Dow Jones average approaches 10,000

Will the Dow Jones industrial average finally get back above 10,000 today?

The banking and technology sectors are doing their best to see that it does.

The Dow pushed to within nine points of 10,000 thanks to blockbuster earnings this morning from JPMorgan Chase & Co., and better-than-expected profits from Intel Corp. after the market closed Tuesday.

As of 8:30 a.m. PDT, the Dow was up 115.86 points, or 1.2%, to 9,986.92. JPMorgan shares were up 3.6% and Bank of America Corp. had gained 2.8%.

Intel was up 3%, with Hewlett-Packard Co. and Cisco Systems Inc. rising more than 2%.

A spate of generally strong earnings reports is helping the market extend its seven-month upward ramble. After sputtering two weeks ago in the face of troublesome employment data, the Dow and other major indexes have regained their footing amid enthusiasm over earnings.

JPMorgan blew past earnings estimates with third-quarter profit of $3.6 billion, or 82 cents a share. Analysts had expected 51 cents a share.

But given that JPMorgan has a sizable presence in both investment banking and commercial banking, its results also underscore the notably contrasting fortunes of Wall Street and Main Street.

Its results were driven by strength in fixed-income issuance and investment banking activities such as giving merger advice. That’s adding up to lush paydays for bankers and traders at JPMorgan and other Wall Street stalwarts, such as Goldman Sachs Group, which is expected to uncork blowout earnings Thursday.

On the other hand, JPMorgan earmarked $2 billion to cover expected consumer loan losses. That’s another reminder of how ordinary Americans are struggling to pay their bills in a stolid economy with rising joblessness.

-- Walter Hamilton

Stocks on shakier ground as indexes diverge and bond market chokes

A victory celebration isn’t much fun if you’re there all alone.

The Dow Jones industrial average closed at a new 2009 high on Friday, but without the company of any other major U.S. market index.

It'll be a bad sign for the seven-month-old rally if the other indexes can’t make their own new highs next week.

The Dow rose 78.07 points, or 0.8%, to 9,864.94 on Friday, surpassing the previous 2009 closing peak of 9,829.87 reached on Sept. 22. The index now is up 12.4% for the year and 51% from its 12-year low in early March.

Friday, by the way, was the two-year anniversary of the last bull market's peak.

The blue-chip Dow leading the way, without broader indexes staying with it, is akin to the battlefield scene of a general advancing to the top of the hill -- only to find his troops far behind. Good luck keeping that hill, general.

Still, the broader market also climbed Friday, and most other indexes are within easy striking distance of this year’s highs, which most also reached on Sept. 22. The market went into only a modest swoon after that, still defying the bears who say it’s way overdue for a sharp pullback.

The Standard & Poor’s 500 added 6.01 points, or 0.6%, to 1,071.49 on Friday, just below the Sept. 22 close of 1,071.66.

The New York Stock Exchange composite inched up 0.4% to 7,015.54, which left it within 0.5% of its Sept. 22 close.

Among small-stock indexes, the Russell 2,000, which rose 1.2% to 614.92, will need to gain another 1% or so to take out the Sept. 22 high.

In June, divergences among the major indexes signaled the top of the spring rally. The NYSE composite, for example, peaked on June 2. The Russell 2,000 topped out on June 4. The Dow was the last to hit a new rally high, reaching 8,799.26 on June 12. After that the market pulled back through July 10, with the Dow losing 7.4% in all, before buyers rushed back into the market beginning in mid-July.

Second-quarter earnings reports fueled the summer rally, and the bulls are betting that third-quarter reports will power the market in the next few weeks.

Stocks could face one other big hurdle: a back-up in interest rates.

The bond market was hit by a selling wave late this week as the steep drop in yields in recent months finally triggered a buyers' strike. Momentum traders who've been riding the bond rally quickly bolted for the door. They got an extra push courtesy of more warnings by Federal Reserve policymakers that short-term interest rates will, some day, rise from zero.

The 10-year Treasury note yield ended Friday at 3.38%, up from 3.25% on Thursday and 3.18% on Wednesday.

Yields also jumped in the California municipal bond market this week after the state was forced to boost rates on an offering of new tax-free debt to get the deal done.

Rising market yields push down the value of older bonds, which is reflected in falling share prices of bond mutual funds. The share price of the Vanguard California Long-Term Tax Exempt bond fund, which hit a 52-week high of $11.39 on Monday, had fallen 1.1% to $11.26 by Friday.

