Let the good times roll

Let the good times roll

NEW YORK (CBS.MW) — Empowered by more evidence that economic growth is moderating to a more sustainable pace within a low-inflation environment, the bulls took charge on Wall Street, propelling the Dow Industrials to its highest level since mid-April and the Nasdaq to its best close since mid-July.

“What I like about this market is the broadening within the Nasdaq over the past three days, marked by the [rally] in the business-to-business sector,“ said Barry Hyman, senior market strategist with Ehrenkrantz King Nussbaum.

“It’s a good sign. It shows people are more comfortable with [more speculative] stocks over defensive ones.”

While the nifty run-up in the stock market during the month of August may bring with it some consolidation in September, Hyman doesn’t think downward moves will be deep.

Hyman said he doesn’t expect an explosive rally over the next three months but does expect constructive action to take place. “That’s as long as we can continue to make the case for a [sidelined] Fed.”

Analysts expect worries to take hold on Wall Street as the third-quarter earnings pre-announcement period nears. The risk going forward is that economic growth slows a bit too much and takes a larger-than-expected bite out of earnings.

There’s plenty on investors’ minds, according to John Zimmerman, director of growth strategies at Banc of America Capital Management, and that may temper market gains in the near-term.

The Nasdaq ended the week at its highest level since July 17. The tech-soaked index is up 4.8 percent for the week and up 4.1 percent for the year. The Dow Industrials rose 0.4 percent this week but is still down 2.3 percent for the year.

Earnings and data watch

Only four S&P 500 companies have yet to unveil their second-quarter results, according to First Call. Three of them — Albertson’s, Heinz and Campbell Soup — will report next week. That leaves only Kroger for the following week.

First Call notes that consumer cyclical analysts are meaningfully lowering their third-quarter profit estimates, though the reductions are being generally offset by the upward revisions in the energy sector. Expectations for third-quarter earnings growth now stand at 17.1 percent from 17.3 percent last week, the earnings compiler said.

Most of the downward revisions in the consumer cyclical group were among the retailers. So far, downward revisions aren’t running higher than normal, First Call said. However, though it is still too soon to tell, First Call said it appears negative pre-announcements could end up at higher-than-normal levels.

Next week will be an extremely quiet one on the economic front, with the highlights represented by the revision to second-quarter productivity numbers, July home completions, July wholesale inventories and July consumer credit.

Friday’s trading activity

The major averages held on to respectable gains Friday, buttressed by a weaker-than-expected August jobs report, which reinforced the widespread view that the Federal Reserve can stay on the sidelines, perhaps for the rest of the year.

Still, investors lightened up on positions ahead of the long holiday weekend and the stock market indexes ended the day well off session highs.

“[The jobs numbers] indicate a pattern of slowing growth in the economy,” said Zimmerman of Banc of America Capital Management.

Inside the market, the Internet sector saw some profit-taking after a healthy rebound this week. Gains in the networking arena Friday offset losses in the chip sector. In the broad market, bank, airline and paper stocks slipped while brokerages and biotechs continued their ascent. And retail stocks rebounded after a bruising sell-off on Thursday.

Non-farm payrolls fell by 105,000, catching Wall Street off guard with the large drop. But market watchers had to sift through the August numbers carefully, as they were skewed by the Verizon strike and government layoffs of temporary census workers. Excluding the impact of the strike and the census layoffs, 102,000 non-farm jobs were created.

The Dow Jones Industrials Average ($DJ) rose 23.68 points, or 0.2 percent, to 11,238.78.

Upside movers included General Motors, Hewlett-Packard, Cocoa-Cola and Wal-Mart while J.P. Morgan backpedaled following its smashing upward move over the past couple of trading sessions. Also losing ground were shares of Citigroup, American Express and Philip Morris.

“The market liked what it saw with the employment report,” said Peter Coolidge, senior equity trader at Brean Murray & Co.

“There are high expectations for the market in September. Whether we can live up to them and see the follow-through buying needed remains to be seen,” Coolidge added.

There is certainly less pressure on the Fed to raise rates in the post-presidential-election period following this week’s string of soft economic data, Coolidge said.

The Nasdaq Composite ($COMPQ) edged up 27.98 points, or 0.7 percent, to 4,234.33 while the Nasdaq 100 Index ($NDX) gained 21.71 points, or 0.5 percent, to 4,099.30.

The Standard & Poor’s 500 Index ($SPX) advanced 0.2 percent while the Russell 2000 Index ($RUT) of small-capitalization stocks added 0.7 percent.

Volume checked in at 774 million on the NYSE and at 1.47 billion on the Nasdaq Stock Market. Market breadth was mixed, with winners pouncing on losers by 16 to 12 on the NYSE and by 22 to 18 on the Nasdaq.

Separately, Trim Tabs said all equity funds saw inflows of $5.6 billion during the week ended Aug. 30 — the same amount witnessed during the previous week. Equity funds investing chiefly in U.S. stocks had inflows of $5.4 billion compared with inflows of $5.6 billion in the previous week.

Inside the day’s data

The unemployment rate rose to 4.1 percent in August compared to the 4 percent rate in the previous month. Average hourly earnings rose by 0.3 percent, less compared to expectations.

