Tuesday, December 19, 2006

Stocks Finish Mixed Despite Inflation Data

News Article
December 19, 2006

BusinessWeek Logo

Stocks Finish Mixed Despite Inflation Data

The Dow hit a new all-time high as investors shrugged off a surprising surge in wholesale inflation. Housing starts also rebounded

Major stock indexes finished mixed Tuesday, with the Dow touching a new all-time closing high, despite initial weakness following an unexpectedly firm inflation report. A 15% overnight plunge in Thai markets also rattled investors. Traders were awaiting Wednesday's mortgage applications data for clues about the housing market, says Standard & Poor's Equity Research.

On Tuesday, the Dow Jones industrial average rose 30.15 points, or 0.24%, to 12,471.32, a new record closing high. The broader Standard & Poor's 500 index added 3.07 points, or 0.22%, to 1,425.55. The tech-heavy Nasdaq composite slipped 6.02 points, or 0.25%, to 2,429.55.

NYSE breadth was positive, with 18 issues advancing for every 15 declining. Nasdaq breadth was 17-14 negative.

In economic news, the U.S. producer price index, or PPI, surged 2% in November, its biggest jump in more than 30 years, amid rising gas prices. The core rate, which excludes food and energy costs, rose 1.3%. The increases reversed October declines of 1.6% for the headline PPI and 0.9% for the core PPI.

Car prices rose 2.2% and light truck prices 13.7% in November, some analysts note. "The jump in vehicle prices suggests that the inflation picture in the goods sector is not quite as favorable as previously thought, though we would still place more weight on the positive surprises to the core CPI over the past two months," says Jan Hatzius, chief U.S. economist at Goldman Sachs, in a note to clients.

Others say the PPI is not a reliable measure of inflation. "Last month, we argued that 'We do not think that the PPI finished goods prices is a very representative index of current inflation pressures,'" says John Ryding, chief U.S. economist at Bear Stearn, in a note to clients. "Today's report underscores that assessment."

Meanwhile, U.S. housing starts bounced 6.7% in November to a 1.588 million pace, from an upwardly revised 1.488 million in October.

The economic docket is relatively light Wednesday, highlighted by mortgage applications. The slate Thursday holds reports on economic growth, jobless claims, leading indicators, and regional manufacturing activity.

Among Tuesday's stocks in the news, Oracle (ORCL) was lower as analysts questioned the software maker's growth strategy despite an in-line report on second-quarter earnings.

Computer electronics retailers were among the worst performers. Circuit City (CC) was sharply lower after posting a third-quarter loss and lowering its full-year sales outlook.

On the upside, Morgan Stanley (MS) was higher as the investment house said it will spin off its Discover credit card business and reported fourth-quarter profit surpassing analyst expectations.
Drugmaker Pfizer (PFE) was higher after the company raised its dividend 21%, to 29 cents from 24 cents.

Microsoft (MSFT) was also up modestly after slipping earlier following a report a function in the software giant's new Internet Explorer 7 Web browser may make it harder for some small businesses to gain online credibility.

Elsewhere, Delta (DALRQ.PK) rebuffed a bid from U.S. Airways (LCC) and filed its plan to emerge from bankruptcy. U.S. Airways said it would continue its bid.

Homebuilders were taking a hit after Hovnanian (HOV) reported a fourth-quarter loss.

Oil prices climbed, boosting corresponding stock groups. In the energy markets, January West Texas Intermediate crude oil futures rose 94 cents to $63.15 per barrel, amid reports of increased violence in oil-rich Nigeria.

European markets finished lower. In London, the FTSE-100 index fell 43.5 points, or 0.7%, to 6,203.9. Germany's DAX index shed 43.74 points, or 0.66%, to 6,553.51. In Paris, the CAC 40 index was down 45.56 points, or 0.82%, to 5,484.76.

Asian markets ended lower. In Japan, the Nikkei 225 index slid 185.23 points, or 1.09%, to 16,776.88. In Hong Kong, the Hang Seng index lost 228.36 points, or 1.19%, to 18,964.55. Korea's Kospi index shed 5.47 points, or 0.38%, to 1,427.76.

Treasury Market
Treasury yields drifted higher, pulling back from an initial surge on the unexpectedly high wholesale inflation reading and firm housing data. The 10-year note edged down in price to 100-08/32 for a yield of 4.59%, while the 30-year bond slipped to 96-15/32 for a yield of 4.72%.

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