Market Dispatches9/28/2007 7:33 PM ET

Will the Fed keep the rally going?

The Dow slips but finishes a wild third quarter up 3.6% and less than 1% under its July high. Some see the blue-chip index hitting 16,000 by the year-end. Techs, energy and commodity stocks dominate the quarter. Consumer spending is better than expected.

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The stock market stumbled into Friday's close, leaving investors to wonder how strongly the market's big momentum since mid-August will continue in the fourth quarter.

At the close, the Dow Jones industrials were down 17.3 points to 13,896. The Standard & Poor's 500 Index was down 4.6 points to 1,527, and the Nasdaq Composite Index fell 8.1 points to just under 2,702.

The major indexes finished the week with small gains but had gains of roughly 4% in September and, amazingly enough, given the volatility that started in mid-July, reasonable gains for the third quarter.

The Dow, for example, fell nearly 1,500 points, or 10.6%, between its July 19 closing high of 14,000.41 and its low in the middle of the day on Aug. 16. With today's close, the blue-chip index had a 3.6% gain for the quarter and had climbed to within 105 points -- less than 1% -- of the July 19 close.

The Dow had been basically unchanged Friday afternoon when news reports quoted William Poole, the president of the Federal Reserve Bank of St. Louis, as saying that investors would be making a mistake to "bake in the cake more rate cuts."

His comment came after he addressed a conference hosted by Market News International. "We will go meeting by meeting," Poole said.

When Poole's comments hit the markets, the Dow fell more than 50 points, but that loss had been trimmed substantially by the close.

The fact is, however, that many investors have assumed the Fed would cut rates at least once more this year. The Fed cut its key federal funds rate to 4.75% on Sept. 18, a decision that sent the Dow up nearly 336 points. The fed funds rate, the rate that banks charge each other for overnight loans, had been at 5.25% for a year.

Fourteen of the 30 Dow stocks were higher today, led by Caterpillar (CAT, news, msgs), up 1.2% to $78.43. About 170 S&P 500 stocks were higher, led by Dean Foods (DF, news, msgs), up 5.2% to $25.58.

What will move the markets next

Poole's comments highlight the Fed's importance to how the stock market will perform in the fourth quarter, historically one of the better quarters for the year.

Assume, as does Tom McClellan of The McClellan Market Report, that the markets move on the basis how much money is available and whether the money wants to be in the financial markets.

The Fed's move on Sept. 18 effectively put the central bank's "foot on the gas," and there's no problem about the supply of cash available, McClellan said. Whether the money wants to be in stocks is a different matter. Trading volume over the past month suggests that many investors are still a bit wary about the stock market after the wild third-quarter gyrations -- a natural reaction to the credit markets' near meltdown in August, he said.

At the same time, the market's recovery from the lows of mid-August gives many market watchers lots of optimism. The Stock Trader's Almanac, for example, sees the Dow hitting 16,000 by the year-end or in the first quarter of 2008.

Other factors that will affect the markets:

  • Whether the housing slump will spread broadly across the economy. Based on Friday's consumer-spending report, the answer seems to be it won't.

  • What will happen with corporate profits. Thomson Financial is projecting year-over-year third-quarter S&P 500 profit growth at 3.9%, down from a 6.2% projection made on July 1. That will likely rise as the third-quarter earnings season progresses. The season will effectively start on Oct. 9 when Alcoa (AA, news, msgs) reports. The reason for the falling estimate is downward revisions to financial, industrial and consumer discretionary stocks, especially home-building stocks, Thomson said on Friday.

  • How much sharply higher commodity prices will affect the economy. Wheat hit $9.465 a bushel this week. Crude closed at $81.66 a barrel Friday, down $1.22 on the day but up nearly 16% for the quarter and 34% for 2007. Gold closed at $750 an ounce in New York on Friday, the highest level since January 1980.

  • Whether hedge funds are able or willing to borrow heavily to bet on the stock market. There's some evidence that, since the big credit crunch in August, hedge funds are limiting their borrowing.

The markets for the week
Close for weekWk. ago close% chg.YTD. chg.
Dow Jones industrials13,895.6313,820.190.55%11.49%
S&P 500 1,526.751,525.750.07%7.65%
Nasdaq Composite2,701.502,671.221.13%11.85%
Russell 2000805.45813.11-0.94%2.26%
Crude oil per barrel$81.66$81.620.05%33.76%
10-yr. Treasury yield4.58%4.63%-1.14%-2.78%
Gold per troy ounce$750.00$738.901.50%17.55%

A quiet but happy end to a wild quarter

Today was the last day of trading for the third quarter, and what a quarter it was: Investors saw the Dow reach 14,000 in July, trudged through a nerve-racking meltdown in the mortgage and credit markets in August, and then cheered a move by the Federal Reserve to cut interest rates by a surprising half a percentage point in mid-September.

