Can Dow strength propel Nasdaq?

Can Dow strength propel Nasdaq?

NEW YORK (CBS.MW) — It was a smashing week for blue chips, with the Dow Industrials establishing a nice winning streak, climbing nine out of the past ten trading sessions.

The Nasdaq, on the other hand, remained mired within a razor-thin range, frustrating those that had hoped decidedly positive earnings reports from Cisco Systems and Applied Materials would give the tech sector the impetus it needed to sprint.

“The Dow contains the names that have been beaten up so much,” said Peter Boockvar, equity strategist at Miller, Tabak & Co.

There’s a clear shift taking place in the market, with investors rewarding the companies they believe will perform the best in a slowing economy.

Boockvar said that’s why sectors such as the utilities are being bid up.

“We had a soft-landing rally on Friday,” he remarked. “The market was in a sweet spot.”

But will the optimism continue? And will the strength witnessed in many of the Dow’s old-economy components spill over into the technology sector, which continues to see lots of churning but no real progress?

Observers say it won’t be an easy task to get the stimuli needed to propel the Nasdaq.

The market, Boockvar notes, is entering an information vacuum with the second-quarter earnings season just about wrapped up and less emphasis on the economic numbers now that the market is convinced the Fed won’t raise rates at the Aug. 22 FOMC meeting.

Investors need reassurance as to how earnings will hold up as the economy slows. By exactly how much will the economy slow, however?

Consumer spending, as indicated by Friday’s retail sales data, remains healthy. And with mortgage rates heading lower, will the steamy demand for housing over the past years be restored? Economists stress that cooler demand for housing over the past months was due more to a lack of supply than a fallout in demand on the heels of higher mortgage rates. New Jersey-based HSH Associates said the average 30-year fixed mortgage rate fell 13 basis points in the latest week.

On the week, the Dow has risen 2.4 percent but remains down 4.1 percent on the year. The Nasdaq ended the week virtually unchanged, rising a mere 2.11 points. On the year, the tech-soaked index is off 6.9 percent.

Earnings and data watch

A total of 25 S&P 500 companies are set to release their quarterly results next week, First Call said. And reports from Hewlett-Packard and Home Depot next week will conclude the current quarter’s earnings season for Dow companies.

First Call estimates that third-quarter earnings will show a 19-percent growth rate. Since the start of the third quarter, expectations for fourth-quarter results have been lowered from up 16.8 percent to up 15.7 percent, First Call noted. And profit growth for 2000 is expected to come in at around 18 percent.

Among the companies reporting next week: Network Appliance, Lycos, Hewlett-Packard, Analog Devices, BEA Systems, Home Depot, Target, JC Penney, Kohl’s, Deere, Estee Lauder, Tiffany, News Corp., Staples and Agilent Technologies.

The highlights of next week’s data docket include: July industrial production and capacity utilization, the July consumer price index, July housing starts, building permits and the trade figures for June.

Friday’s trading activity

The Dow Industrials closed above the 11,000 mark for the first time since April 25 Friday as a report revealing that wholesale inflation remains in check buoyed interest-rate sensitive areas of the market such as the financials. A 9.6 percent rally in shares of Philip Morris also helped the blue-chip gauge score triple-digit gains.

The flat reading in the July producer price index reinforced the view that the Federal Reserve needn’t raise short-term rates at its upcoming policy-setting meeting on Aug. 22.

The upbeat tone in the broad market lifted the spirits of tech investors and helped the Nasdaq carve out respectable gains after faltering out of the gate.

“The market is getting hopeful that the Fed is done on the tightening front and that economic growth will hold up at a good clip,” said John Waterman, managing director of investments at Rittenhouse Financial.

Select technology stocks participated in the blue-chip rally, Waterman observed. “But money is being selective, it’s flowing into the companies that saw the most solid earnings while [ignoring those] with even the slightest question mark on that front.”

Within technology, chip stocks enjoyed the best buying interest while computer hardware stocks slumped under the weight of heavy selling in shares of Dell Computer. The broader market saw eager buyers emerge in the financial, tobacco, retail, chemical, drug and utility sectors while oil service shares retreated as crude oil prices took a break after reaching 6-week highs on Thursday.

The Dow Jones Industrials Average ($DJ) rallied 119.04 points, or 1.1 percent, 11,027.80.

The Dow has risen nine out of the past 10 trading days, noted Bill Schneider, head of block trading at UBS Warburg.

