Major averages still split

Mixed performance for Dow, Nasdaq

Brokerages rally; new home sales jump 14.7%

NEW YORK (CBS.MW) — Split screens dominated throughout the trading day Tuesday in another sleepy session that saw most of the action take place in the brokerage arena, where merger talk ignited a splendid rally.

Most sectors within the broad market ended in the minus column, led by bank, drug, airline and utility issues. Investors nibbled on select tech shares — which helped the Nasdaq chisel out a gain — with most of the buying interest clustered in the computer hardware and networking sectors.

“The brokerage stocks are cruising while we’re seeing a little profit-taking in the bank sector,” said Bryan Piskorowski, market analyst at Prudential Securities. “We’re in a low volume environment.”

“There isn’t a lot of conviction or energy in this market. Whether people will roll up their sleeves after the Labor Day holiday and put new money to work remains to be seen,” said John Waterman, managing director of investments at Rittenhouse Financial.

While earnings pre-announcements for the third-quarter — expected to begin hitting screens in September — will be a hurdle for the market, Piskorowski believes equities are in good shape.

“The Fed is expected to be on hold for the next [policy-setting] meeting and we have a somewhat moderating economy,” he added. That said, he believes the market will continue to peel apart each piece of economic news. This week’s main event will be Friday’s employment report for August.

The Dow Jones Industrials Average ($DJ) lost 37.74 points, or 0.3 percent, to 11,215.10.

Leaders on the downside were shares of Alcoa, Philip Morris, Merck, United Technologies, Boeing and Johnson & Johnson. The Dow’s frontrunners included AT&T, Caterpillar, J.P. Morgan, Walt Disney and IBM. The latter (IBM), up 1 3/8 to 132 7/8, has risen for five straight trading sessions and is up about 18.4 percent for the month.

Intel (INTC) added 3/16 to 74 1/16. The chip kingpin said late Monday it found a defect in its Pentium III processor running at 1.13 gigahertz, which began shipping July 31. An Intel spokesman said the company has shipped a very small number of the processors and defined the problem “immaterial” to its quarterly revenue numbers.

AT&T shares rose 1 9/16, or 5.2 percent, to 31 13/16. AT&T said late Monday that it’s gaining control of high-speed cable partner ExciteAtHome (ATHM). From Sept. 1, ExciteAtHome’s results will be included in AT&T’s financial statements. Because of that, AT&T reduced its earnings estimates for the third-quarter by 5 cents a share and slimmed its first- and second-quarter earnings by five cents a share. And Ma Bell’s fiscal 2000 profit is expected to be 1 to 2 cents less per share compared to previous estimates.

The Nasdaq Composite ($COMPQ) added 11.58 points, or 0.3 percent, to 4,082.17 while the Nasdaq 100 Index ($NDX) shed 2.30 points, or 0.1 percent, to 3,951.94.

“The market’s tone is excellent,” said Barry Hyman, senior market strategist with Ehrenkrantz.King Nussbaum.

The major averages still have upside potential, Hyman said, but concerns over earnings pre-announcements will take hold around mid-September, with the telecom sector especially vulnerable on the heels of Nokia’s recent warning.

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

Volume was relatively light, checking in at 788 million on the NYSE and at 1.49 billion on the Nasdaq Stock Market. Breadth was mixed, with losers outpacing winners by 15 to 13 on the NYSE and advancers outnumbering decliners marginally, by 21 to 19, on the Nasdaq.

Light action

Volume is expected to remain light throughout the week with little in the way of news to chew on. In fact, the second-quarter earnings season is just about wrapped up and the start of the third-quarter earnings pre-announcement period is still about two weeks away.

Hyman believes participation will pick up nicely after Labor Day but doesn’t expect the market to broaden out. While sector rotation will continue, he believes the market will favor big-cap stocks going forward, which remain the safest play for investors.

“Now we approach the cruelest month of the year — September — which has been on average the only down month of the twelve during the past 60 years,” noted Robert Dickey, chief technical strategist at Dain Rauscher Wessels.

“A possible reason for September-October pullbacks is that fears about third-quarter earnings cause investors to be more defensive at this time of the year. Earnings warnings from some key companies combined with a weak follow-through after the positive first- and second-quarter reporting periods have raised the concern over the third-quarter reports coming up,” Dickey said.

