Dow up 213 on GDP surprise

By Charley Blaine and Elizabeth Strott

Stocks rallied strongly today thanks to falling energy prices and a government report suggesting that economic growth in the second quarter had been better than expected.

The big rally generated talk that the worst of the economy's problems were over. But trading volume was so light that it was not clear that all investors agree. Short interest in many stocks, especially financial stocks, is still high and suggests that volatility will continue to rule the markets.

And if you wanted proof of that, look no further than computer maker Dell (DELL, news, msgs), whose second-quarter earnings, released after the close, missed Wall Street estimates. The stock was down nearly 10% to $22.71 in after-hours trading and could lead to a weak open on Friday. The stock had closed down 1.6% to $25.21 in regular trading.

Meanwhile, the Dow Jones industrials closed the day up 213 points, or 1.9%, to 11,715. The Standard & Poor's 500 Index was up 19 points, or 1.5%, to 1,301, and the Nasdaq Composite Index rose 29 points, or 1.2%, to 2,412.

In two days, the Dow has gained 302 points, the S&P 500 29 points and the Nasdaq 70 points, their best 2-day gain since Aug. 8 and Aug. 11. The closes for the Dow and S&P 500 were their best since Aug. 11 and the best for the Nasdaq since Friday.

The major indexes are ahead for the week despite a drubbing Monday.

This month, the Dow is up 3%, the S&P 500 up 2.6% and the Nasdaq up 3.7%. For the year, the Dow remains down nearly 11.7%, the S&P 500 is off 11.4%, and the Nasdaq is down 9.1%.

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The trigger for the day's rally was a government report that revised its estimate of economic growth in the second quarter from a 1.9% annual rate to a 3.3% rate. Economists had expected a revision to 2.7%. The growth was fueled by a rise in exports and by consumers spending their tax-rebate checks.

The news boosted stocks such as Caterpillar (CAT, news, msgs), up 3.1% to $71.68, and Boeing (BA, news, msgs), up 2.8% to $66.34.

"The good news is that productivity growth remains strong, American industry continues to bang out new creative and attractive products, and the economy is likely to have only a shallow recession," business professor Peter Morici of the University of Maryland wrote in a note this morning. "The economy should bottom out in the fourth quarter of this year and the first quarter of 2009, and then recover."

• Video: Money manager Leon Cooperman is 'cautiously optimistic'

But the report was greeted with some skepticism. The problem, as Barry Ritholtz noted on his blog, The Big Picture, was that the report used an inflation rate that was lower than expected and even lower than the inflation suggested in recent Consumer Price Index reports. "If you believe the data," he wrote, "I also have a bridge for sale in Brooklyn."

Merrill Lynch economist David Rosenberg wrote in a note to clients that total private domestic demand actually contracted at a 0.7% annual rate in the quarter, its third decline in a row. "Those who think the economy has managed to skirt a recession should consider that this private domestic spending metric only embarked on such a losing streak in the past in 1960, 1974, 1980, 1990 and 2001 -- all were classic recession years."

At the same time, a much-larger-than-expected increase in natural-gas supplies pushed the price of gas lower and dragged crude oil with it. Crude in New York closed down $2.56, or 2.2%, to $115.59 a barrel. Natural gas was off 4.1% to $8.05 per million Btu.

Twenty-nine of the 30 Dow stocks were higher, led by American International Group (AIG, news, msgs), up 7.6% to $21.51, and Citigroup (C, news, msgs), up 5.3% to $19.08. The one loser: Coca-Cola (KO, news, msgs), down 1.3% to $53.12.

Nine of the 10 sectors of the S&P 500 were higher today, with financials showing the most strength. The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund, which tracks the financial sector of the S&P 500, was up 4% to $21.39, followed by the Select Sector SPDR-Consumer Discretionary (XLY, news, msgs) ETF, up 2.3% to $30.85.

The Select Sector SPDR-Energy (XLE, news, msgs) ETF was the only loser of the 10 that track the index, down 1.8% to $75.

While Dow components ExxonMobil (XOM, news, msgs) and Chevron (CVX, news, msgs) were up on the day (because lower oil prices helps their refining businesses), oil-and-gas production stocks and oil service stocks were lower.