The major averages finished the week up slightly and showed gains of roughly 4% each for September. The Dow ended up 3.6% for the quarter. The S&P 500 was up 1.6% for the quarter, and the Nasdaq Composite was up nearly 3.8%.

A few notes about the quarter:

  • Big cap stocks ruled. Witness the Dow's performance for the quarter compared with the S&P 500. The Nasdaq-100 Index ($NDX.X) was up 8.2% today for the quarter, compared with a 3.4% quarterly loss for the small-cap Russell 2000 Index ($RUT.X) and the Nasdaq's 3.8% gain. (The Russell is up 2.3% on the year.)

  • Energy ruled. The energy component of the S&P 500 jumped nearly 10% during the quarter, compared with just 1.6% for the S&P overall. That's directly related to a 16% gain for crude oil during the quarter -- 11% in September alone. Crude was at $83.18 this afternoon in New York, up slightly on the day. Oil services giant Schlumberger (SLB, news, msgs) had a 24% gain for the quarter and is up 66% on the year. The gains were not uniform. Refiners' profits have been squeezed of late because crude had moving higher faster than gasoline prices. So, Valero Energy (VLO, news, msgs) and Sunoco (SUN, news, msgs) were down 9% and 11% in the quarter, respectively.

  • Big tech stocks were hot. Amazon.com (AMZN, news, msgs) jumped nearly 36% and is up 135% for the year. Apple was up 26% for the quarter and 82% for the year. Ebay (EBAY, news, msgs) added 21%, putting it up about 30% this year. Cisco Systems (CSCO, news, msgs) was 19% ahead for the quarter, and IBM Corp. (IBM, news, msgs) finished the quarter up nearly 12%.

  • Housing and financial stocks were battered. The Philadelphia Housing Sector Index ($HGX.X) fell nearly 25% in the quarter; the Amex Securities Broker/Dealer Index ($XBD.X) was off 8.3%. The two banking giants in the Dow -- JPMorgan Chase (JPM, news, msgs) and Citigroup (C, news, msgs) -- finished the quarter down 5.4% and 9%, respectively. JPMorgan was up 3% in September, but Citigroup was off 0.5%.

  • Stocks with big exposure to overseas markets benefited. The top four Dow stocks for the quarter -- Procter & Gamble (PG, news, msgs), up nearly 15%; United Technologies (UTX, news, msgs), 13.5%; IBM; and Hewlett-Packard (HPQ, news, msgs), 11.8% -- all get half of their business outside the United States. Boeing (BA, news, msgs), up 9.7% in the quarter, is traditionally the biggest U.S. exporter. As the value of the dollar falls, the value of their overseas profits rises.

  • Commodity stocks were powerful. Again, the reason was the lower dollar (down 4.4% against the euro in September) and burgeoning global demand that pushed everything from wheat to copper sharply higher. Gold for December delivery closed at $750 an ounce this afternoon, its highest close since hitting $850 an ounce in January 1980. Southern Copper (PCU, news, msgs), which has operations around the world, was up 31%; Freeport-McMoRan Copper and Gold (FCX, news, msgs) added 27%. Monsanto (MON, news, msgs), one of the biggest producers of agricultural seeds, was up 27% for the quarter and 64% on the year.

Energy prices -- New York close
 Fri.Thur.Chg.Month chg.YTD chg.
Crude oil (NYMEX) (per barrel)$81.66$82.88-$1.22

10.29%

33.76%
Heating oil (per gallon)$2.2379$2.2521-$0.01429.58%40.05%
Natural gas (per million BTU)$6.8700$6.9190-$0.049025.64%9.06%
Unleaded gasoline (per gallon)$2.0683$2.0939-$0.02560.80%29.10%

Consumer spending is better than expected

Consumers didn't seem to be too bothered by the credit crunch, the housing slump or the mortgage-market mess in August, even though the news wasn't doing much for the stock market.

The Commerce Department reported that consumer spending rose 0.6% in August, the best reading in four months and better than economists' expectation of a 0.4% rise. August's increase followed a 0.4% rise in July.

Consumer spending makes up about 70% of the U.S. economy, so it is an important indicator of how the economy is faring.

Meanwhile, in a shift that could ease inflation fears, core consumer prices rose 0.1% in August, the smallest increase in more than three years. The personal-consumption-expenditures (PCE) deflator, a key gauge watched closely by the Federal Reserve, rose 1.8% in August from the same period in 2006 -- within the Fed's comfort zone of between 1% and 2% for inflation.