Sector movers

The brokerage sector was on fire Tuesday, lit up by merger talk, with the Amex Securities Broker/Dealer Index ($XBD) climbing by a smashing 5.3 percent. The index, which has enjoyed hefty gains since mid-July amid a favorable interest-rate environment, touched an all-time high of 670.79 in intra-day dealings.

The upside mover within the sector was Donaldson, Lufkin & Jenrette (DLJ), which rocketed 25 percent, or 16 7/16 to 82 1/4. The company’s online arm, DLJ Direct (DIR), tacked on 28.4 percent, or 2 1/4 to 10 3/16. Credit Suisse First Boston is reportedly in talks to acquire DLJ, according to the Wall Street Journal Online. A CS First Boston spokesman said the company wouldn’t comment on market speculation and a DLJ spokeswoman didn’t return a phone call seeking comment.

“This business is quickly becoming one of a handful of companies,” commented Barry Hyman, market strategist with Ehrenkrantz King Nussbaum on the DLJ merger speculation.

The need for size and concentration of assets among securities firms is increasing substantially, he continued.

“You need size to be a player in the asset management and investment banking areas,” Hyman said.

Other brokerage stocks got a boost from the takeover talk, with E-Trade (EGRP) up 2.1 percent to 17 7/8, Bear Stearns (BSC) up 5.5 percent to 63 1/8, Lehman Brothers (LEH) up 2.6 percent to 140 19/32, and Goldman Sachs (GS) up 4.1 percent to 127 7/16.

Bank stocks retreated, with the S&P Bank Index ($BIX) off 1.3 percent, as a soggy bond market provided a negative backdrop for the group. A dose of sturdy economic data caught the market off guard early in the session, pushing government prices lower.

In the technology arena, chip stocks hugged the flat line for most of the session but ended a touch lower for the third straight trading session as the Philadelphia Semiconductor Index ($SOX) shed 0.2 percent. Rambus (RMBS) was one the biggest downside movers within the index, falling 4.5 percent to 80 1/4. Micron Technology (MU) filed a lawsuit against Rambus Monday, claiming violations of Federal antitrust laws and infractions relating to certain Rambus patents. Micron dipped 2 5/16 to 87.

See for post-market trading activity.

Treasury focus

Treasury prices slipped, with fixed-income investors slightly disturbed by the unexpected strength in the housing market.

The 10-year Treasury note shed 7/32 to yield ($TNX) 5.81 percent and the 30-year bond was off 1/8 to yield ($TYX) 5.74 percent. .

On the economic front, Tuesday saw the release of August consumer confidence, which came in at 141.1, a touch lower than expectations for a 141.7 reading and less than July’s level of 143.0.

July new home sales, meanwhile, climbed a whopping 14.7 percent to 944,000, much higher than the 826,000 expected by a survey of economists conducted by CBS MarketWatch.com
.

The climb was the largest in seven years and unsettled market participants, as it suggests six Fed rate hikes since June 199 have yet to take a meaningful bite out of the housing market.

“With mortgage rates coming down in July, new home sales soared,” observed Joel Naroff, chief U.S. economist at Naroff Economic Advisors.

“When the housing market began to weaken, it was viewed as a signal that the economy was beginning to slow. That might have been the case in the spring, but it is not the situation anymore,” Naroff continued. “With mortgage rates below 8 percent and consumer confidence hanging in at near record levels, home sales should remain robust.”

“The [home sales] number comes completely out of the blue — there has been nothing in the anecdotal or survey evidence even hinting at such a massive rebound,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

While the new home sales series is among the most volatile of economic indicators, Shepherdson said the figures come as a shock to the markets, which are firmly in soft landing mode.

“Sales will likely drop back next month, but it is now clear to all that the housing [sector] is not a spent force,” he concluded.

Wednesday will see the release of July leading economic indicators, expected to slip by 0.1 percent. View Economic Preview, economic calendar and forecasts and historical economic data.

In the currency arena, dollar/yen (C_JPY) was off 0.3 percent to 106.14 while euro/dollar (C_EUR) slipped 0.9 percent to 0.8920.

In the commodity arena, October crude erased 13 cents to $32.74 ahead of the American Petroleum Institute’s crude inventory data, to be released after the close Tuesday. The Bridge/CRB index added 0.72 to 224.63.