Dow Tops 9000; Nasdaq Rolls On

PETER A. MCKAY GEOFFREY ROGOW

Good news about profits and housing sparked a broad-based stock rally on Thursday, with the Dow Jones Industrial Average gaining nearly 200 points and moving above 9000 for the first time since January.

The blue-chip average gained 188.03 points, or 2.1%, to 9069.29, its highest closing level since Nov. 5. The Dow has now risen in 12 of 16 trading days this month and is up 7.4% for the month thus far. The benchmark has risen 38.52% from its 12-year closing low of 6547.05 hit on March 9 and is 35.97% from its record close of 14164.53 hit on October 9, 2007.

Among the Dow's components, AT&T rose 2.6% and 3M rose 7.3%. Both posted declines in second-quarter profits that were smaller than expected. Microsoft climbed 3.1% and American Express rose 2.4%. They are due to report after the closing bell.

Upbeat earnings reports have been the key driver of the Dow's recent march.

"The early part of this rally was clearly short covering going into earnings season. The market was big-time held short and with the lack of bad news, the path of least resistance has been up," said Kevin Kruszenski, director of equity trading for KeyBanc Capital Markets. "People have been so trained to buy weakness but now they're being forced to chase their long ideas."

The S&P 500 rose 22.22 points, or 2.3%, to 976.29, helped by gains in every sector. The broad measure is up 6.2% so far this month and has risen in seven of the last nine sessions.

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The rally began early in the trading day after the National Association of Realtors said existing-home sales rose again in June. An exchange-traded fund tracking the S&P 500's homebuilders rose 4.8% following the report. KB Home was up 6.5%, Pulte Homes was up 4.4%, and Toll Brothers was up 5.8%.

A better-than-forecast report on claims for unemployment benefits also added fuel to the rally. The Labor Department said initial jobless claims climbed by 30,000 to 554,000 last week, less than economists, on average, expected. The tally of continuing claims fell by 88,000 to the lowest level since April 11.

Cyclical sectors like technology rallied. The Nasdaq Composite Index rose 47.22 points, or 2.5%, to 1973.60, its 12th straight day of gains. The tech-heavy measure hasn't recorded a winning streak of that length since the 13 day-stretch ending Jan. 9, 1992. The Nasdaq has risen 13% over its 12-day run.

EBay rose 11% after the online auctioneer said current-quarter results would top analyst estimates. Rival online retailer Amazon.com gained 5.7% after striking a deal to acquire online shoe retailer Zappos.com, but its shares were moving lower in after-hours trading after it posted a 10% drop in earnings.

The health-care sector also rallied as Bristol-Myers Squibb posted better-than-expected results and said that it plans to buy Medarex for $2.4 billion. Bristol-Myers shares rose 2.8% and Medarex leapt 89%.

President Barack Obama's press conference Wednesday evening regarding proposed health-care legislation also appeared to help the sector. Traders have been betting that the package will be delayed and may not effectively control costs, leaving room for health-care providers to make solid profits.

"The sector has been really sensitive to the policy news for about six months or so," said trader Todd Leone, of Cowen & Co. "But it's been acting a lot better the longer they seem to be pushing the thing off."

Shares of Ford Motor rose 9.4% after the auto maker said that it had returned to profitability in its second quarter and slowed its cash burn.

The dollar strengthened against the Japanese yen but fell versus the euro.

Treasury prices sank. The two-year note was down 6/32 to yield 1.035%. The 10-year note fell 1 7/32 to yield 3.697%.

Some market veterans said that stocks could yet suffer a correction thanks to persistent weakness in employment and corporate revenue even as profits have been ticking higher.

Doreen M. Mogavero, chief executive of the New York floor brokerage Mogavero, Lee & Co., was busy executing customers' orders to buy shares on Thursday, but said she remains wary that the Dow could yet tumble to 8600 or so.

"If I get an order from a client, i have to go with the momentum," Ms. Mogavero said. "But my opinion is still that I'm not convinced this rally is really sustainable. Where is the [economic] growth supposed to come from?"

Dow Declines on Day, Week

PETER A. MCKAY GEOFFREY ROGOW

Stocks finished mixed for the day and lower for the week on Friday after gains for technology and financial shares offset a slump in the energy sector after oil prices cratered.

The Dow Jones Industrial Average sank by 15.87 points, or 0.2%, to 8539.73, leaving the blue-chip measure down more than 2% for the week. That marked its first weekly drop in a month and only the third weekly loss since its March lows.

Financials had paced much of the week's declines on concern surrounding the White House's plans to overhaul financial regulation. Late on Thursday and Friday, financials bounced in what traders said were short-covering rallies.

The Dow was helped by Bank of America, which gained 2.5%, and American Express, which climbed 2.3%. Oil components Exxon Mobil and Chevron sank 0.6% and 0.5%, respectively.

The S&P 500-stock index rose 2.86 points, or 0.3%, to 921.23 as its financial sector rose 1.8% and its technology sector rose 1.2%. The Nasdaq Composite Index gained 19.75 points, or 1.1%, to close at 1827.47.

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Smart-phone makers Apple and Palm gained amid signs that more consumers are adopting higher-end phones. But BlackBerry maker Research In Motion fell 4.9% as investors worried that it is facing stiffer competition from Apple, Palm and others. The device maker's earnings jumped last quarter, it reported late on Thursday, but it issued an outlook that disappointed some traders.

Several investors said they were turning their attention to upcoming second-quarter earnings releases, expected to begin in a couple weeks. While economic trends have improved, debate remains about whether company fundamentals have improved as well.

"In order for this to become a real bull market we have to see the earnings that are delivered lead to upward revisions in analysts' estimates and we haven't seen that yet," said Jeff Knight, head of global asset allocation for Putnam Investments.

