Tuesday, November 14, 2006

Dow Hits Record High on Tame Inflation

News Article
November 14, 2006

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Dow Hits Record High on Tame Inflation

Wholesale prices matched their biggest monthly decline in October, fueling hopes that the Fed would stay on hold

Stocks finished broadly higher Tuesday, recovering from early lows as investors weighed a sharp drop in wholesale inflation and unexpectedly weak retail sales. The Dow reached another closing high, with earnings reports from big-box retailers also in focus. A buy program and short covering helped boost stocks, says Standard & Poor's Equity Research.

On Tuesday, the Dow Jones industrial average rose 86.05 points, or 0.71%, to 12,217.93, after touching a new all-time intraday high of 12,228.01. The blue-chip benchmark topped its previous record close of 12,176.54, set Nov. 8. The broader Standard & Poor's 500 index added 8.8 points, or 0.64%, to 1,393.22, a six-year high. The tech-heavy Nasdaq composite climbed 24.28 points, or 1.01%, to 2,430.66.

NYSE volume was decidedly positive, with 24 issues advancing for every eight declining, while Nasdaq breadth was 20-9 positive. Trading was active ahead of Friday's options expiration.

Investors were digesting a steep decline in wholesale prices Tuesday. The producer price index (PPI) fell 1.6% in October, matching the record decline. The core PPI, which excludes food and energy, dropped 0.9% in October, the biggest slide since August, 1993. Both numbers were weaker than expected.

Meanwhile, retail sales fell 0.2% in October, or 0.4% excluding autos. These figures were also weaker than Wall Street expected.

The numbers suggest the economy is a headed for a "soft landing," some analysts say. "The Federal Reserve is likely to leave interest rates unchanged until the balance of risks between recession and inflation become clearer," says Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.

Others say the PPI is a flawed measure of current inflation pressures. "We continue to expect that core CPI rose 0.2% in October," says John Ryding, chief U.S. economist at Bear Stearns.

In other economic data, business inventories rose 0.4% in September while sales plunged 2%. On Wednesday, investors were due to receive the November reading of the Empire State index.

Eleswhere on the economic front, St. Louis Federal Reserve Bank president William Poole said in a speech in Philadelphia Tuesday that the FOMC shouldn't remain too tight on monetary policy for too long.

On the company side, Wal-Mart (WMT) was higher after the retail giant reported an 11.5% increase in third-quarter profit but trimmed its guidance for the year.

Rival discount retailer Target (TGT) was also higher as a 16% rise in third-quarter profit topped analyst estimates.

Home Depot (HD) was higher after the home-improvement retailer posted a 3.1% drop in third-quarter earnings on sharply lower same-store sales.

Shares of DR Horton (DHI) climbed as the homebuilder's 51% fourth-quarter profit decline still exceeded Street forecasts.

Among companies slated to announce quarterly results Wednesday were Applied Materials (AMAT) and Tyco International (TYC).

Elsewhere, General Motors (GM), Ford (F) and DaimlerChrysler (DCX) were meeting with President Bush Tuesday to discuss measures to help compete against imports (see BusinessWeek.com, 11/14/06, "Will Bush Listen to Motown?"). Ford also restated financial results from the last five years to correct errors in how it accounted for interest-rate hedging.

Chipmaker Intel (INTC) released its widely anticipated quad-core chips ahead of a rival version from competitor Advanced Micro Devices (AMD).

Software giant Microsoft's (MSFT) Zune music player made its debut in a bid to unseat Apple's (AAPL) iPod as the leading digital-music device.

In the energy markets, December West Texas Intermediate crude futures fell 30 cents to $58.28 a barrel ahead of options expiration Tuesday.

European markets finished lower. In London, the FTSE-100 index fell 7.6 points, or 0.12%, to 6,186.6. Germany's DAX index slipped 6.35 points, or 0.1%, to 6,387.38. In Paris, the CAC 40 index lost 14.28 points, or 0.26%, to 5,476.28.

Asian markets ended higher. In Japan, the Nikkei 225 index rallied 267.06 points, or 1.67%, to 16,289.55. In Hong Kong, the Hang Seng index edged up 9.88 points, or 0.05%, to 18,878.42. Korea's Kospi index gained 10.68 points, or 0.76%, to 1,407.37.

Treasury Market
Treasury yields slid following the PPI decline and damp retail sales data. The 10-year note rose in price to 100-15/32 for a yield of 4.57%, while the 30-year bond climbed to 97-14/32 for a yield of 4.66%.

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