The Federal Reserve’s main concern throughout the tightening cycle has been the taut labor market, which it fears will eventually fuel wage inflation. Thus far, however, productivity growth has continued to outstrip rises in wages. View Economic Preview, economic calendar and forecasts and historical economic data.

The pace of moderation in employment growth is taking place at different speeds for the various groups within the labor market, noted Dan Seto, senior economist at Sumitomo Life Investment Co. But businesses, he added, are becoming more cautious in hiring because they know the economic environment won’t be as favorable going forward.

While the picture is still a blurry one, the slowdown trend is in place and labor costs aren’t presenting a problem, Seto noted. The Fed is taking a sit back, wait-and-see approach, the economist said. With the evidence in place thus far, the central bank is likely to be on hold for the remainder of the year, he concluded.

Checking the various sectors within the jobs report, manufacturing lost 79,000 workers, construction was flat, while the retail trade lost 35,000 jobs and the services sector added 160,000 jobs.

The market received another piece of news Friday to back up the slowdown theory that has been the linchpin behind the stock market’s incredibly positive action in August and the drop in Treasury yields to their lowest levels in over a year.

The National Association of Purchasing Management index fell to 49.5 percent, less than the expected 51.8 percent and its first drop below the key 50-mark since February 1999. A reading below the 50 percent level indicates a contracting manufacturing sector while a reading above the level suggests the manufacturing sector is expanding. On Thursday, the Chicago Purchasing Managers index slid to 46.5 percent in August from the previous month’s reading of 52 percent.

With the NAPM report, the prices paid index slipped to 56.2 percent in August from the previous month’s 61.9 percent while the new orders index came in at 49.7 percent, just a touch below the 49.9 percent registered in July.

Sector movers

The Internet sector came under the heaviest selling pressure Friday, with the Goldman Sachs Internet Index ($GIN) off 0.5 percent and Merrill Lynch’s Internet Holdrs (HHH), a basket of 20 Net stocks, off 2.6 percent.

Yahoo (YHOO), off 6.2 percent to $113.94, suffered the largest loss in the group of 20 stocks contained in the Holdrs. The company announced it would take a one-time charge of $25 million to third-quarter earnings related to the acquisition of e-mail firm EGroups.

A profit warning from an Internet consulting company — Viant — also soured the tone in the marketplace. In addition, some participants used the August run-up in Net stocks as an opportunity to book some profits.

Viant Corp. saw its shares plunged 41 percent, or $5.69 to $8.19. The company (VIAN) warned after the close Thursday that third-quarter revenue is expected to fall 12 to 15 percent below the $38.5 million in revenue reported in the second quarter. The company also said it expects to report an unspecified loss in the third quarter on a per-share basis. The firm saw was downgraded by a litany of Wall Street firms, including Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs, SG Cowen, Donaldson Lufkin & Jenrette, CIBC World Markets and ING Barings.

Scient (SCNT), meanwhile, shaved 18.7 percent to $22. The company announced a $25 million buyback of its common stock on Friday but slid as it was hit with a slew of downgrades. Merrill Lynch, Lehman Brothers, BB&T Capital Markets, ING Barings and SG Cowen all lowered their ratings on the stock, which is a component of Merrill’s B2B Holdrs (BHH). The Holdrs, which rose 22.3 percent in August, added 2.5 percent on Friday even as Scient sold off.

Donaldson, Lufkin & Jenrette downgraded the Internet consulting group to a “market perform” in tandem with its lowered rating of Viant shares on Friday. The brokerage said the risk profile of the sector is increasing as it navigates a transition in demand. DLJ notes that the group of about 20 Net consulting stocks has declined an average of 64 percent in 2000. While a correction may be near its bottom, DLJ believes its unlikely the group will see any upward estimate revisions over the next one to two quarters.

Retail stocks rebounded after falling for three straight sessions, weighed down by earnings warnings and less-than-stellar same store sale results on Thursday. The S&P Retail Index ($RLX) added 2.3 percent. The biggest downside movers on Thursday rebounded, with Target (TGT) up $1.44 to $24.63, J.C. Penney (JCP) up 4.8 percent to $14.69 and Gap (GPS) up $1.25 to $23.50. Nordstrom (JWN) announced late Thursday that Blake Nordstrom was named president, effective immediately, and that John Whitacre is resigning after 24 years with the company. The stock added 94 cents to $18.94, erasing earlier losses. Nordstrom saw its rating slashed by Bear Stearns, Merrill Lynch and CS First Boston.

Investors remain concerned about the retailers, Zimmerman said. They threw in the towel on Thursday, he said, and while the group may have reached a bottom, there’s no catalyst to get people excited about the group in the near term.

See for post-market trading activity.

Treasury focus

Treasurys gained ground as the tame employment report brought out the bulls. On Thursday, the long end enjoyed a stellar rally, with the 30-year up over a point.

The 10-year Treasury note added 7/32 to yield ($TNX) 5.68 percent and the 30-year bond added 2/32 to yield ($TYX) 5.66 percent.

Over in the currency market, dollar/yen (C_JPY) slipped 0.7 percent to 105.88 while euro/dollar (C_EUR) rallied 1.3 percent to 0.8996.

Turning to the commodity arena, October crude rose 26 cents to $33.38 while the Bridge/CRB index climbed 1.04 to 228.45.