Stocks End Sharply Higher

The major indexes rallied after the FOMC indicated it will keep rates low. More merger news, along with favorable economic data, also sparked buying

Stocks rallied into the close Tuesday to end solidly higher after the Federal Reserve left interest rates unchanged. Another merger announcement, along with positive readings on durable goods orders and consumer confidence, also boosted sentiment.

The tech-heavy Nasdaq composite index led the way higher with a gain of 49.35 points, or 2.62%, to 1,932.26. Semiconductor stocks surged after Taiwan Semiconductor (TSM ) reported a five-fold increase in third-quarter profits and announced a large increase in capital expenditures for 2004, reports Standard & Poor's MarketScope.

The Dow Jones industrial average rose 140.1 points, or 1.46%, to 9,748.31. The broader Standard & Poor's 500 index gained 15.66 points, or 1.52%, to 1,046.79.

The Federal Reserve's Federal Open Market Committee (FOMC) left the funds rate at 1%, as expected. The FOMC maintained a weaker bias in terms of inflation risks. In its post-meeting press release, the committee said the labor market appeared to be "stabilizing," and that was the only real change from the previous meeting's statement, notes economic research outfit MMS International. No improvement was given to the economic assessment, and risks of undesirably low inflation remains the predominant concern of the Fed. Meanwhile, the Fed said policy accommodation can be maintained for a "considerable period."

In economic news, durable goods orders rose 0.8% in September, after a large upward revision in August to a decline of 0.1% from a drop of 1.1% previously. A 7.6% rise in orders for vehicles and parts were the main contributor to the September gain. The report reveals substantial strength in both shipments and orders of nondefense capital goods, which suggests a robust equipment sector, says MMS. "The data underscore the nagging belief that the Fed could tweak its balanced bias on the economic risks to the upside before long," says MMS.

Consumer confidence jumped to 81.1 in October after the surprising dip to a revised 77.0 in September (76.8 previously). The index was 81.7 in August. Present conditions paced the rebound, rising to 66.8 from a revised 59.7. The future expectations component edged up to 90.7 from a revised 88.5 in September. This is yet another sign of the economy's health, says MMS.

In the latest merger news, British American Tobacco (BTI ) agreed to sell its American tobacco unit to R.J. Reynolds (RJR ) for $3 billion. They will form a new public holding company, Reynolds American Inc., in which BTI will own 42%, and RJR holders will own 58%. Both stocks were higher.

Separately, RJR posted a third-quarter net loss of $3.45 billion, including charges. It also reduced its forecast for 2003, to a net loss of roughly $3.24 billion to $3.27 billion.

In the chip sector, SG Cowen says Taiwan Semiconductor's capital spending comments bode well for the semiconductor equipment group, especially for Applied Materials (AMAT ) because the company has the most leverage to TSM.

In earnings news, Verizon (V ) reported third-quarter earnings per share of 64 cents, vs. $1.60 (including gains) a year ago, as higher operating costs offset a slight revenue rise (excluding revenues from access lines).

Shares of Biogen (BGEN ) rose after the company posted third-quarter earnings per share of 36 cents, vs. 28 cents, on a 19% revenue rise. The biotech outfit did not change its 2003 EPS from operations guidance, and said its 2003 EPS (reported) outlook is currently not assessable as the company cannot predict any charges in the fourth quarter.

On the downside were shares of Oxford Health Plans (OHP ), after the company reported third-quarter earnings per share of $1.19, vs. $1.04, on a 7.6% revenue rise. The managed-care provider initiated a 10-cent per share quarterly dividend. It sees EPS in 2003 of $4.03 to $4.08, and 2004 of $4.30 to $4.50, citing a challenging enrollment environment and competitive landscape.

Also weak was King Pharmaceuticals (KG ) after the company reported third-quarter earnings per share of 44 cents, vs. 35 cents a year ago (including items), on 34% total revenue rise. The company reduced its outlook for the fourth quarter and full year, citing lower sales of its hypertension drug Altace.

Avon (AVP ) posted third-quarter earnings per share of 56 cents, vs. 38 cents a year ago (includes items), on 11% sales rise (including foreign exchange). The cosmetics maker raised 2003 EPS guidance to $2.65 to $2.70, and anticipates 10% to 12% 2004 EPS growth.

Wednesday's earnings calendar includes scheduled reports from Boeing (BA ), Northrop Grumman (NOC ), Electronic Data Systems (EDS ), CVS (CVS ), and Providian Financial (PVN ).

Treasury Market

The FOMC's policy statement did not spook the markets Tuesday and Treasuries breathed a sigh of relief into the close, says MMS International. With no change in either the risk assessment or the time-frame of accommodation, Treasuries rebounded from early lows suffered as some took out insurance against a more hawkish outlook. Shorter-dated issues predictably led the late-day rally, with the yield on the 2-year note dropping 10 basis points to 1.72%. The yield on the benchmark 10-year note settled at 4.20%.

The Treasury's $26 billion 2-year note auction is the only meaningful event on Wednesday's schedule. While Fed Chairman Greenspan, and FOMC members Ferguson and Broaddus will be speaking, none are likely to make policy comments after a Tuesday's straightforward announcement, says MMS International.

World Markets

European stock markets finished higher. London's Financial Times-Stock Exchange 100 index gained 21.6 points, or 0.51%, to 4,272.9. The Bank of England's Nickell says Britain's economic recovery justifies a rate hike, but he says the central bank must be careful in taking that step.

In Paris, the CAC 40 was up 45.56 points, or 1.38%, to 3,352.15. Germany's DAX index rose 69.83 points, or 2%, to 3,586.93 as German IFO reading of 94.2 was stronger than expected. This followed a stronger than expected rise last month, although in September this was due entirely to a higher expectations component.

Asian markets finished higher Tuesday. In Japan, the Nikkei 225 index gained 106.89 points, or 1.02%, to close at 10,561.01, led by surges in bank stocks following an optimistic outlook for UFJ Holdings and overnight gains on Wall Street.

In Hong Kong, the Hang Seng index surged 342.16 points, or 2.91%, to close at 12,091.81.

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