“The market may pause [at this point]. But the Dow has really benefited from its old-economy components, which have more reliability on the earnings front compared to tech stocks,” Schneider said.

Todd Gold, technical strategist at Gruntal & Co., defined the Dow’s performance Friday as a “bright spot” but said the Nasdaq is still unable to find real leadership.

“Between Applied Materials and Cisco we had great reports and great forward-looking statements but no real follow-through buying [to take them higher],” Gold said.

“Overall, the market is not rewarding the faith of tech shareholders very well,” echoed Tom Peterson, publisher of the newsletter Bull’s Eye Research.

Keeping the Dow firmly in the black was the 9.2 percent jump in shares of Philip Morris. Also higher: DuPont, Caterpillar, Intel and Procter & Gamble. Only five Dow stocks ended lower, including Hewlett-Packard, General Electric and Microsoft.

The Nasdaq Composite ($COMPQ) lifted 29 points, or 0.8 percent, to 3,789 while the Nasdaq 100 Index ($NDX) added 49 points, or 1.4 percent, to 3,644.

The Standard & Poor’s 500 Index ($SPX) edged up 0.8 percent while the Russell 2000 Index ($RUT) of small-capitalization stocks rose 1.7 percent.

Volume was light, standing at 840 million on the NYSE and at 1.33 billion on the Nasdaq Stock Market. Advancers bested decliners by 19 to 9 on the NYSE and by 21 to 18 on the Nasdaq.

Separately, Trim Tabs reported equity inflows of $8.7 billion in the week ended Aug. 9 versus outflows of $5.3 billion in the previous week. Equity funds that invest chiefly in U.S. stocks saw inflows of $7.5 billion compared to outflows of $5.0 billion in the prior week, Trim Tabs said.

Inside the data

July retail sales rose 0.7 percent compared to the expected 0.4 percent increase. Excluding autos, retail sales rose 0.6 percent.

“I’m impressed with this report. And the individual components are even more impressive, with solid gains in key categories,” remarked Michael Moran, chief economist at Daiwa Securities.

Consumers, Moran added, showed a willingness to spend on discretionary items.

The July PPI, meanwhile, came in at flat levels compared to the expected 0.1 percent increase. The core PPI, which excludes the jumpy food and energy components, edged up 0.1 percent, as expected. and view Economic Preview, economic calendar and forecasts and historical economic data.

“We got another great inflation report,” Moran said of the PPI. He believes the Fed will remain sidelined in August but said key to the Fed’s stance on rates going forward will be the performance of the housing market and the spending habits of consumers.

Moran it will be important to see whether lower mortgage rates will rekindle strength in the housing market going forward.

Sector movers

Shares of computer hardware stocks slumped Friday, with Goldman Sachs Hardware Index ($GHA) off 0.3 percent.

Dell Computer (DELL) was the downside mover, losing 4 1/16, or 9.7 percent, to 37 11/16. Dell posted second-quarter results after the close Thursday, making 22 cents compared to the First Call estimate of 21 cents a share and 19 cents in the year-ago quarter. Dell said Wednesday that its earnings per share would include an investment gain, but declined to comment on the amount. Market participants were disappointed with the PC giant’s revenue growth and took the stock lower.

Morgan Stanley Dean Witter defined Dell’s earnings as “fair but not perfect.”

While earnings-per-share exceeded estimates, the company’s revenue, though up 25 percent from the year-ago quarter, fell short of its estimates, Morgan Stanley said in a note to clients. The brokerage maintained its “outperform” rating on the stock and increased its earnings-per-share estimates on Dell for the January 2001 quarter to 94 from 91.

But Salomon Smith Barney lowered its rating on Dell to an “outperform” from a “buy” rating due to revenue concerns.

Among other downside movers in the hardware arena, Dow-component Hewlett-Packard (HWP) slipped 2 1/4 to 110. But Apple Computer (AAPL) added 1/8 to 47 11/16 and IBM (IBM) edged up 1/4 to 120.

Chip and chip equipment stocks put on a mixed performance, recuperating most of the losses suffered out of the gate. The Philadelphia Semiconductor Index ($SOX) added 1.2 percent.

