Dow struggles; Nasdaq off highs

Dow slumps; Nasdaq ekes out gain

Retail stocks hit; CPI benign, up 0.2%

NEW YORK (CBS.MW) — Weakness in the retail and financial sectors chipped away at the Dow Industrials Wednesday even as investors enjoyed a double dose of friendly economic data.

The Dow’s sogginess spilled over into the Nasdaq, which ended a touch positive but well off session highs. Chip stocks continued to provide support, buttressed by a stellar earnings report from Analog Devices.

Mike Holland, president of Holland & Co., said the current environment is a very healthy one for technology growth.

“The outlook is for good productivity and low inflation,” Holland said. “There’s nothing on the horizon at present to cloud this outlook. The market is reasonably priced overall.”

Turning to specific sectors, the broader market saw selling in biotech, airline, and utility issues while gains were witnessed in the drug and oil groups. The tech arena saw losses in the computer hardware and software issues.

The Dow Jones Industrials Average ($DJ) slumped 58.61 points, or 0.5 percent, 11,008.39.

“The Dow has gotten sandbagged by [the retailers] for a second session. And financial stocks continue to tread water,” said Donald Selkin, chief market strategist at Joseph Gunnar.

“Perceptions change rapidly in this market and we get continued, vigorous rotation,” Selkin added. “There’s still uncertainty over profit growth later in the year.”

What Selkin finds encouraging is the rally in shares of BEA Systems and Analog Devices following their smashing earnings results as it proves the market is able to respond positively to good news.

“This uptrend in the market will continue to be choppy, with much less momentum than we experienced last fall. Concerns about third- quarter earnings, caused by higher interest rates and oil prices, will take much of the steam out of the move to make this rally much more sloppy than what investors would like,” observed Robert Dickey, chief technical analyst at Dain Rauscher Wessels.

The Dow’s biggest downside mover was Home Depot — off 4.7 percent. Also losing ground: Wal-Mart, American Express, J.P. Morgan, Honeywell and Walt Disney. Among the winners: AT&T, Exxon Mobil, Johnson & Johnson and Philip Morris.

The Nasdaq Composite ($COMPQ) inched up 9.54 points, or 0.2 percent, to 3,861.20 after rising as much as 63 points in intra-day dealings. The Nasdaq 100 Index ($NDX) lost 1.37 points to 3,721.25.

The Standard & Poor’s 500 Index ($SPX) edged down 0.3 percent while the Russell 2000 Index ($RUT) of small-capitalization stocks gained 0.6 percent.

Volume checked in at 934 million on the NYSE and at 1.40 billion on the Nasdaq Stock Market. Winners bested losers by 16 to 13 on the NYSE and by 20 to 19 on the Nasdaq.

Inside the data

The July consumer price index rose 0.2 percent both overall and at the core, which excludes the extremely jumpy food and energy components, matching consensus estimates.

The closely-watched core CPI rate has been very well-behaved, having risen only 0.2 percent for four straight months.

The CPI is the last key indicator released ahead of the Fed’s policy-setting meeting next week. The morning’s benign data only reinforces the view that the Fed can stay sidelined on Aug. 22 as the market had made up its mind the central bank could afford to take a wait-and-see stance following the favorable second-quarter productivity data and July employment report.

“Inflation remains well-behaved overall,” said Dan Seto, senior economist at Sumitomo Life Investment Co.

While there’s some indication of problems in little isolated pockets, Seto said the inflation picture remains a rosy one and that the U.S. economy is moving in the right direction.

Seto said the Fed appears inclined to take a wait-and-see approach on interest rates. What will be key for the central bank going forward, he said, is how the consumer behaves.

“The Fed is targeting demand, not supply,” Seto observed.

In other news, July housing starts fell 3.3 percent to a 1.512 million rate, lower than the expected 1.55 million. And building permits slipped by 2 percent to 1.497 million.

Thursday will see the release of the Philadelphia Fed Index for August. View Economic Preview, economic calendar and forecasts and historical economic data.

Sector movers

An impressive earnings report from Analog Devices (ADI) after the close Tuesday gave the semis another nice boost on Wednesday. The Philadelphia Semiconductor Index ($SOX) added 1.2 percent, extending its winning streak to four straight sessions.

Analog Devices, which is not a component of the $SOX index, posted a third-quarter profit from operations of 43 cents, easily beating the First Call estimate of 37 cents share. Quarterly sales surged 85 percent from the year-ago period. Shares surged 17 3/16 above their NYSE close to 94. UBS Warbug lifted its price target on the stock to $120 from $100 following what was defined an “outstanding” quarterly report. Warburg also raised its fourth quarter earnings-per-share estimate to 50 cents from 40 cents.

BEA Systems (BEAS) rose 8 1/8 to 57 and boosted Merrill Lynch’s Internet Infrastructure Holdrs (IIH), which climbed 2.9 percent. The company registered after the close Tuesday a second-quarter profit from operations of 5 cents a share, a penny ahead of the First Call estimate. The company made 2 cents in the year-ago period.

