Nasdaq Up 1%; Blue Chips Flat

PETER A. MCKAY GEOFFREY ROGOW

Stocks were little changed Tuesday, hovering in a narrow range amid mixed reactions to repayment of government bailout money by major banks, as the Dow Jones Industrial Average moved in and out of positive territory for the year.

The anticipated repayment of $68 billion in bank bailout money was a "sign of financial repair," said Treasury Secretary Timothy Geithner, who added that the economy still faced challenges but was beginning to heal. In recent weeks, commodities, stock and credit markets have behaved as if the worst of the economic and financial crisis has passed.

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The Dow industrials were recently up 20 points at 8784, barely in the black for 2009. American Express rose 5.2%, leading gains, while United Technologies led the average's decliners, falling 1.6%. The S&P 500 rose about 0.6%, led by gains in its technology and basic-materials sectors.

The Nasdaq Composite Index climbed 1.1% after Texas Instruments, a maker of chips for cellphones, televisions and other consumer products, boosted its second-quarter profit outlook.

David Chalupnik, head of equities trading at FAF Advisors, which owns shares in Texas Instruments, said that he was particularly heartened by remarks in a conference call with TI executives in which the company said that retailers and other customers were drawing down their inventories of electronics.

"Once they've drawn down completely and actually start building inventories, the potential for upside growth in sales is tremendous," said Mr. Chalupnik. "That's also a good sign for the tech sector as a whole."

Talk of the anticipated bank repayments first circulated on Wall Street trading desks early Monday afternoon, helping the Dow erase a more than 100-point drop and leading to some gains Tuesday.

Still, skeptics about a possible next leg up for the market continue to dominate. Ben Inker, director of asset allocation at the Boston portfolio-management firm GMO LLC, said his company has pared back its stock buying lately largely because the valuations are no longer nearly as attractive as at the market's March lows. However, he said, GMO is holding onto its blue-chip names, which it believes are well positioned to weather the remainder of the recession and likely capital raising by smaller companies in every sector to pay down debt.

When the S&P was at its March low, Mr. Inker estimated that it could rise by about a third to reach fair value. Coming into Tuesday's action, it was up nearly 39%.

"At these levels, it's not like we're being bribed to take risk, which is what we prefer," said Mr. Inker. "At the same time, government bonds are also nowhere near attractive."

Mr. Inker said Treasury prices could yet head lower, with a 5% yield on the 10-year Treasury a reasonable level given widespread expectations of a second-half recovery in the U.S. On Tuesday, the 10-year note slipped 1/32 to yield 3.896%.

Short-dated Treasurys, however, rallied in price and were breaking a three-day losing streak as a recent heavy sell-off that sent yields to multi-month highs enticed bargain hunters.

The backup in yields also lent support to a $35 billion, three-year note auction Tuesday afternoon, with the first leg of the U.S. government's $65 billion in sales of notes and bonds this week garnering strong interest from investors, including foreign central banks.

As stocks finished little changed on Monday and traded near the flat line on Tuesday, albeit on light volume, the CBOE Volatility Index, a measure of investor jitters, recently slid 5.4% to 28.15.

Still, traders noted there has been increased volatility in the last hour of sessions lately, partly duw to the lighter volume. On Monday, for example, the Dow erased a significant decline in less than ten minutes during the last hour. And last Thursday, the indexes made a similar move ahead of the May payrolls report.

"We've had these down days reverse aggressively in the last hour of trading and that has given added pause to any institution trying to get in and out of this market in a major way," said Dick Del Bello, a senior partner with Conifer Securities.

Among other markets, the U.S. Dollar Index fell 1%, while the Dow Jones-UBS Commodity Index rose 1.9%. Oil futures closed up $1.92 at $70.01 a barrel in New York.

Raw materials have benefited lately from expectations that the economy will recover later this year and bolster demand. At the same time, some traders have grumbled that commodity prices could get ahead of themselves and prevent a needed uptick in consumer activity.

The average retail price of a gallon of regular-grade gasoline in the U.S. now stands at $2.619, according to AAA, up more than 18% from a month ago but down about 35% from a year ago, when prices were near records at the height of the energy bubble.

LATICONOMICS

Tuesday, June 9, 2009