Dow, S&P 500 Rise to New Records

Takeover activity and GE's profits helped fuel more buying after Thursday's jump, as investors gear up for lots of earnings and inflation news next week

Bulls stayed in charge on Friday, pushing the Dow Jones industrial average above 13,900 and S&P 500 index to new records after Thursday's big gains. The Nasdaq overcame earlier losses and finished higher too. Investors focused on takeover speculation surrounding Alcoa (AA) and other companies, and earnings news from General Electric (GE). A drop in retail sales and higher import and export prices was brushed aside, while consumer sentiment rose.

On Friday, the Dow Jones industrial average gained 45.52 points, or 0.33%, to a new high of 13,907.25 -- and is now up 11.6% for the year. Wall Street watchers are already guessing about how long it will take for the 30-stock index to reach 14,000.

The broader S&P 500 index rose 4.8 points, or 0.31%, to 1,552.5 -- giving it a 9.5% gain year-to-date.

And the tech-heavy Nasdaq Composite index added 5.27 points, or 0.2%, to 2,707.0 -- and is ahead of the blue chips with a 12.1% rise for the year. But the index still has a lot of ground to make up before reaching its all-time closing high of 5,048.62 set in March 2000.

The recent outperformance of big tech stocks shows that investors are willing to be more speculative and take risks, says Chris Johnson, CEO and chief market strategist with Johnson Research Group. "That's good, but it's also bad because it says the market is reaching something of a top," he worries. He doesn't see a dramatic drop for tech stocks harkening back to the bust in 2000. But he advises investors to be more careful and pick stocks instead of buying indexes and broad ETFs. "I think investors should be willing to put in their time and pull up their sleeves," he says.

Overall, Johnson is encouraged by the follow-through buying after Thursday's jump. "If you go into earnings season with a big bang like that, it's going to get investors excited," he says. "Investors are afraid stocks will leave the station without them, so they'll buy."

Still, the market is not without problems, Johnson admits. Thursday's climb was driven by short covering by institutions, and much of the buying of indexes and ETFs may already be out of the way, Johnson says. Plus, earnings expectations from Wall Street analysts for S&P 500 companies have gone up for the second quarter (to 4.5% to 5% growth from 2.5% in March), setting the market up for declines if there are big disappointments, he says. Not to mention the concerns about the subprime mess, consumer spending, and inflation (see, 7/13/07, "Stocks Scale the Wall of Worry").

In fact, the latest indicator of consumer spending from the government came in much weaker than expected. U.S. retail sales fell 0.9% in June (vs. forecast of a 0.1% rise), while the ex-auto component was down 0.4% (vs. forecast for a 0.3% rise). However, Action Economics notes that the report follows higher revised gains of 1.5% in May (1.4% previously), while the ex-auto figure was revised up to 1.6% (from 1.3%). And on a year-over-year basis, retail sales are still up 3.2% and are up 4.0% excluding autos, says Action Economics.

The good news is the Reuters/University of Michigan consumer sentiment index for July rose to 92.4 in the preliminary print, from 85.3 in June -- much better than expected. Strength was paced by the future economic outlook, where the index rose to 83.9 from 74.7.

In another report, U.S. import prices increased 1.0% in June, stronger than expected, and export prices rose 0.3%. May's numbers were also revised higher. On a year-over-year basis, import prices are up 2.3% (vs. 1.1% in May), while export prices are up 4.1%. Among June imports, petroleum prices were up 4.7% on top of hefty gains since February. Excluding petroleum, import prices edged up 0.2%.

"The strength in the price data should keep alive the Fed's concerns over the potential for accelerating price pressures," says Action Economics.

And U.S. business inventories rose 0.5% in May, while sales surged 1.3%, following April's increases of 0.4% for inventories and 0.7% for sales. The inventory-sales ratio continued to shrink, to 1.26 from 1.27 in April.

Next week, earnings season gets into full swing, with reports from large tech companies like Intel (INTC), IBM (IBM), eBay (EBAY), Microsoft (MSFT), Yahoo (YHOO), and Google (GOOG). And the lineup of economic reports is also heavy with updates on inflation, as well as housing starts and Federal Reserve Chairman Benjamin Bernanke's semi-annual testimony on the U.S. economy and monetary policy before the House Financial Services Committee.

Among stocks in the news Friday, General Electric (GE) reported second quarter earnings per share from continuing operations of 52 cents, vs. 46 cents a year ago, on a 12% revenue rise. It raised its stock buyback plan to $14 billion for 2007, with $12 billion expected to be completed between now and yearend. The company sees 54-56 cents third-quarter EPS from continuing operations. It also says it plans to exit the U.S. mortgage business.

Takeover activity also lured buyers. Playtex Products (PYX) agreed to be acquired by Energizer Holdings (ENR) in a $1.9 billion deal. Terms: PYX holders will get $18.30 per share in cash.

Alcoa (AA) withdrew its offer for Alcan (AL) in light of Rio Tinto's (RTP) announced agreement to buy Alcan. Alcoa says it has more attractive options for delivering additional value to shareholders.

But there were some earnings warnings from Spectrum Brands (SPC), citing unfavorable weather conditions, and Macrovision (MVSN), which didn't close two signficant business arrangements in the quarter.

Idenix Pharmaceuticals (IDIX) lost ground after the development program of its valopicitabine for treatment of hepatitis C has been placed on clinical hold in the U.S. based on overall risk/benefit profile observed to date in clinical testing.

In the energy markets, August NYMEX crude rose $1.39 a barrel to $73.89. A damaged pipeline in the North Sea, which could curb production there for several weeks, was behind the rally, says Action Economics. Meanwhile, front-month gasoline shed over 4 cents/gallon to $2.2250, as U.S. refineries come back on line, says Action Economics.

Elsewhere, European stock markets ended higher Friday. In London, the FTSE 100 index was up 19 points, or 0.28%, to 6,716.7. In Paris, the CAC 40 index gained 14.91 points, or 0.24%, to 6,117.96. Germany's DAX index rose 39.34 points, or 0.49%, to 8,092.77.

Many Asian markets rode Thursday's big rally on Wall Street. Japan's Nikkei 225 index shot up 254.81 points, or 1.42%, to 18,238.95. In Hong Kong, the Hang Seng index rose 290.27 points, or 1.27%, to 23,099.29. But in mainland China, Shanghai's benchmark index edged down 1.60 points, or 0.04%, to 3,914.4.

Treasury Market

Treasury yields ended a volatile session slightly lower following the consumer sentiment gain that came in well above expectations and the earlier round of weak retail sales data. The 10-year note yield edged down to 5.11%.

Traders were keeping a close eye on the "acronym market", especially the credit indexes including the ABX, says Action Economics. Sources note the subprime ABX BBB- 07-01 continues to "melt like a frozen pond in April," reports Action Economics.

"The weakness in June retail sales only added to fears that the subprime mess and related credit issues are starting to take their toll on the consumer, though we believe the slowdown in real consumption to a 1.3% in the second quarter was more a function of outsized strength in the prior two quarters where a 4.2% pace was posted," says Action Economics.

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