Stocks Finish Lower

The major indexes retreated after a Federal Reserve member talked up inflation

Stocks lost ground on Tuesday, after Federal Reserve Governor Richard Fisher says inflation is at the upper end of the Fed tolerance zone with little sign of moving lower.

The Dow Jones industrial average fell 94.37 points, or 0.9%, to 10,441.11. The broader Standard & Poor's 500 index was down 12.23 points, or 1%, to 1,214.47. The tech-heavy Nasdaq composite index lost 16.07 points, or 0.75%, to 2,139.36.

November West Texas Intermediate crude oil tumbled $1.57 to $63.90 a barrel, extending the declines seen since U.S. Energy Secretary Bodman said yesterday that the government was ready to tap emergency stockpiles of crude and heating oil if needed to avert a winter shortage, reports Action Economics.

Wednesday's release of the September ISM non-manufacturing business activity index is expected to moderate to 60.0 from August's level of 65.0. The spike in energy prices and Hurricane Katrina disruptions were expected to weigh on the survey, although the strength in the ISM manufacturing data suggests the outlook for rebuilding/replenishment strength may dominate any disruption effect, says Action Economics. Similar to the ISM, Action Economics expects the price index to reveal a big jump with energy prices.

On the economic front, August factory orders climbed 2.5% in August from a revised 2.5% drop in July (-1.9% previously). Durable orders were revised to 3.4% from 3.3%. A 5.5% rebound in computers/electronics helped boost factory orders.

Fisher, president of the Dallas Federal Reserve, said in a speech that inflation is at the upper end of the Fed's "tolerance zone," with little inclination to move lower. He also said that the economy appeared to be moving into a phase of slower growth, though the picture is less clear after the hurricanes, which will be absorbed economically over many years, reports Action Economics.

Among stocks on the move, Lexmark International (LXK ) skidded after the company cut third-quarter earnings per share guidance to 40-50 cents (excluding estimated impact of previous workforce reduction), and now expects a 4%-5% revenue decline. The printer maker cited lower laser and inkjet supplies revenue, along with lower end user demand.

London-based energy giant BP (BP ) estimates that the third-quarter impact from hurricanes on replacement cost profit (before interest and taxes) will be more than $700 million. Production was lower in the third quarter, and it sees $100 million added costs due to the secure and repair of its Thunder Horse facility.

Clorox (CLX ) fell after the consumer products maker warned that it sees 41-47 cents second-quarter EPS from continuing operations on 1%-3% sales rise. It cited rapidly rising energy-related costs driven by impacts of recent hurricanes.

Continental Airlines (CAL ) says that despite the adverse impact from Hurricanes Katrina and Rita and continued record high jet fuel prices, it expects to report a modest profit for the third quarter, due to relatively strong performance during July and August.

Martin Marietta (MLM ) sees better-than-expected $1.61-$1.66 third-quarter earnings per share (including 17 cents benefit). The construction materials maker cited continued strong aggregates pricing, solid volume, and good cost management.

In deal news, Fox & Hound Restaurant Group (FOXX ) signed a letter of intent to be acquired by Levine Leichtman Capital Partners for $14 per share in cash.

Treasury Market

Treasury yields fell on Tuesday, with the 10-year note easing to 4.37%. "The bond market overcame a litany of bearish factors and chose instead to square up ahead of the payrolls report later in the week in very low-volume conditions given the 2-day Rosh Hashanah holiday," says Action Economics.

World Markets

European stock markets finished the session mixed on Tuesday. London's Financial Times-Stock Exchange 100 index was down 7.1 points, or 0.13%, at 5,494.4.

Germany's DAX index gained 55.5 points, or 1.1%, to 5,138.02. In Paris, the CAC 40 index rose 27.7 points, or 0.6%, to 4,650.24.

Asian markets finished mixed on Tuesday. In Japan, the Nikkei 225 index jumped 213.56 points, or 1.58%, to 13,738.84, as stocks resumed their uptrend after a pullback over the past two sessions. Exporters such as Matsushita Electric, Canon, and Sony led the market higher, boosted by a drop in the yen's value to its weakest level against the U.S. dollar since May 2004, says Standard & Poor's MarketScope. Yen weakness and dollar strength make Japanese products more attractively priced in foreign markets.

Hong Kong's Hang Seng index eased 12.18 points, or 0.08%, to 15,382.21 due in part to concern of higher interest rates after U.S. September ISM raised inflation concerns. Rates in Hong Kong generally track those in the U.S. since the local currency is pegged to the dollar, says Standard & Poor's MarketScope.

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