Stocks Finish Mixed

The big question for investors: Will the Federal Reserve cut interest rates by 25 or 50 basis points next week?

Blue chip indexes rose slightly, while the Nasdaq finished with a small loss in a choppy session Friday as the debate rages over what the Federal Reserve will do with respect to interest rates next week. Recent economic statistics have yet to show the growth spurt that many were looking for following the Iraqi war, notes Standard & Poor's MarketScope. The question for the Fed and the market is whether they will cut rates by 25 or 50 basis points.

The Dow Jones industrial average gained 21.2 points, or 0.23%, to 9,200.75. The broader Standard & Poor's 500 index rose 0.99 of a point, or 0.1%, to 995.69. The tech-heavy Nasdaq composite edged down 3.91 points, or 0.24%, to 1,644.73.

Auto makers, forest products, auto parts, and health-care distributors were higher, while electronic manufacturing and homebuilding stocks fell. Higher yields in the bond market sparked concern Friday that mortgage rates may have finally bottomed, possibly contributing to some profit-taking in homebuilders, notes Standard & Poor's MarketScope.

Friday was the quarterly expiration of options and futures. From a technical perspective, "it's healthy to see small pullbacks," says Christopher Johnson, director of quantitative analysis at Shaeffer's Investment Research. "We could see a few weeks where we track sideways." After the strong gains Monday, June 16 -- when the Dow moved across its 80-month moving average of 9,300 -- trading volume dipped a bit. This is normal when major averages cross key technical levels, Johnson says. Overall, though, he says the "foundation and fundamentals of the market is starting to improve."

Next week, the main event is the Federal Open Market Committee meeting on June 24 and 25. Though the Fed may be trying to increase transparency on its policy intentions, dueling Fed articles in major newspapers the last two days have added more confusion, says economic research outfit MMS International.

After data last week caused some violent swings in Fed outlooks between cuts of 50 basis points and 25 basis points, the bond market was again whipsawed this week by data as well as rumors and Fed sources stories. The net effect, according to a survey done by MMS, is nearly an even split between the 25 basis point and 50 basis point rate cut forecasts.

"We are already pushing short-term rates to their lowest levels since World War II, and 0.75% is probably the practical limit for the [Fed] funds rate," wrote David Wyss, chief economist for Standard & Poor's, in a weekly note. S&P continues to expect a rate cut of 25 basis points.

The problem is that rates can't go negative, Wyss says. He notes that normal rate spreads would be pushing some CD and saving rates to zero. "Money market funds will have a hard time covering expenses if yields fall any lower," he says.

As for economic data, the calendar is thin next week. The key data releases for the week include consumer confidence on Tuesday, home sales on Wednesday, and Michigan sentiment on Friday.

Some companies scheduled to report earnings next week include Apollo Group (APOL ), Walgreen (WAG ), Fedex (FDX ), Palm (PALM ), Goldman Sachs (GS ), 3Com (COMS ), General Mills (GIS ), and Nike (NKE ).

Among stocks in the news Friday, PeopleSoft's (PSFT ) board of directors voted unanimously to reject Oracle's (ORCL ) revised unsolicited offer of $19.50 per share in cash.

Heinz (HNZ ) was higher on speculation reported in the latest issue of BusinessWeek that the company may be a takeover target.

General Motors (GM ) and Hughes Electronics (GMH ) will offer about $10 billion in debt securities and convertible debt to accelerate balance sheet and financial flexibility. GM now expects to accelerate efforts to fund its U.S. pension plans, which were underfunded at the end of 2002.

Dow component General Electric (GE ) reaffirmed its earnings outlook for 2003, as it met with analysts.

In earnings news, KB Home (KBH ) reported second-quarter earnings per share of $1.94, vs. $1.42 a year ago, on a 26% revenue rise. The homebuilder raised its fiscal year 2003 EPS estimate to $8.20.

Solectron (SLR ) shares fell after the company posted third-quarter loss per share (GAAP) of $3.74, vs. 35 cents loss per share a year ago, on a 7.2% sales drop. The contract manufacturer's pro forma loss was 10 cents per share. The company says it will not be in compliance with one of the covenants of its undrawn, $450-million credit facility. It sees a fourth-quarter pro forma loss of 2 cents to 6 cents a share.

There were no major economic releases Friday.

Treasury Market

The latest round of reading Fed "tea leaves" in the press Friday drove Treasury prices lower and yields higher after the Wall Street Journal sought to downplay risk of the larger cut in "sourced" story, says MMS International. At first the curve flattened on losses at the front-end, but the long-end suffered most by the end of the session as the market jumped to the conclusion that "unconventional" Fed tactics were now more remote. The 10-year yield rose to 3.40%.

The primary focus next week will be Wednesday's FOMC announcement, but supply of new debt issues coming to market will also come into play, MMS says. On Monday, the Treasury will announce details of Wednesday's 2-year note auction, while GM is planning a $10 billion offering and GMAC is expected to raise about $3 billion.

World Markets

European stock markets were mixed Friday. London's FTSE 100 index was up 28.6 points, or 0.7%, to 4,160.1 in a rebound from yesterday's slide, as some investors were encouraged by a report that Prime Minister Blair won't raise income taxes.

In Paris, the CAC-40 index gained 25.2 points, or 0.8%, to 3,190.11 despite a report that the French economy is headed for the slowest growth in a decade. In Frankfurt, the DAX index edged down 8.13 points, or 0.25%, to 3,238.98 after a report that German producers prices fell raised some concerns that the nation is heading into a deflationary cycle.

Asian markets finished mixed Friday. Japan's Nikkei 225 index was up 9.88 points, or 0.11%, to 9,120.39, supported by a rebound in bank stocks. Hong Kong's benchmark Hang Seng index fell 49.80 points, or 0.5%, to 9,930.31.

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