That's not a big loss compared with what the stock market might suffer in a week. Still, for bond investors who've been watching the value of their holdings rise almost non-stop since July as cash has poured into the market, this week was a rude reminder that it's possible to lose money in bonds, too.

-- Tom Petruno

Photo: On the NYSE floor on Friday. Credit: Mario Tama / Getty Images

Cruise ship giant Carnival posts earnings surprise as bookings rebound

Cruise ship operator Carnival Corp. today reported better-than-expected third-quarter earnings and said bookings continued to improve, another sign that consumers are opening their wallets a little wider.

From Reuters:

Carnival lifted its 2009 earnings forecast and said ticket prices for its cruises were stabilizing.

Bookings for the next three quarters were 19% ahead of 2008 levels, spurred in part by heavy discounting. Travelers are also booking cruises earlier, which has helped rates stabilize, Carnival noted.

Chief Operating Officer Howard Frank said during a call that rates were unlikely to fall further in the fourth quarter, given the strength of late bookings.

"For a limited number of itineraries ... we have been able to move prices up," Frank said.

The Miami-based company’s stock gained $1.52, or 4.8%, to $33.52 today, although it pulled back after trading as high as $34.95. The shares are up 38% this year after plunging 45% last year.

Carnival’s rival, Royal Caribbean Cruises, rose 73 cents, or 3.1%, to $23.97, a 52-week high.

Carnival earned $1.07 billion, or $1.33 a share, in the quarter ended Aug. 31. That was down from $1.35 billion, or $1.65 a share a year earlier, but well above analysts’ average estimate of $1.18 a share. Sales were off 14% from a year earlier, to $4.1 billion.

A big dive in fuel costs compared with a year earlier helped the bottom line last quarter.

The company, whose brands include Holland America, Princess Cruises and the Cunard Line, raised its full-year profit forecast to a range of $2.16 to $2.20 a share from a previous forecast of $2 to $2.10.

Still, Frank told analysts that Carnival was cautious about 2010 because of expectations that high unemployment would hinder consumer spending.

He specifically cited pricing for the company’s Mexican Pacific coast cruises as a "challenge" because of the "significant economic slowdown in Southern California."

-- Tom Petruno

Photo: Carnival's newest and largest ship, the Carnival Dream. Credit: Fincantieri Shipyard

Jobs report points to better profits, at workers' expense

Today’s rally on Wall Street -- with most market indexes up between 1% and 2% -- doesn’t tell us much, given that so many players already were gone for the long weekend. Trading was thin.

But it isn’t surprising that the market was happy enough with the August employment report, which showed a smaller-than-expected net loss of jobs (216,000) but a jump in the overall unemployment rate to 9.7%, a 26-year high.

In the context of many other economic reports since June pointing to the beginning of a recovery, the underlying employment data suggest that the early benefits of any recovery will flow directly to many companies’ bottom lines. That's good for stock prices.

Carlos Torres at Bloomberg News puts it quite succinctly:

Employers kept Americans’ working hours near a record low in August, indicating that economic growth is poised to reward companies with added profits while postponing any recovery in the job market.

The average workweek held at 33.1 hours, six minutes from the 33 hours in June that was the lowest since records began in 1964, the Labor Department said.

The preconditions for gains in payrolls, including giving the army of part-timers longer hours and taking on additional temporary employees, weren’t met last month. At the same time, with economic growth forecast to resume this quarter, the figures set the stage for a surge in worker productivity and drop in labor costs that will stoke corporate profits.

"It’s disappointing and it tells us that we are not quite there yet," said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. "It’s great for business and terrible for households" for coming months, Feroli said.

Longer-term this situation isn’t sustainable, as has been much discussed this summer. Without job and income growth consumer spending will remain depressed, stunting any economic recovery.

It’s also likely, though, that as corporate profitability rebounds layoffs will become less likely and more companies will look to hire to provide relief to depleted and overworked staff.

At least, that’s how economic rebounds are supposed to progress. If businesses don’t follow the script they’ll boost the risk that the economy will stumble back into recession in 2010.

Surely managements must know this.

-- Tom Petruno

 

If a recovery is coming, one size won't fit all

What’s the likeliest shape of any U.S. economic recovery?

Answer this first: What business, or geographic region, are you in?

Forbes publisher Richard Karlgaard, writing in his DigitalRules blog, makes a simple and quite valid point about the universal effort to boil a recovery down to a single letter shape, typically U, L, V or W: One size, or one letter, won’t fit all.

Karlgaard, like many others, expects a U-shape for a U.S. economic recovery overall, meaning a slow turnaround. (All U-shapers really mean to conjure a U with a stretched-out bottom.)

