Market breadth was positive. On the New York Stock Exchange, winners beat losers 2 to 1 on volume of 1.2 billion shares. On the Nasdaq, advancers beat decliners by 4 to 3 as 1.7 billion shares changed hands.

Stocks have been rising since the Federal Reserve cut interest rates last week for the first time in four years, and that optimism was continuing to put a floor under the market this week. The economic reports don’t suggest higher inflationary pressures or a big drop in consumer spending. The new home sales fell to a 795,000 annual unit rate in August, the lowest level in seven years, from an 867,000 unit rate in July. The GDP growth was revised down to 3.8% in the second quarter from a previous read of 4.0%. Tomorrow’s personal income and spending reports will be the next indicators of how the consumer - whose spending fuels more than two-thirds of economic growth - is holding up.

Shares of Microsoft closed down $0.01 or 0.03% to $29.49, despite reporting that its Halo 3 video game racked up about $170 million in first-day sales. Fans pre-ordered more than 1.7 million copies of the game, and more than 10,000 stores opened at midnight Monday to start selling.

Stock of Sallie Mae closed up $4.11 or 9.13% to $49.12, on reports that a group led by private equity firm J.C. Flowers is willing to renegotiate the $25 billion merger deal with the student loan company. Sallie Mae was dealt a blow when the buyers said they wanted out of the deal because of the economic environment and legislation signed by President Bush on Thursday that will trim education-lending subsidies.

Shares of KB Home closed down $0.62 or 2.57% to $24.71, after reporting a steep third-quarter loss that was worse than what analysts were expecting. It also warned that the housing market is likely to worsen through 2008. KB reported a loss of $35.6 million, versus earnings of $153.2 million in the year-ago period.

Stock of Palm Inc. closed up $0.97 to 6.29% to $16.40, after it unveiled a new device that the company hopes will appeal to a broader base of cell phone buyers. This device is dubbed the Centro.

Shares of Rite Aid closed down $0.21 or 4.16% to $4.84, after reporting a second-quarter loss versus a year ago that was worse than what analysts were forecasting. The drug store chain also warned that it would post a bigger quarterly loss for fiscal-year 2007 than it had previously thought.

U.S. light crude oil for November delivery rose $2.58 to $82.88 a barrel on the New York Mercantile Exchange. Last week, the October contract settled at a record high of $83.32. However, this is below inflation-adjusted highs hit in the early 1980s, which would be equal to at least $95 a barrel today.

All the best,
Manuel Jesus-Backus
The Portfolio Crafter