Stocks Finish Mixed

The first session of 2004 got off to a nice start after the best read of U.S. manufacturing activity since 1983, but the euphoria faded

Stocks ended mixed on Friday, the first day of trading of 2004. A key gauge of U.S. manufacturing activity for December far outstripped analysts' estimates to post its best reading in two decades, and gave the major indexes a boost through the morning, but high prices attracted profit-takers ahead of the weekend.

"There was an initial, euphoric rally following the numbers that came out, and now a bit of reality may be setting in that some stocks are overpriced," says Larry Seibert, vice chairman, OAM Avatar Associates. "We're due for a pullback of some kind, the question is when, and to what magnitude." Seibert's firm expects a 5% to 10% correction in next month or two.

The Dow Jones industrial average, which added 25.3% in 2003, slipped 47.07 points on Friday, or 0.42%, at 10,409.85. The broader Standard & Poor's 500 index -- up 26.4% in 2003 -- dipped 3.44 points, or 0.31%, to 1,108.48. Large cap pharmaceuticals, led by Pfizer (PFE ), Merck (MRK ) and Bristol-Myers Squibb (BMY ) were the top contributing groups. Meanwhile, profit-taking hit heavily weighted diversified banks such as Wells Fargo (WFC ) and large retailers like Wal-Mart (WMT ) and Costco (COST ).

The tech-heavy Nasdaq composite index, which enjoyed a 50.0% gain in 2003, managed to add a mere 3.31 points, or 0.16%, to 2,006.68. Health care distributors were lower, led by McKesson (MCK ).

In economic news, the Institute for Supply Management (ISM) index for December, a reading on U.S. manufacturing activity, arrived at 66.2, up from 62.8 in November. (The median estimate was for a slight decline to 61.5.) The orders index was 77.6, the highest level since July of 1950, vs. 73.7, with production at 73.0 vs. 64.0. The employment index is 55.5 -- "thunderous compared to anything in recent memory," notes economic research firm, MMS International -- vs. 51.0, while the prices paid index stands at 66.0 vs a prior 64.0.

The data showed that the factory sector is growing rapidly. "ISM takes this as 'significant encouragement' for the first quarter," says MMS. "We would say so. ISM data tend to do a good job of indicating whether growth is above or below trend, and the extent of that difference. This points to growth well above trend."

The strong ISM data sparked speculation among stock traders that the time between now and the first Fed rate hike has been shortened, according to Standard & Poor's MarketScope.

In company news, Ciphergen Biosystems (CIPH ) cut its fourth quarter revenue guidance to a range of $15 million to $15.5 million, down from $19 million. The company says that its new ProteinChip System placements in the U.S. were short of expectations due to increased indirect competition, and the entry of more direct competition. The stock finished 26% lower.

Israeli company Tower Semiconductor (TSEM ) and Siliconix have inked a long-term manufacturing and supply deal whereby Siliconix will buy about $200 million worth of Tower Semiconductor semiconductor wafers. Tower Semiconductor finished 12% higher.

Jefferies downgraded its investment rating on McKesson to 'hold' from 'buy.' Bear Stearns downgraded the stock to 'peer perform' from 'outperform.' On Wednesday, the company announced that it was awarded a two-year contract, valued at $2.9 billion per year, from the Dept. of Veterans Affairs. S&P reports that there is "some question whether margin was sacrificed to win the contract," and questions about the pricing power of the market sector. McKesson lost 4.0% lower on Friday.

Meanwhile, Bear Stearns downgraded pharmaceutical distributor AmerisourceBergen (ABC ), to 'peer perform' from 'outperform.' On Wednesday, the company cut its fiscal 2004 guidance, reflecting the loss of the Dept. of Veteran Affairs contract to McKesson. AmerisourceBergen shed 3.8%.

Linens 'n Things (LIN ) finished 6.5% lower after a Lehman analyst cut his estimates of the stock, saying the home-goods retailer's holiday sales were on the low end of their planned low- to mid-single digits, and that margins were impacted by greater promotional activity. Lehman rated the stock 'equal-weight.'

Economic news next week begins with new construction spending on Monday. Tuesday's lineup includes November factory orders, and December non-manufacturing activity from the Institute for Supply Management. On Wednesday, traders have an update on mortgage applications. Thursday's session offers initial jobless claims and an unemployment report at 8:30 a.m. EST.

Treasury Market

Treasury prices finished lower following the strong factory data. "Treasuries across the curve added to losses, with the 10-year yield rising 6 basis points to 4.35% almost immediately," says MMS. "Market sources report broad-based selling, with almost no buyers for support." The 10-year yield ultimately rose 13 basis points.

On Wednesday, the Treasury Dept. announced that it will auction $17 billion in three-month bills, and $16 billion in six-month bills on Monday.

The dollar's slide isn't expected to abate with the flip of the calendar. The greenback was at 1.258 against the euro Friday afternoon, with the British pound at 1.792.

World Markets

European stocks finished higher on Friday. Earlier in the day, the Eurozone manufacturing PMI releases were weaker than expected in the case of Italy and France, but German PMI showed a strong rise, reports MMS.

London's Financial Times-Stock Exchange 100 index was up 33.30 points, or 0.74%, at 4,510.20. Shares of W.H. Smith dragged lower on news that company was expecting a profit shortfall due to disappointing sales and margin pressures in the U.K. The biggest contributors to the advance in the FTSE included GlaxoSmithKline, HSBC Holdings, Vodafone and AstraZeneca. Bloomberg reports that GlaxoSmithKline said its genital herpes drug, Valtrex, cuts the risk of spreading the virus that infects a quarter of U.S. adults.

In Paris, the CAC 40 finished up 38.9 points, or 1.09%, at 3,596.8. Germany's DAX index has crossed the 4,000 mark, having added 53.34 points, or 1.35%, to 4,018.5. Deutsche Telekom, Deutsche Bank, SAP and Munich RE helped lead the advance.

In Asia, Hong Kong's Hang Seng index added 225.54 points, or 1.79%, to close at 12,801.48. The index added about 35% in 2003.

Japan's Nikkei 225 index did not trade Friday as markets there observed a national holiday. The index finished 2003 up 24.5%, ending a three-year decline. On Tuesday, the index rose 176.02 points, or 1.68%, to close at 10,676.64 in a half-day session. Japanese markets don't re-open until Monday, Jan. 5, another half-day session.

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