Stocks rise on energy shares, offsets bank fears

NEW YORK (Reuters) - The Dow and S&P 500 rose on Tuesday as hurricane fears lifted oil prices and boosted energy shares, blunting the effect of a report that showed a growing number of problem U.S. banks.

Trading volume was light and volatile, but traders said energy prices were the key mover.

U.S. crude oil, which at one point broke above $117 a barrel, ended up 1 percent on fear that Hurricane Gustav could disrupt output in the U.S. Gulf.

Shares of Exxon Mobil (XOM.N) rose 1.6 percent to $79.95, making them among the biggest boosts for the S&P and the Dow.

"Energy was the story today, with the bounce in the oil stocks being a reaction to the news of the hurricane," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco. He also said the firmer dollar helped stocks.

But gains were limited by a report from the U.S. Federal Deposit Insurance Corporation that said 117 U.S. banks were on its troubled banks list at the end of the second quarter, up from 90 after the first three months of the year.

"We've had some failures already, so this watch list has garnered a lot of attention," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey. "And it's not the number of banks so much as the size."

The FDIC said the assets of the banks on the problem list totaled $78.3 billion through June, up from $26.3 billion at the end of the first quarter.

The Dow Jones industrial average was up 26.62 points, or 0.23 percent, at 11,412.87. The Standard & Poor's 500 Index was up 4.66 points, or 0.37 percent, at 1,271.50. The Nasdaq Composite Index was down 3.62 points, or 0.15 percent, at 2,361.97.

While the FDIC list unnerved the broader market, one analyst said it may be good news for the largest U.S. banks.

"The conclusion is, the weak are going to get weaker and the strong will be able to take advantage of the weak," said Charlie Peabody, a bank analyst at Portales Partners in New York.

Most of the banks on the FDIC's list are small banks.

Shares of top U.S. bank Citigroup (C.N) rose 1.3 percent to $17.84 while JPMorgan Chase (JPM.N) rose 1.3 percent to $36.61. The S&P Financial index rose 0.72 percent, and the KBW Banks index gained 0.65 percent.

Retailers rose, with the S&P retail index gaining 0.7 percent, while the S&P energy index was up 1.8 percent.

Shares of Anadarko Petroleum (APC.N) jumped 6.4 percent after the company announced a share repurchase program of up to $5 billion.

The gain in the price of oil weighed on companies that are sensitive to higher fuel costs, such as airlines. An index of airline stocks was down 4.1 percent.

On the Nasdaq, Marvell Technology Group (MRVL.O) shares fell 6.6 percent after Jefferies & Co. downgraded the microchip design company's stock on concerns about its hard disk drive inventory and weak cellular positioning.

Market gains were limited by minutes from the Federal Reserve's last policy meeting, where officials said high energy prices, a weak labor market and the housing slump would continue to drag on the troubled U.S. economy.

For now, consumer confidence appears to be holding up. A Conference Board report on Tuesday showing consumers were feeling more optimistic in August gave stocks an early boost and helped offset a mixed bag of housing data.

The Standard & Poor's/Case-Shiller showed prices of single-family homes fell at a record pace in June, though nine of the 20 cities tracked showed price increases, up from seven in May.

But Gary Shilling, president of A. Gary Shilling & Co in Springfield, New Jersey, said the data shows the housing slump is far from over. "We think we will see prices falling until the fourth quarter of 2010. There will be more write-downs at financial institutions and a lot more problems for consumers."

Embattled mortgage finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N) rallied on hopes that a possible government rescue would not necessarily wipe out shareholder value.

"I think there's a lot of speculation that maybe the shareholders will get bailed out. So shareholders think, 'If I buy this at $3 to $5 a share and the shareholders get bailed out, I'm going to do great.' They're certainly not doing it on the basis of fundamentals," said Mark Coffelt, chief investment officer at Texas Capital Value Funds in Austin, Texas,

Fannie's shares rose 8.3 percent to $5.62 and Freddie's shares jumped 20.7 percent to $3.97.

Trading volume was light on the New York Stock Exchange, with about 841 million shares changing hands, well below last year's estimated daily average of roughly 1.90 billion. On Nasdaq, about 1.44 billion shares traded, also below last year's daily average of 2.17 billion.

Advancing stocks outnumbered declining ones on the NYSE by about 1.6 to 1 while on the Nasdaq, advancers beat decliners by about 1.2 to 1.

(Additional reporting by Richard Leong; Editing by Leslie Adler)