But within the U he expects a "VW economy" -- pockets of Vs, or rapid and sustained recoveries, and pockets of Ws, or recoveries followed quickly by renewed weakness:

"The V part of the VW economy includes dynamic growth companies and large exporters. Apple is enjoying a V recovery. Salesforce.com just reported a big, booming V quarter on Friday. Mobile broadband is an entire industry that will enjoy sustained V growth. Low-tax states like Texas, Tennessee and North Dakota are experiencing V recoveries.

"America's W economy includes all those companies, industries, states, cities and personal careers where deteriorating value propositions were masked in good times. It always happens that way. Recessions unmask bad business models. The 1973-74 recession laid bare the inherent inefficiencies of slapped-together 1960s conglomerates. The 1990 recession unmasked the problems of IBM and the minicomputer industry.  IBM made adjustments and fought another day. The minicomputer industry just died.

"Today's W economy: newspapers, McMansion builders, inefficient manufacturers, high-tax state and local governments, and workers unable to adapt, relearn and relocate."

Karlgaard’s view makes sense if you believe there is in fact some kind of recovery underway. The U.S. economy is so huge and dynamic that both success and failure are ever-present, of course. The recession has been absolutely brutal and has killed off countless businesses. But many others will survive and will grab the market share left by the casualties (though for some industries the overall pie will have shrunk, maybe permanently).

I’ve argued before that the stock market’s rally since March has largely been a snap-back from price levels that were discounting Armageddon.

If the economy isn't on the verge of a second implosion (still a point of contention with many people, I realize), then the market’s next phase should be about separating the true V-recovery companies from the U, L and W companies.

-- Tom Petruno

The script calls for a sell-off in stocks. So where is it?

Many of the classic warning signs of an imminent pullback in stock prices are flashing red. Yet the market has continued to push ahead, seemingly oblivious.

The bears proffer the image of Wile E. Coyote, off the cliff but with his legs still in motion.

On Thursday, despite the government’s unarguably disappointing report showing a drop in July retail sales -- raising yet more questions about the consumer’s ability to spend -- major stock indexes posted modest gains to close at new 2009 highs.

The Dow Jones industrial average added 36.58 points, or 0.4%, to 9,398.19, its highest close since Nov. 4.

Even if you believe that the rally since March 9 is a genuine new bull market rooted in expectations of an economic recovery, no such advance proceeds without sharp setbacks along the way. And we haven’t had one.

For the broader Standard & Poor’s 500 index, the most significant decline so far was a 7% drop from June 12 to July 10. Blink, and you missed it.

Since July 10, amid a flood of better-than-expected (i.e., less bad) second-quarter earnings reports, the S&P has jumped 15.2%, lifting its gain since March 9 to 49.7%.

Even many bulls now look around and worry this is all too much, too soon.

As I noted in this post on Monday, gauges of investor sentiment have moved quickly and solidly into bullish territory since mid-July. That's often a good excuse for a bout of profit-taking.

The latest weekly Investors Intelligence survey of market newsletter writers showed 49.4% were bullish this week, up from 47.2% last week and the highest reading since January 2008.

Another warning sign: "Short sellers" who bet on falling stock prices have been scrambling to close out their trades.

Meanwhile, individual investors’ total purchases of domestic and foreign stock mutual funds swelled to $5.5 billion in the seven days ended Aug. 5, the highest since mid-May -- which was just as the market was tiring from its spring surge, although it never took a spill.

But maybe the most troubling clue is coming from China, where optimism about the economy -- and a speculative frenzy fueled by cheap money -- drove a 91% gain in the Shanghai market index from year’s end through Aug. 4. Since then the index has slumped in six of eight sessions, including today’s drop of 3%. It’s off 12.2% from the recent peak.

Fundamentally, Wall Street’s bulls still have a legitimate case: If the market is supposed to price in the future, rather than the present or the past, "It’s saying that the first half of 2010 is going to look a whole lot better than the first half of 2009," says Art Hogan, market analyst at Jefferies & Co. in Boston.

Between here and there, however, what are the odds of a pothole-free ride?

-- Tom Petruno

Image: Wile E.'s Looney Tunes stamp from 2000. Credit: Associated Press

Stock bulls' camp swells, stoking fear the party is ending

It was a lot easier to believe the stock market could rally when prices were much lower and bulls were hard to find. Now, the optimists' camp is getting to be a crowded place.

Popular surveys of investor sentiment last week showed a surge in bullishness as stocks continued to climb. That's usually the way it works, of course: As the party gets hotter more people want to join it, even though the best food and drink may already be gone.