Apache (APA, news, msgs) fell 2.5% to $114.36; offshore rig company Transocean (RIG, news, msgs) was down 0.7% to $129.51.

The gross-domestic-product revision was the second upbeat economic surprise in two days: On Wednesday, the government said July durable-goods orders had risen 1.3%, much higher than the expected gain of 0.2%.

Meanwhile, the Labor Department this morning said that initial jobless claims fell by 10,000 to a seasonally adjusted 425,000 last week. It was the third straight week in which jobless claims eased.

The four-week moving average fell by 6,000 to 440,250 last week.

Energy prices -- New York close

	Thur.	Wed.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$115.59	$113.01	-$2.56	-6.84%	20.43%
Heating oil (per gallon)	$3.1826	$3.2617	-$0.0791	-7.45%	20.13%
Natural gas (per million BTU)	$8.0500	$8.3940	-$0.3440	-11.72%	7.58%
Unleaded gasoline (per gallon)	$3.0214	$3.0672	-$0.0458	-0.87%	21.30%

Dell's nasty surprise

Dell blamed its disappointing second-quarter earnings report -- and a very cautious outlook -- on what the company called "continued conservatism in IT spending in the U.S., which has extended into Western Europe and several countries in Asia."

That forced the computer maker to spend heavily on sale promotions, which cut into profit margins.

Dell also was one of the first U.S. companies to concede that a rally in the U.S. dollar could hurt demand for its products.

The company earned $616 million, or 31 cents a share, on revenue of $16.4 billion. Analysts had expected 36 cents a share in earnings. Net income was down 17% from a year ago; earnings per share were down 6%. Revenue was up 11% from a year ago.

The difference between net income and earnings per share was a result of the company's buyback of 60 million shares for $1.4 billion.

• Video: A reaction to Dell's earnings

"The thing that is concerning and the thing that is making the stock go down is they're starting to talk about demand destruction in Western Europe and in Asia," said John Menzies, a portfolio manager at Pacific Growth Equities in San Francisco. "Up until this point the large tech companies, like the IBMs of the world, have done pretty well in holding up their earnings because they've had strong and consistent international demand."

Revenue was up 16% in its Asia-Pacific and Japan business, 11% in Europe, 5% in commercial sales in the United States and 53% in global consumer sales. Dell shipped more than twice as many consumer laptops in the second quarter as it did a year ago, driving revenue up 28% to $2.8 billion. Profitability was roughly break-even as the business expanded its retail presence and absorbed a litigation expense of $18 million.

The company said most of its planned 8,900 job reductions have been made. The final 400 cuts will come in the third quarter.

Gustav heads for Gulf

Tropical Storm Gustav is growing stronger and heading toward the Gulf of Mexico, where it could threaten oil and gas rigs vital to the nation's fuel supply.

The National Hurricane Center said the storm is expected to strengthen over the next 48 hours and could regain hurricane status by Friday, possibly hitting the U.S. Gulf Coast on Tuesday.

"This storm could be a real monster," Scott Bernhardt, the chief operating officer at Planalytics, told CNBC this morning, adding that it "could be a Category 2 or 3."

Fears about the potential impact of Gustav had pushed the price of crude up above $120 a barrel earlier in the session, but oil turned lower by late morning. Some observers believed Gustav's effect was already reflected in energy prices.

Still, any threat to the Gulf oil and gas rigs creates anxiety on Wall Street because the region is the source of about one-fifth of all U.S. oil production and about 16% of the nation's natural-gas output.

One analyst said he believes oil is in a bearish mode overall despite price gains related to the storm's threat. Oil prices "did not advance by amounts that we would immediately consider proportionate to the threat (posed) by Hurricane Gustav," Cameron Hanover analyst Peter Beutel wrote in a note to clients this morning.

But the storm may just be a blip on oil's chart: "What may be more interesting, though, is this market's seeming inability to build on price rallies, something that argues in favor of there being a spike and then a sell-off," Beutel wrote.

