Interest rates sap rally's strength

For a brief moment this afternoon, the Dow Jones industrials were up 19 points and seemed poised for yet another record close. But the rally faded during the last hour of thin holiday trading, and the market finished basically unchanged.

At the close, the Dow was down nine points to just under 12,502. The Standard & Poor's 500 Index was also down 2.2 points to just under 1,425, and the Nasdaq Composite was down about 5.6 points to 2,426.

Blame the bond market's reaction to decent news on housing, consumer confidence and a report on Midwest manufacturing. All three reports were stronger than Wall Street had expected, and bond yields moved higher. The yield on the 10-year Treasury note ended at 4.69%, up from 4.65% yesterday and 4.425% on Dec. 1.

Wall Street generally doesn’t like rates to rise because it forces stock prices lower to produce the returns investors want.

Thirteen of the 30 stocks in the index were higher today, led by a 0.6% gain for Johnson & Johnson (JNJ, news, msgs). The loser was Citigroup (C, news, msgs), down 0.9%. The banking giant's slide was a reaction to higher rates and probably some profit-taking. The stock was up 3.4% last week.

Notice the narrow range of the high and low gains, which was typical of the entire market. The big gainer on the S&P 500 was Tenet Health Care (THC, news, msgs), up 3.2%. The loser was Mattel, down 2.4%, probably the result of reports of a fairly good -- but not a killer -- Christmas shopping season. On most days, the S&P's daily leader jumps 5% or more.

The geopolitical risks to 2007

It's hard to find a pundit who doesn't see the market rising in 2007. It's so pervasive a consensus that it could well be wildly wrong.

If anything could hurt the market, it's probably geopolitical risks rather than economic fundamentals. Here are five possible problems that could hit the markets, courtesy of Greg Valliere of the Stanford Washington Research Group, which researches political and economic issues for corporations:

• Iran's nuclear facilities get hit by Israel. Israeli forces did attack nuclear facilities being built by Iraq.

• Most of Afghanistan reverts back to the Taliban, and al-Qaeda gets a sanctuary again.

• All-out civil war rages in Iraq after the expected execution of former dictator Saddam Hussein.

• North Korea tries to export a nuclear weapon, and the United States begins a naval blockade.

• Venezuelan President Hugo Chávez stirs up more trouble in Latin America, especially Mexico.

Energy prices -- New York close

	Thur.	Wed.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$60.53	$60.34	$0.19	3.06%	-0.84%
Heating oil (per gallon)	$1.6231	$1.6088	$0.0143	-2.63%	-6.07%
Natural gas (per million BTU)	$6.2480	$5.8380	$0.4100	-17.07%	-44.34%
Unleaded gasoline (per gallon)	$1.5980	$1.5889	$0.0091	11.96%	-6.55%

A bottom near for housing?

Housing watchers got a piece of good news for the second day in a row. Sales of existing homes were up slightly in November from October, although home prices fell for a fourth straight month, the National Association of Realtors said.

The trade group said existing-home sales rose to a seasonally-adjusted 6.28 million rate, up 0.6% from October's rate of 6.24 million. Economists had expected the home sales rate to fall a bit more than 1.4%.

Single-family sales increased to 5.52 million units; condo sales increased by 3.1%.

Sales rates climbed modestly across the country from October. But the rates remain solidly below levels of a year ago. Single-family home sales are off more than 10% from a year ago. Condo sales are down 13.6% from a year ago.

Still, the news was greeted as positive -- the second bit of good news for the housing sector in two days. Yesterday, the Commerce Department said new-home sales rose 3.4% in November from October to a rate of about 1.05 million.

"It appears we've hit bottom," David Lereah, the chief economist of the Realtors group, said today. Lereah said the price drops have stirred sales, helping the housing market to get back on its feet.

But it will likely take a few more quarters to turn around fully, Bank of Tokyo-Mitsubishi UFJ economist Ellen Zentner told Bloomberg News.

What's next for the economy?

The housing data, along with today's reports on the Chicago Purchasing Managers Index and consumer confidence, gave investors and economists one last look at the economy this year. It wasn't too bad a picture.

The Conference Board reported that consumer confidence has risen in December, thanks to an improved job market and a more positive outlook on the economy. The index rose to 109 from a revised 105.3 in November.

Economists had expected the index to fall to 101.9 from the previously reported 102.9.

• Video: What do today's reports mean for the economy?

Additionally, the Chicago Purchasing Managers Index rose to 52.4 this month from November's 49.9, which was a three-year low. Economists had anticipated the index to rise to 50.9. A reading lower than 50 indicates contraction in the industry.

Meanwhile, weekly initial jobless claims rose to 317,000 from an adjusted 316,000 last week, lower than the 320,000 rise expected by economists. The four-week moving average of initial claims fell by 10,250 to 315,750.

The Labor Department reported that continuing jobless claims had risen by 16,000 to 2.53 million for the week ending Dec. 16 -- the highest level since Jan. 28.

Short hits from the markets -- 4 p.m.