To market contrarians -- those who believe the crowd typically is too late -- rising optimism is a reason to bet that the summer rally is nearing its end.

The latest Investors Intelligence survey of market newsletter writers showed the percentage who are bullish jumped to 47.2% last week, up from 42.2% the previous week and the highest since mid-June -- which was just as the market was topping out before a modest sell-off hit.

The American Assn. of Individual Investors' latest weekly poll found 50% of AAII members now count themselves as bulls when asked to predict the market's trend over the next six months. That was the first reading at or above 50% in more than a year, and up from 47.7% a week earlier (although this survey is notorious for its volatility).

Over the last four weeks the bulls have gotten the two things they wanted most this summer: better-than-expected corporate earnings reports (albeit mostly due to cost-cutting) and more data indicating that the economy's rate of decline has slowed significantly. The July employment report on Friday, showing the smallest monthly net loss of jobs in a year (247,000), helped push major market indexes to 10-month highs.

But with the Standard & Poor's 500 index, at 1,010.48 on Friday, now up 49% from its 12-year low in March, the bears -- and some nervous bulls -- believe the market has priced in every bit of good news, and could easily be toppled by negative surprises, particularly with dreaded September approaching.

If you expect the economy and earnings to look worse rather than better in the next few months, you probably don't need an engraved invitation to sell stocks at this point. There is a still-huge camp on Wall Street that believes the bulls are misreading the economy and the market in the same way they did from 1929 to 1932, as the Depression unfolded.

But if you think the turn in the economy is more likely to continue than not, the sell decision gets tougher. It's easy to say the market is overdue for some kind of pullback after the run-up since July 10. Yet investors who were expecting a dive in late June and early July -- after the March-April-May rally stalled out -- underestimated the amount of money that was ready to jump into stocks after even a minor decline.

The S&P 500 fell just 7% from June 12 to July 10 before rocketing again. That didn't even get close to a garden-variety market "correction" of 10% to 15%.

Although the Investors Intelligence and AAII surveys show that optimism is rising -- which suggests a lot of money already has gotten back into stocks -- the percentages of bulls still are well below the levels reached in the past when investors were truly giddy.

"While some are treating [the latest AAII survey] as a contrarian, or negative, sign, when looking at a longer-term picture of the indicator one can argue that the bulls could finally be ready to significantly come back into the market," market research firm Bespoke Investment Group said in a report last week.

"During the '03-'07 bull market, sentiment remained above 50% quite a bit of the time, and it even reached 70% a few times," the report noted. "If anything, above 50% is a comfortable reading during prolonged rallies and not a sign that optimism is too high."

-- Tom Petruno

Photo: The Wall Street bull statue in lower Manhattan. Credit: Andrew Harrer / Bloomberg News

After a lull, buyers pile into financial stocks again

The financial sector led Wall Street into the abyss last fall -- and it still seems determined to lead it out.

On an otherwise down day for the stock market, major financial shares surged Wednesday for a third straight session.

An index measuring the performance of the 79 financial stocks in the Standard & Poor’s 500 jumped 3.3% to its highest level since Nov. 7, even as the S&P overall eased 0.3% for the day.

Citigroup shot up 33 cents, or 10.2%, to $3.58. Bank of America rose $1.02, or 6.5%, to $16.66. Private-equity and hedge fund manager Blackstone Group rocketed $2.03, or 15.7%, to $14.96.

Nicolas Colas, chief market strategist at brokerage BNY ConvergEx in New York, said it was a good sign, not a bad one, that the banks, money managers and other financial players that survived last year’s meltdown are attracting a second wave of investors after the May-June lull that followed their spring surge.

"Financials are still the tip of the spear in this rally," he said.

Wild gains Wednesday in some of the most speculative shares -- including Fannie Mae and Freddie Mac, both controlled by the government -- suggested that traders were in a frenzied pile-on, which often is what happens when rallies are peaking.

But the sector also was underpinned by some solid fundamental news, Colas said. American Express said its level of credit-card writeoffs fell in July for a second straight month, suggesting that the economic situation was "stabilizing," CEO Ken Chenault said during an investor presentation.

Radian Group, the third-largest mortgage insurer, reported an unexpected second-quarter profit, stunning investors. The firm’s shares zoomed $3.05, or 83%, to $6.72.

Fortress Investment Group, which like Blackstone manages private-equity and hedge funds, jumped 55 cents, or nearly 13%, to $4.85 after reporting quarterly results that beat estimates.