Preparing for the storm

Louisiana declared a state of emergency Wednesday to prepare for the storm. The Department of Homeland Security's Federal Emergency Management Agency has said it is preparing for the storm's approach. The agency said it has 2.4 million liters of water in 137 trucks, 4 million meals in 203 trucks, 478 electric generators and 267 truckloads of blankets and cots in position for distribution in the Gulf Coast states.

If Gustav hits the Louisiana coast, it would be about three years to the day since Hurricane Katrina devastated New Orleans.

Toyota cuts sales forecast

Toyota Motor (TM, news, msgs) this morning slashed its 2009 sales forecast in the face of continued weakness in the global economy.

Toyota now expects sales to grow by 2.1%, to 9.7 million vehicles in 2009, lower than a previous estimate of 5.6% growth for next year. Still, the company is talking about positive numbers in a difficult environment. During the first six months of this year, the Japanese automaker ranked No. 1 in global sales, having wrested leadership from U.S. automaker General Motors (GM, news, msgs) with an aggressive expansion program over the past several years.

Toyota lowered its North American sales forecast for 209 by 10%, to 2.7 million vehicles.

Shares of Toyota were up 0.8% to $88.70 in New York trading.

Tiffany shines; Sears' profit plunges

Luxury retailer Tiffany (TIF, news, msgs) this morning said that second-quarter profit nearly doubled, thanks to strong overseas demand.

Tiffany earned $80.8 million, or 63 cents per share, up from $40.5 million, or 29 cents per share, last year. The results topped Wall Street's estimate of 55 cents per share. Sales in the Americas weren't so hot -- up only 3% to $422.4 million -- but European sales rose 35% to $71 million, and Asian sales jumped 17% to $214.2 million.

Tiffany also boosted its full-year forecast by 2 cents to between $2.82 and $2.92 per share.

Shares soared 10.7% to $43.85 -- fifth-best among S&P 500 stocks.

Meanwhile, Sears (SHLD, news, msgs) said second-quarter net income fell 62% to $65 million, or 50 cents, from $173 million, or $1.15 per share, in the same period last year.

Excluding a tax benefit, Sears earned 21 cents per share, missing analysts' expectations of 28 cents per share.

CEO Eddie Lampert has taken steps to reorganize the company, but the retailer has been hit hard by the slowing economy.

"We haven't lost confidence in Lampert, and he's moving some of the pieces around and admitting where he's made mistakes and trying to fix them," said Whitney Tilson, the founder of New York hedge fund T2 Partners.

Shares of Sears were up 4.2% to $90.62.

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

	Thur.	Wed.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.700%	1.640%	0.060	3.98%	-45.86%
5-year Treasury note yield	3.070%	3.026%	0.044	-6.00%	-11.14%
10-year Treasury note yield	3.795%	3.772%	0.023	-4.62%	-5.95%
30-year Treasury bond yield	4.389%	4.383%	0.006	-4.65%	-1.57%
Currencies
U.S. Dollar Index	77.250	77.195	0.055	5.22%	0.72%
British pound in dollars	$1.8298	$1.8352	-0.0054	-7.72%	-8.01%
Dollar in British pounds	£0.5465	£0.5449	0.0016	8.37%	8.71%
Euro in dollars	$1.4710	$1.4719	-0.0009	-5.71%	0.65%
Dollar in euros	€ 0.6798	€ 0.6794	0.0004	6.05%	-0.64%
Dollar in yen	109.46	109.52	-0.06	1.46%	-2.14%
Canadian dollar in U.S. dollars	$0.952	$0.955	-$0.0033	-2.62%	-4.14%
U.S. dollar in Canadian dollars	$1.051	$1.047	$0.0043	2.76%	4.32%
Commodities
Gold	$837.20	$834.00	$3.20	-9.27%	-0.10%
Copper	$3.4005	$3.4450	-$0.04	-7.13%	11.82%
Silver	$13.7050	$13.5680	$0.14	-22.96%	-8.14%
Corn	$5.7000	$5.7750	-$0.08	-2.98%	25.14%
Crude oil (NYMEX) (per barrel)	$115.59	$118.15	-$2.56	-6.84%	20.43%