Among the chip stocks, Intel (INTC) added 1 13/16 to 63 13/16 while Advanced Micro Devices (AMD) edged up 1/8 to 57 1/8. With the chip equipment segment, Kulicke and Soffa Industries (KLIC), off 1/16 to 15 1/8, was still reeling from last week’s profit warning. Applied Materials (AMAT) fell 1/16 to 69 3/16, unable to get mileage from it positive earnings report this week.

In the networking arena, shares of bellwether Cisco Systems (CSCO) recovered following Thursday’s steep drop, pulling the Amex Networking Index ($NWX), off 0.4 percent, well above its intra-day lows.

Within the sagging Internet group, business-to-business stocks slipped. Merrill Lynch’s B2B Holdrs (BHH) fell 2.7 percent. Internet Capital Group (ICGE) slid 3.8 percent, or 1 3/16 to 30 7/16. The company posted late Thursday a second-quarter loss of 70 cents a share, higher than the 6 cents it lost in the year-ago period.

Dain Rauscher Wessels initiated a number of companies in the B2B arena Friday with a “buy” rating, including VerticalNet (VERT), FreeMarkets (FMKT), Commerce One (CMRC) and Internet Capital Group. Among them, Commerce One rose 3.4 percent while Free Markets fell 2.9 percent.

In the broader market, tobacco stocks surged, with smart gains across the board. Philip Morris (MO) was Dow’s upside leader throughout the session, rising 2 3/4 to 31 1/4. RJ Reynolds (RJR) added 2 3/16, or 6.6 percent, to 35 1/2 while Loews Corp. (LTR) climbed 5 9/16, or 7.3 percent, to 81 5/8.

Goldman Sachs issued a positive note on the sector. “We see good likelihood that tobacco company valuations will improve significantly over the next 12 to 18 months as the threat of aggregated claims cases recedes,” Goldman said in a note to clients.

“Our sum-of-the-parts valuation analysis indicates that the shares of Philip Morris and Loews could rise 50 to 60 percent by next year,’ Goldman added.

Retail stocks recovered mildly, with the S&P Retail Index ($RLX) up 1.3 percent. Wal-Mart (WMT) regained its composure, adding 1 1/8 to 52 1/8 after tumbling 11.5 percent over the past couple of trading sessions. And Kmart (KM) rose 1/8 to 7 3/8. Even Gap (GPS) edged up 1/16 to 27 1/16 after sliding on Thursday following a profit warning.

See for post-market trading activity.

Treasury focus

Government prices relinquished all of their earlier gains as equities captured investors’ fancy.

The market is in the process of digesting the week’s $25 billion worth of refunding auctions, which saw the best demand for the 5- and 30-year issues.

The 10-year Treasury note lost 6/32 to yield ($TNX) 5.785 and the 30-year bond fell 14/32 to yield ($TYX) 5.71 percent.

Over in the currency arena, the dollar showed little reaction to the Bank of Japan’s decision to nudge up rates Friday for the first time in 10 years. The target for short-term rates now stands at 25 basis points from practically zero — where it had hovered since Feb. 1999.

The move was widely expected by financial markets as central bank officials had repeatedly expressed their desire to end the zero-rate policy — considered artificial and thus unsustainable — during the past months. BOJ Governor Masaru Hayami said in a press conference after the rate hike that the decision was made by a clear majority and that it wasn’t the beginning of a rate hike cycle.

The move came after weeks of wrangling between the government — which opposed an increase in rates — and the central bank.

Having the BOJ and the government fight over policy has terrible long-term implications if you’re trying to encourage investors, according to Greg Anderson, financial economist at Fleet Boston Financial.

“The BOJ rate hike Friday is not about levels of short-term rates, it’s about the message that was sent to the market and the lack of coordination [it demonstrated],” Anderson said.

The divide between the views of the Ministry of Finance and the central bank is a real confidence buster, Anderson continued. It doesn’t give financial markets confidence that fiscal and monetary policy will work together to bring a real recovery to the Japanese economy.

He sees a weaker yen over the next months as a consequence.

“It’s like having two doctors arguing over the symptoms and treatment of a patient,” he quipped.

In recent trading, dollar/yen (C_JPY) shed 0.1 percent to 108.50 while euro/dollar (C_EUR) fell 0.5 percent to 0.9030. See latest currency rates.

In the commodity market, September crude lost 32 cents to $31.02, climbing above the $31 barrier for the first time since June 30 on Thursday. Tight inventories have put great upward pressure on crude prices in recent weeks. Meanwhile, the Bridge CRB index rose 0.50 to 220.02.