It has helped, of course, that the Treasury, the Federal Reserve and the Federal Deposit Insurance Corp. have made trillions of dollars in cheap credit available to banks, brokerages and other players, aiming to revive them.

In any case, the earnings data are emboldening investors who want to believe that "the companies are catching bottoms" in their operations, said Jon Najarian, co-founder of trading firm optionmonster.com in Chicago.

And for the broader economy -- still credit-starved -- one key to a sustained recovery is healthier financial firms that are more willing to lend and invest, Colas noted.

For that reason, he said, he’d be much more concerned if he saw the stock market rallying without financial stocks helping to lead the way.

-- Tom Petruno

Whole Foods says consumers may be 'trading down' less

Shares of natural-foods grocer Whole Foods Market Inc. soared to their highest level in more than a year late Tuesday after the company reported better-than-expected quarterly earnings and raised its profit estimate for fiscal 2009.

Whole Foods, for years nicknamed "whole paycheck" for many consumers’ perceptions of its prices, said its sales trends hinted that cost-conscious shoppers were "trading down" less in their buying.

Although same-store sales were off 2.5% in the company's fiscal third quarter ended July 5 compared with a year earlier, the rate of decline slowed sharply from the 4.8% year-over-year decline in the second quarter and a 4% drop in the first quarter.

The Austin, Texas-based chain said that cost controls helped it generate earnings of nearly $35 million in the quarter, or 25 cents a share, compared with $33.9 million, or 24 cents, a year earlier. Analysts had expected a profit of 20 cents a share.

The company raised its earnings estimate for fiscal 2009 (ending in September) to a range of 80 cents to 82 cents a share, up from its previous estimate of 65 cents to 70 cents.

Whole Foods’ shares rocketed to $28.25 in after-hours trading. The price was up 2 cents to $24.82 in regular trading before the results were announced.

The stock, which had been sliding since early 2006 as the company faced rising competition in organic foods from major grocery chains, has more than tripled since it hit a low of $8.19 last November.

Whole Foods, which had total sales of nearly $1.9 billion last quarter, said its average shopper basket size stabilized during the three months and began to improve toward the end of the period. What’s more, in the first four weeks of the current quarter same-store sales slipped 1.1% from a year earlier, continuing the better tone of business, the company said.

"We hope these trends are an indication that the level of ‘trading down’ might be easing somewhat," the firm said on its conference call with analysts.

Recipe for a rally: Eager buyers, reluctant sellers

Despite a pullback near the closing bell today, the stock market's summer rally isn't showing many signs of peaking out.

It’s always tempting fate to say that, but the evidence is that buyers still are eager -- and that potential sellers aren’t keen on letting go at these prices.

"The attitude is, ‘Why sell today when you can sell higher tomorrow?’ " said Ryan Larson, head of equity trading at Voyageur Asset Management in Chicago.

The Standard & Poor’s 500 index closed up 11.60 points, or 1.2%, to 986.75, the highest finish since Nov. 4. The index is up 12.2% since July 10 and 9.2% this year to date.

At its high for the session the S&P reached 996.68, knocking on the door of the 1,000 mark.

The summer rally has been rooted in the belief that the worst has passed for the economy and that some kind of recovery will begin in the next five months or so.

As is usually the case, "investors are positioning themselves ahead of the fundamentals," Larson said.

The bears insist that an economic recovery in the second half is a fantasy, but investors have been heartened by quarterly earnings reports that have been nowhere near as dire as feared, thanks largely to massive cost-cutting.

What really helps, though, is to hear more corporate chiefs use the "B" word. "The United States economy has found bottom," Andrew Liveris, CEO of Dow Chemical, said in the company’s earnings report today. He added, though, that a recovery "will be slow . . . as unemployment continues to be a drag on consumer spending."

Dow’s shares jumped $1.26, or 6.2%, to $21.53.

Goodyear Tire CEO Robert Keegan said the company was "beginning to see some signs of economic stabilization and recovery, although still fragile at this stage and varied around the globe." Goodyear’s shares rose $1.97, or 14.2%, to $15.86.

Naturally, every CEO is talking his book: If he owns shares in his company or has stock options, it’s in his interest to keep this market momentum going.

But that’s also how economic cycles turn -- each bit of encouraging data builds on another. In a sense, the economy always has to talk itself into a recovery. That’s the process underway now, and it would only be unusual if the stock market weren’t responding positively to what it hears.

-- Tom Petruno

Photo: On the NYSE floor. Credit: Andrew Harrer / Bloomberg News