Tuesday, June 20, 2006

Stocks Finish Mixed as Rebound Fizzles

News Article
June 20, 2006

Business Week Online

Stocks Finish Mixed as Rebound Fizzles

Market players remained skittish despite a greater-than-expected rise in May housing starts

Stocks finished mixed Tuesday, after an early rebound on a solid housing report fizzled amid caution ahead of next week's Federal Reserve meeting. Worries about slowing economic growth, rising inflation and a global uptrend in interest rates continue to weigh on sentiment, says Standard & Poor's Equity Research.

The Dow Jones industrial average rose 32.73 points, or 0.3%, to 10,974.84, led by Verizon (VZ ). The broader Standard & Poor's 500 index edged down 0.02 points, or less than 0.01%, to 1,240.12. The tech-heavy Nasdaq composite slipped 3.35 points, or 0.16%, to 2,107.06.

Volume was low compared with 20-day averages. NYSE breadth was slightly negative, with 18 issues advancing for every 15 declining. Nasdaq breadth was 17-13 negative.

Some analysts say they like the market where it is. "Despite all the hand-wringing, eight out of 10 S&P sectors are still up year-to-date, with small caps up 3.5% and transports up 10%," notes Henry McVey, chief U.S. investment strategist at Morgan Stanley. "This has not been a 1990, 1998, or 2002-style event. We may see a continued bounce here since the market is oversold, but for the sustained upside we look for in the second half, we would like to see a broadening of leadership, more analysts trimming estimates, and a peak in the CPI [consumer price index] later in the summer."

An upbeat housing report was in focus Tuesday. The Commerce Department said housing starts rebounded 5% to 1.96 million units in May after an upwardly revised 1.86 million in April. That's slightly stronger than expected, says Action Economics, but any market impact may be offset by a 2.1% decline in building permits.

The report suggests the housing market is slowing, but not crashing, analysts say. "We view this morning's data as further evidence the housing market is in a downturn, but that it is not headed for collapse," explains Carl Riccadonna, an economist at Deutsche Bank Securities. "Nonetheless, the housing market is an important leading indicator of the overall economy, and the fact that it is slowing tells us that both consumption and overall growth are also likely decelerating."

The pace of the expected housing cooldown may prove difficult to predict, others say. "A significant miss in the timing of the economic slowdown related to housing could alter forecasts for inflation and the Fed," observes Lehman Brothers economist Drew Matus. "These developments demand close attention be paid."

The economic docket is lean again Wednesday, highlighted by mortgage applications and oil inventories. Other upcoming releases include leading indicators Thursday and durable goods Friday. Neither is likely to affect the outlook for an expected interest-rate hike at the Fed's June 28-29 meeting, says Action Economics.

In corporate news, JetBlue Airways (JBLU) was higher after Morgan Stanley initiated coverage of the aircraft with an overweight recommendation. The broker also started coverage of American Airlines parent AMR Corp. (AMR ) and Continental Airlines (CAL ) with equal-weight ratings and Southwest Airlines (LUV ) with underweight.

In other broker calls, Applied Materials (AMAT ) was higher after Prudential upgraded the chip-equipment maker from neutral to overweight. However, chipmakers Intel (INTC ) and Advanced Micro Devices (AMD ) were down modestly.

On the earnings front, Kroger (KR ) was higher after the supermarket chain reported a 4% increase in first-quarter profit. For-profit education company Apollo Group (APOL ) was lower after posting a flat profit for its fiscal third quarter.

Elsewhere, retailer Target (TGT ) was modestly lower after the company said June sales are trending toward the upper end of its forecasts.

Aircraft maker Boeing (BA ) was little changed in choppy trading as European rival Airbus faced a possible cancellation of a $3 billion order after delays in the jets' delivery.

M&A activity continued apace. Dow member General Electric (GE ) struck a deal for Swedish medical instruments maker Biacore International. Pharmaceutical company Pfizer (PFE ) holds 41% of Biacore.

In the energy markets Tuesday, July West Texas Intermediate crude oil futures closed down 4 cents at $68.94 in volatile trading as the July contract expired. A weekly inventory report is on tap for Wednesday.

European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 32.1 points, or 0.57%, to 5,658.2. Germany's DAX index climbed 54.38 points, or 1%, to 5,493.61. In Paris, the CAC 40 index was up 41.4 points, or 0.88%, to 4,770.42.

Asian markets finished lower. Japan's Nikkei 225 index retreated 211.94 points, or 1.43%, to 14,648.41. In Hong Kong, the Hang Seng index lost 159.89 points, or 1.01%, to 15,608.97. Korea's Kospi index sank 25.84 points, or 2.06%, to 1,225.83.

Treasury Market

The solid housing report drove Treasury yields higher, says Action Economics. The 10-year note slipped to 99-26/32 for a yield of 5.15%, while the 30-year bond fell to 89-19/32 for a yield of 5.19%. The Treasury curve remained inverted, with the yield on the 2-year note topping the 10-year by 4 basis points. An inverted yield curve is taken by some forecasters as a sign of impending recession.

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