Kana Communications (KANA) also boosted the Holdrs with its 16.9 percent jump to 38. The company announced it has entered into a strategic alliance with IBM to manage online transactions and relationships among customers and business partners. IBM (IBM) ended flat at 122.

In the Internet arena, portal Lycos (LCOS) registered late Tuesday a fourth-quarter profit of 12 cents a share, beating the First Call estimate by 4 cents. Shares added 3 1/8 to 61 1/16. The stock is a component of Merrill’s Internet Holdrs (HHH), which climbed 0.9 percent.

Computer hardware stocks ended close to flat levels, erasing earlier gains, with the Goldman Sachs Computer Hardware Index ($GHA) off 0.01 point. Dow-component Hewlett-Packard (HWP) reported after the close of trading Wednesday third-quarter earnings of 97 cents a share, beating the First Call estimate of 85 cents a share. Shares edged up 7/16 to 111 7/16 ahead of the news. Dell Computer (DELL), meanwhile, added 3/8 to 38 7/16.

See for post-market trading activity.

Meanwhile, another string of retail firms unveiled their results and investors unloaded shares of retailers for a second straight session. The S&P Retail Index ($RLX) lost 2.9 percent.

Home Depot (HD), which fell 9.3 percent on Tuesday, lost an additional 2 1/2 to 51 on Wednesday. The Dow-component received a downgrade from Donaldson, Lufkin & Jenrette to a “buy” from a “top pick.” Salomon Smith Barney cut its rating on the stock to an “outperform” from a “buy.” On Tuesday, the company saw its rating slashed by Banc of America Securities.

DLJ also lowered its ratings on Wal-Mart (WMT), off 1 7/8 to 49 11/16, and Costco (COST), down 1 11/16 to 33 1/16.

Turning to the earnings news, Tiffany posted a second-quarter profit of 26 cents a share, 4 cents ahead of the First Call consensus estimate. The company made 16 cents in the year-ago quarter. The stock (TIF) slipped 1 13/16 to 38 9/16.

Talbots registered a second-quarter profit of 46 cents a share, in line with the First Call estimate and well ahead of the 12 cents earned in the year-ago quarter. Shares (TLB) edged up 1/8 to 61 11/16.

Saks posted late Tuesday a second-quarter loss of 3 cents a share, matching the downwardly revised First Call estimate. The company made 18 cents in the year-ago period. Looking ahead, Saks said it anticipates continued weakness in sales and gross margins in the department store group during the third quarter related to the apparel environment. The company said it expects the third quarter to be modestly profitable. The stock (SKS) added 1/16 to 9 1/2.

Intimate Brands (IBI) checked in after the close Tuesday with second-quarter earnings of 20 cents a share, matching the First Call estimate and 2 cents ahead of earnings-per-share in the year-ago quarter. The stock edged down 1/2 to 16 1/8.

And Kohl’s checked in after the close Tuesday with second-quarter earnings of 19 cents a share, beating the First Call estimate by a penny and ahead of last year’s earnings of 13 cents a share. Shares (KSS) fell 7/16 to 56 9/16.

The Saks warning of slower third-quarter earnings put additional pressure on the retail sector. On Tuesday, J.C. Penney (JCP) said third- and fourth-quarter earnings per share could be adversely affected if the ongoing slowdown in the department store sector continues. J.C. Penney slipped 15/16 to 15 9/16.

Shares of Linux-related stocks rose on Wednesday. Canada-based Corel (CORL) climbed 7/32 to 3 7/8 as investors cheered news that founder Michael Cowpland was stepping down as president, chairman and CEO to pursue new start-up opportunities in the Linux arena. VA Linux Systems (LNUX) put on 2 5/8 to 41 9/16 while Red Hat (RHAT) added 15/16 to 24 15/16.

Oil and oil service stocks climbed after trading in a choppy fashion throughout the session. The CBOE Oil Index ($OIX) added 1.4 percent while the Philadelphia Oil Service Index ($OSX) put on 3.3 percent. September crude added 13 cents to $31.80 while the Bridge CRB index rose 0.99 to 219.68. The American Petroleum Institute reported late Tuesday that crude supplies rose by a larger-than-expected 7.4 million barrels to total 286.4 million in the latest week. The 24-year record low for API crude stocks stands at around 282 million barrels.

Among the oil stocks, Dow-component Exxon Mobil (XOM) edged up 1 117/256 percent to 82 197/256. In the oil service sector, Halliburton (HAL) added 2 149/256 to 54 5/256 while Baker Hughes (BHI) gained 11/16 to 38 3/8.  

Treasury focus

Government prices slipped, with no positive action following the release of the morning’s batch of tame economic data.

In the meantime, Treasury announced that it will buy back $1.5 billion in long-dated bonds on Thursday.

The 10-year Treasury note slipped 7/32 to yield ($TNX) 5.835 percent and the 30-year bond slid 12/32 to yield ($TYX) 5.74 percent.

In the currency market, the greenback continued to weaken against the yen, with dollar/yen (C_JPY) at 108.64, off 0.4 percent from the previous close. Euro/dollar (C_EUR), meanwhile, added 0.3 percent to 0.9155. See latest currency rates.