Thursday, December 21, 2006

Stocks Fall after Softer Economic Data

News Article
December 21, 2006

BusinessWeek Logo

Stocks Fall after Softer Economic Data

The Philly Fed index unexpectedly dropped in December. Third-quarter GDP growth was revised downward, while weekly jobless claims posted gains

Stocks finished lower Thursday in slow pre-holiday trading, as investors digested a set of mostly softer reports on the economy and mixed corporate earnings. Investors were awaiting another batch of economic data to be released Friday, says Standard & Poor's Equity Research.

On Thursday, the Dow Jones industrial average fell 42.62 points, or 0.34%, to 12,421.25. The broader Standard & Poor's 500 index dropped 5.22 points, or 0.37%, to 1,418.31. The tech-heavy Nasdaq composite was down 11.76 points, or 0.48%, to 2,415.85.

NYSE breadth was negative, with 20 issues declining for every 14 advancing. Nasdaq breadth was 17-13 negative.

In economic news, the Philadelphia Federal Reserve's index of regional manufacturing activity fell to -4.3 in December, much weaker than expected, after rising to 5.1 in November. Still, expectations for other manufacturing gauges remain unchanged, says Action Economics.

Earlier, the final reading for third-quarter U.S. gross domestic product, or GDP, growth was revised down to 2% from 2.2%. The chain price index was revised up to a 1.9% pace from 1.8%. The mixed data contrast with expectations for no change and could add to wories about slowing growth in 2007, says Action Economics.

The softer growth figures don't significantly alter the third-quarter economic landscape, some analysts say. "This slight downward revision to GDP does not change the picture of modest economic growth in the third quarter, held back by sharply lower residential investment," says John Ryding, chief U.S. economist at Bear Stearns, in a note to clients. "The revision to third-quarter growth is a slight positive for fourth-quarter GDP as the revision was largely due to lower inventory investment."

The slowdown in GDP growth seems temporary, others note. "The economic backdrop looks good," says Lincoln Anderson, chief economist and chief investment officer of LPL Financial Services. "The Fed wanted to engineer a slowdown, and they got it."

Meanwhile, initial jobless claims rose 9,000 to 315,000 in the week ended Dec. 16, from an upwardly revised 306,000 a week earlier. The four-week moving average dipped to 325,750 from 327,750.

Separately, U.S. leading indicators nudged higher 0.1% in November to 138.2, beating expectations of a 0.2% decline.

Looking ahead, Friday brings another busy economic docket ahead of the Christmas holiday. The markets will be mulling over data on durable goods, personal income, consumer spending, inflation, and consumer sentiment.

Among Thursday's stocks in the news, Nike (NKE) was modestly higher after the shoemaker reported an 8% rise in second-quarter profit.

Drug retail was among the top-performing industries, as shares of Rite Aid (RAD) rose on strong third-quarter revenues.

Chipmakers fell following disappointing guidance from Jabil Circuit (JBL). Credit Suisse and Jefferies each downgraded the shares.

Retailer Bed Bath & Beyond (BBBY) was down despite a 3.8% increase in third-quarter earnings. Credit Suisse lowered its recommendation on the shares from outperform to neutral.

Accenture (ACN) was higher after the management and technology consulting company posted a 32% jump in first-quarter profit on a 12% sales surge.

Shares of General Mills (GIS) gained as the packaged-food maker's second-quarter results topped Wall Street expectations.

Rival ConAgra (CAG) was up on a 44% rise in second-quarter income.

In M&A news, defense contractor Raytheon (RTN) said it would sell its aircraft business for $3.3 billion to a new company started by a Goldman Sachs affiliate and a Canadian buyout firm.

Huntington Bancshares (HBAN) agreed to pay about $3.6 billion in stock and cash for fellow Ohio-based banking company Sky Financial (SKYF).

On the analyst front, Circuit City (CC) was higher after J.P. Morgan raised its rating on the stock from neutral to overweight, citing positive catalysts for fiscal 2008.

In the energy markets, January West Texas Intermediate crude oil futures fell 86 to $62.86 per barrel, with inventories still at the upper end of the seasonal range.

European markets finished slightly lower. In London, the FTSE-100 index fell 14.9 points, or 0.24%, to 6,183.7. Germany's DAX index shed 12.95 points, or 0.2%, to 6,573.96. In Paris, the CAC 40 index edged down 4.03 points, or 0.07%, to 5,510.39.

Asian markets ended mixed. In Japan, the Nikkei 225 index gained 36.79 points, or 0.22%, to 17,047.83. In Hong Kong, the Hang Seng index slipped 17.28 points, or 0.09%, to 19,222.84. Korea's Kospi index lost 5.81 points, or 0.4%, to 1,436.47.

Treasury Market
Treasury yields dipped on the soft Philly Fed data and rumors of a London security threat, after drifting earlier. The 10-year note rose in price to 100-19/32 for a yield of 4.56%, while the 30-year bond climbed to 96-31/32 for a yield of 4.7%. However, Richmond Federal Reserve President Jeffrey Lacker warned of inflation risks. The market will be watching the PCE deflator report Friday, says S&P.

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