Personal incomes rose 0.3% in August, down from a 0.5% increase in July. Economists had been looking for a 0.4% rise.

Short hits from the markets -- 4 p.m. ET
 Fri.Thur.Chg.Month chg.YTD chg.
Treasurys
13-week Treasury bill3.700%3.600%0.100-7.27%-24.26%
5-year Treasury note yield4.229%4.217%0.012-0.52%-10.04%
10-year Treasury note yield4.579%4.573%0.0060.93%-2.78%
30-year Treasury bond yield4.833%4.837%-0.0040.04%0.31%
Currencies
U.S. Dollar Index77.7478.25-0.51-3.10%-6.21%
British pound in dollars$2.0483$2.02720.02121.50%4.53%
Dollar in British pounds £0.4882£0.4933-0.0051-1.47%-4.33%
Euro in dollars1.42671.41540.01134.65%8.09%
Dollar in euros€ 0.7009€ 0.7065-0.0056-4.44%-7.48%
Dollar in yen ¥114.81¥115.56-0.75-0.81%-3.54%
Commodities
Gold$750.00$739.90$10.109.99%17.55%
Copper$3.6400$3.6480-$0.0087.15%26.79%
Silver$13.9200$13.6450$0.2813.82%5.49%
Crude oil (NYMEX) (per barrel)$81.66$82.88-$1.2210.29%33.76%

Greenspan warns about the R-word -- again

It seems like Alan Greenspan might want his old job back. Either that or the former Fed chief just likes to be heard. And it seems like he's always mentioning that R-word.

"The danger of recession has obviously risen," Greenspan said in an interview with the BBC, according to Bloomberg News. But the chance of a recession was "less than 50-50," Greenspan noted. He gave a similar warning earlier this month.

His words come after his successor, Ben Bernanke, cut interest rates Sept. 18.

Greenspan left his post at the Fed in January 2006; he had been appointed by President Reagan in August 1987.

Alcatel-Lucent faced with emergency

Telecommunications-equipment company Alcatel-Lucent (ALU, news, msgs) is in dire straits, and Chief Executive Officer Patricia Russo has a lot of work to do.

The Financial Times has reported that Russo has one month to come up with an emergency restructuring plan that she will present at the company's board meeting Oct. 30.

Shares of Alcatel-Lucent jumped 4.3% to $10.17 on Friday. "The board's move is quite positive for shareholders," Matthieu Bordeaux-Groult, a fund manager at Richelieu Finance, told Bloomberg News. "The market is expecting tangible actions, no more profit warnings."

The company has issued three profit warnings in less than a year.

Apple's general counsel moves

For the second time in a year and a half, Apple (AAPL, news, msgs) is losing its chief lawyer.

Donald Rosenberg, Apple's former general counsel, has left the company to go to Qualcomm (QCOM, news, msgs), whose former general counsel, Lou Lupin, resigned in August.

Rosenberg had been at Apple for only 10 months, having replaced Nancy Heinen, who left the post in May 2006. The Securities and Exchange Commission filed a suit against Heinen and Apple's former chief financial officer, Fred Anderson, last April, charging them with backdating stock options.

Anderson has since settled his case; the SEC is still investigating Heinen.

Apple has replaced Rosenberg with Oracle's (ORCL, news, msgs) former general counsel, Daniel Cooperman. Before Apple, Rosenberg was at IBM for 30 years.

Shares of Apple were down 0.7% to $153.47. Qualcomm shares were up slightly to $42.26. Oracle was up slightly to $21.65.

Banks sell loans to recharge deal

Big banks on Wall Street sold $9.4 billion in loans Thursday to help finance the leveraged buyout of First Data (FDC, news, msgs) by private-equity firm Kohlberg Kravis Roberts, according to published reports.

Underwriters Credit Suisse (CS, news, msgs) and Citigroup are still holding the majority of the $24 billion in debt financing they provided for the First Data deal.

The move is expected to help bring life back to the leveraged-buyout world, which had been put on hold amid the market turmoil over the past month. The loan amount is almost twice the $5 billion in loans the banks had offered earlier this month, The Wall Street Journal pointed out.

"It's certainly a sign that the markets have improved and stabilized from a few weeks ago, but it doesn't mean we're out of the woods," Eric Takaha, a bond portfolio manager at Franklin Templeton Investments, told The Journal.

KKR first announced its plan to buy First Data for $29 billion in April.

By Elizabeth Strott and Charley Blaine

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