	Thur.	Wed.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	4.865%	4.845%	0.200	-0.51%	22.08%
5-year Treasury note yield	4.682%	4.643%	0.039	-4.25%	7.46%
10-year Treasury note yield	4.690%	4.654%	0.036	5.58%	6.71%
30-year Treasury bond yield	4.813%	4.783%	0.030	7.96%	5.85%
Currencies
U.S. Dollar Index	83.56	83.69	-0.13	-1.82%	-8.14%
British pound in dollars	$1.963	$1.960	0.004	2.96%	14.36%
Dollar in British pounds	£0.509	£0.510	-0.001	-2.88%	-12.43%
Euro in dollars	$1.316	$1.314	0.003	3.17%	11.39%
Dollar in euros	€ 0.7596	€ 0.7613	-0.002	-3.08%	-10.22%
Dollar in yen	¥118.89	¥118.60	0.29	1.66%	0.87%
Commodities
Gold	$636.90	$630.90	$6.00	4.96%	22.74%
Copper	$2.8950	$2.9140	-$0.02	-13.44%	33.93%
Silver	$12.9400	$12.9250	$0.01	5.46%	45.56%
Crude oil (NYMEX) (per barrel)	$60.53	$60.34	$0.19	3.06%	-0.84%

A bad taste at Apple

The morning started with more bad news for Apple Computer (AAPL, news, msgs).

Apple CEO Steve Jobs reportedly received 7.5 million stock options five years ago without approval by the company's board, and records showing a meeting by the board to discuss and approve the grant of those options were in fact falsified, the Financial Times is reporting.

Shares of Apple fell 0.8% to $80.87. It was down to as low as $79.65 in the morning.

• Video: The iPhone is here . . . but not that iPhone

Apple's stock has fallen about 8.7% over the past two weeks.

The paper said Jobs gave back his options before he exercised them and was given restricted stock as a replacement. A regulatory filing by Apple tomorrow is expected to address the options issue.

The news follows a report earlier this week that federal prosecutors were investigating the company for allegedly falsifying stock-options documents.

It was a good year

At the end of today, the S&P 500 is up 14%. While that's a pretty performance that should please investors in S&P 500 index funds, one famed fund manager is not cheering.

It's been a challenging year for Bill Miller, whose $21 billion Legg Mason Value Trust (LMVTX) was up 6.7% as of yesterday, well behind the S&P's performance.

Miller's Legg Mason fund has outperformed the S&P 500 every year for the past 15 years, according to Bloomberg News, with the fund rising at an average annual rate of 15.8%. The S&P 500 has gained an average of 11.9% each year.

The fund, which holds fewer than 45 stocks, was hurt by Amazon.com (AMZN, news, msgs) and UnitedHealth Group (UNH, news, msgs), whose shares have both lost 14% this year.

Goldman raises money for new fund

Investment bank Goldman Sachs Group (GS, news, msgs) said it has raised more than $6.5 billion for a global infrastructure fund that will invest in airports, toll roads and utilities projects.

Goldman said it had put $750 million of its own money into the fund, the first of its kind for the bank. The fund will focus on bigger investment opportunities in developed markets. The stock was off slightly at $201.11.

• SmartMoney: Will Goldman keep rolling in 2007?

Is Google ready to fall?

That's what Time magazine thinks about the powerhouse search engine. Google (GOOG, news, msgs) executives are on the cover of this week's issue of Time, and the magazine asks whether it is time for Google to stumble after eight years of growth -- two as a publicly-traded company. Though Google shares have traded above $400, even touching $500, over the past three months, investors were concerned after the company announced it was launching a Chinese site which would be heavily censored. The move seemed to go against the informal Google mantra: "Don't be evil."

Google leaders Sergey Brin and Larry Page have a common goal: To give everyone access to any information at any time, the magazine writes.

The story also questions whether Google, founded in 1998, has an overall plan for continued success beyond much of the luck that has helped propel the company to the spotlight.

Analysts have mixed reactions to the story and how it will affect the stock. Google shares were off 0.8% to $464.47 this afternoon.

• Video: Google makes the cover of Time

Meanwhile, Google is poised to become the world's most visited Web site next year. With the acquisition of YouTube, Google will likely take over Microsoft as the No. 1 visited site globally, USA Today reports. (Microsoft is the publisher of MSN Money.)

Google beat Yahoo for the first time in November as the second-most-visited site around the world, without YouTube.

Shares were down more than $1 to $466.31.

IBM, Siemens win billion-dollar bid

IBM Corp. (IBM, news, msgs) and Siemens (SI, news, msgs) have won a 10-year, $9.3 billion deal with the German army to help update its technology.

Dubbed Herkules, the project is designed to modernize the army's information-technology system by bringing its data centers, telephones, personal computers, and voice and data networks up to date.

Shares of IBM was off 0.2% at $97.04, just below the company's 52-week-high of $97.23. Siemens shares rose more than 1.4% to $98.93, a new 52-week high.

Virgin America grounded before takeoff

British billionaire Richard Branson hit a roadblock with his planned U.S. low-fare airline, Virgin America. The Department of Transportation tentatively denied the airline's application, saying that it didn’t meet a requirement that 75% of its voting interest be owned or controlled by U.S. citizens.

Virgin America hopes to launch domestic U.S. service in early 2007, based out of San Francisco International Airport.

The airline is 25% owned by Virgin Group, Branson's private company, which also owns 51% of Virgin Atlantic, two British rail franchises, and the music- and video-oriented Virgin Megastores.

Internet, phone delays in Asia

Asian telecoms were hit hard after earthquakes in Taiwan yesterday caused major disruptions in Internet and telephone service across Asia.

Service was affected in Taiwan, Singapore, Japan, Hong Kong and South Korea, and was slowly being restored.

The earthquake damaged two undersea cables used by Chunghwa Telecom, Taiwan's biggest phone company. Chunghwa said it had sent four ships to the site off Taiwan's coast to start repairs, which could take two to three weeks. The company estimated lost revenue from the quake to be $3.1 million.

By Charley Blaine and Elizabeth Strott