Stocks Finish Higher

Oil prices keep falling, as investors looked for clues on the economy in the Fed's Beige Book report

Stocks edged higher Wednesday as oil prices kept falling. In a report released in the afternoon, the Federal Reserve indicated it was bullish on the economy prior to Hurricane Katrina. Investors seemed to brush off news that second-quarter productivity growth was revised down and unit labor costs were revised up.

The Dow Jones industrial average rose 44.26 points, or 0.42%, to 10,633.5. The broader Standard & Poor's 500 index was up 2.97 points, or 0.24%, to 1,236.36. The tech-heavy Nasdaq composite index gained 5.17 points, or 0.24%, to 2,172.03.

In the energy markets Wednesday, October West Texas Intermediate crude oil was down $1.59 at $64.37 a barrel.

Coming Thursday are releases on wholesale inventories and sales, the EIA's crude oil stocks, consumer credit, and weekly jobless claims.

Intel (INTC ) will give its mid-quarter update after the close of trading Thursday.

In economic news Wednesday, the Fed's Beige Book said growth was "widespread" in July through August, but this was based on data collected through Aug. 29, reports Action Economics. The Fed said retail sales gained in most areas, paced by car sales. It added labor markets tightened, with wage increases noted as well. Some energy intensive firms passed on costs, but consumer price gains were generally "modest." The Fed also noted some signs of softening in regional housing markets, says Action Economics.

In a speech to the Chicago futures industry, Chicago Fed President Michael Moskow said the Fed faces a "judgment call" in assessing the fallout from Hurricane Katrina with respect to the economy, inflation, and policy, reports Action Economics.

U.S. productivity figures for the second quarter were revised downward to 1.8% from 2.2% due to a lowered adjustment in output growth to 4.1% from 4.4%, alongside a small upward bump in hours worked growth to 2.2% from 2.1%. The big upward unit labor cost revision was due partly to this, but mostly to a push-back in compensation growth from the first quarter to the second quarter that actually left wage growth and unit labor cost growth slightly lower over the two-quarter period, says Action Economics.

The new data show compensation growth of 5.5% in the first quarter and 4.4% in the second quarter, and unit labor cost growth of 2.2% in the first quarter and 2.5% in the second quarter, hence smoothing out strength in cost growth over the two quarters. On a year-over-year basis, compensation cost growth was knocked down to 6.5% from 6.6%, while unit labor cost growth was lowered to 4.2% from 4.3%, says Action Economics.

Among stocks in the news, Dow components Hewlett-Packard (HPQ ), J.P. Morgan (JPM ), and McDonald's (MCD ) rose on brokerage upgrades.

Electronics For Imaging (EFII ) sees better-than-expected 30-32 cents third-quarter earnings per share (pro forma), and 21-23 cents (GAAP), on revenue of $137 million to $139 million. It cited strong performance of its Fiery controller business.

A number of stocks fell on earnings warnings. Spice maker McCormick & Co. (MKC ) expects fiscal year 2005 EPS to be lower than expected due to a sales and profit shortfall in its industrial business, and initial estimates of impact of Hurricane Katrina. CS First Boston downgraded the stock to neutral from outperform.

Spectrum Brands (SPC ) sees lower-than-expected fourth-quarter EPS (GAAP) of 2-5 cents, and cut fiscal year 2006 EPS (GAAP) forecast to $2.20-$2.35. S&P downgraded the shares.

Altera Corp. (ALTR ) sees 66%-67% third-quarter gross margin as percentage of sales, vs. earlier guidance of 68%-69%. The programmable logic devices maker says high-margin, low-volume turns business thus far in the quarter have been less than anticipated.

Hibernia (HIB ) shares fell after the company and Capital One Financial (COF ) renegotiated acquisition purchase price, which is now valued at about $5 billion, or $30.49 per Hibernia share; this represents reduction of 9% relative to previous terms.

Treasury Market

Treasury yields rose Wednesday in the wake of the unfriendly revisions in second-quarter productivity, which saw productivity fall and unit labor costs nearly double from original estimates. The yield on the 10-year note rose to 4.14%.

The Fed's Beige Book regional economic survey came as little surprise, since the survey acknowledged that the data reflected conditions prior to the hurricane. Increased economic activity, jumps in energy prices, and some labor market tightness, however, supports the notion that the Fed would have retained a tightening bias, says Action Economics. "But all else is not entirely equal after the hurricane and the market has priced the Fed out of the picture once past a likely finely balanced hike on Sept. 20," says Action Economics.

World Markets

European stock markets finished higher Wednesday. London's Financial Times-Stock Exchange 100 index was up 6.7 points, or 0.13%, to 5,365.9.

Germany's DAX index gained 19.86 points, or 0.4%, to 4,988.14 as the German economy continued to show revival signs with July industrial production jumping 1.2%, more than the 0.8% expected.

In Paris, the CAC 40 index rose 13.64 points, or 0.3%, to 4,486.19 on hopes for an economic revival.

Asian markets rose on Wednesday.

Japan's Nikkei 225 index rose 8.16 ooints, or 0.06%, to 12,607.59. Trading was cautious as investors awaited a report on machinery orders, as well as Intel's mid-quarter update tomorrow.

In Hong Kong, the Hang Seng index gained 63.79 points, or 0.42%, to 15,224.57. Gains in telco, banking, and select property shares led the market higher. Trading was choppy and volume little changed, reports Standard & Poor's MarketScope.

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