A slide in crude oil prices, which fell $1.82 to settle at $69.55 a barrel, weighed on energy stocks. Crude has risen amid improved sentiment about the global economy as well as hedging against dollar weakness, though there is debate about whether such sharp gains can be sustained.

Oil prices traded higher early in Friday's session on concerns about turmoil in Iran and in Nigeria, where rebels attacked a pipeline, and stocks were able to post small gains in the morning. But traders said they recently have been bracing for weak energy demand in the U.S. and other oil-consuming nations that remain stuck in recession.

Mr. Knight called the the recent surge for commodities prices move a tactical opportunity to "short the inflation fears many market veterans have touted."

Traders also may have tweaked their books heading into "quadruple witching," the simultaneous expiration of options on individual stocks, index options, single-stock futures and index futures. In the past, it has brought additional volatility to the market, with traders frantically selling or buying shares to deliver against previous bets using futures and options contracts.

But some observers said most of the expected pressure probably occurred in the beginning of the week, when the Dow had a three-day losing streak in which it fell more than 300 points. Thursday and Friday, the market was relatively calm. The Chicago Board Options Exchange Volatilty Index dropped 8% on Friday.

"What we've generally been seeing in this expiration cycle is people rolling over whatever options positions they have," settling the expiring contracts and then taking on similar bets in contracts for the following month, said Allen Greenberg, Chicago-based options chief for brokerage BNY ConvergEx. "They're not necessarily looking for a big new move in either direction."

Dow Gives Backs Last Week's Gains

Dow Turns Positive for 2009 Amid Late Push

PETER A. MCKAY ROB CURRAN KELLY NOLAN

The Dow Jones Industrial Average moved into the black for the year on Friday afternoon as a recent pattern of late-session swings continued.

The Dow industrials, which had flipped into positive territory for the year to date six times this month but failed to close above that mark, rose 28.34 points, or 0.3%, to 8799.26. That was its highest close since Jan. 6 and leaves it up 0.26% for the year to date.

The S&P 500-stock index rose 1.32 point, or 0.1%, to 946.21. It is up 4.8% for the year to date.

Tech stocks came under pressure after National Semiconductor posted a steep loss in its fiscal fourth quarter. Shares of the chip maker slumped by more than 6% and the Nasdaq Composite Index sank 3.57 points, or 0.2%, to 1858.80. It's up 18% so far this year.

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A muddled picture from elections in Iran added to the session's late volatility. Reformist former premier Mir Hossein Mousavi personally claimed that he had won a landslide victory in Iran's presidential election on Friday, but the state news agency reported that incumbent Mahmoud Ahmadinejad had prevailed.

"That's just enough to make some with a bearish tilt a little more nervous before the weekend," said Dan Peirce, a portfolio manager with State Street Global Advisors, noting that it will take some time for the final result of the election to become clear.

Midday Friday, a malfunction of three computer servers at the New York Stock Exchange caused the suspension of floor trading in about 200 stocks, though they have since reopened for trading. Floor trader Ted Weisberg, of brokerage Seaport Securities, said the computer glitch was a minimal headache for his firm.

"This is the downside of computers no matter where you are. Computers break. But then they replace them, and you move on," he said.

Mr. Weisberg said the Dow's recent run within reach of the 9000 level seems to have emboldened sellers. "The Dow seems to be driving everything right now," with weakness spilling into other indexes when it retreats, spooking retail investors, said Mr. Weisberg.

Treasury prices climbed despite a report in The Wall Street Journal that the Federal Reserve is unlikely to significantly boost its purchases of Treasury and mortgage-backed paper when its interest-rate committee meets June 23 and 24. The two-year note was up 3/32, yielding 1.276%. The 10-year note rose 19/32 to yield 3.790%.

For the seventh time this month, the Dow traded above its closing level from last year and finally closed in a new high for 2009. Not all news was good, however, with commodities closing lower. Dave Kansas reports after the bell.

The dollar rallied on hopes that the Fed would essentially be protecting the greenback's value by refraining from Treasury purchases that would drive rates down.

"You can see right now, we're at this interesting fork in the road," said Paresh Upadhyaya, currency portfolio manager at Putnam Investments, which has bet against both the dollar and the euro because of the lingering weakness in those denominations' home economies.

The dollar's rally pushed down the prices of raw materials. Oil futures, which have been hitting new highs for the year in recent sessions, fell 64 cents to $72.04 a barrel in New York.

Shares of major commodity producers suffered as a result. U.S. Steel fell 5.9%. Despite those pullbacks, some money managers are optimistic about the prospects for a renewed rally in the broader market led by commodity-focused stocks.

"We're talking here about a sector that allows you to participate not only in inflation here in the U.S. but also the major emerging-market economies," like China and India, said James D. Baer, managing member of Uhlmann Price Securities in Chicago. "As they continue to industrialize, they're going to have a long-term need for commodities."

Dow Tries to Claw Into Black

PETER A. MCKAY GEOFFREY ROGOW

The Dow Jones Industrial Average spent most of the session flirting with breaking even for the year to date amid some volatile trading in the aftermath of a better-than-expected report on employment.

The Dow industrials were up 25 points with less than 30 minutes left in regular trading, as gains for manufacturing stocks like Boeing and Caterpillar were offset by drops for DuPont, which suffered an analyst downgrade, and Merck, which is shelving plans to seek approval for a new heart-failure drug this year.

The blue-chip measure has pushed into positive territory several times in the session, only to turned back, but appeared on course to close above its level on 2008's last trading day. The Dow was about 0.3% above its 2008 close.

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The S&P 500-stock index, which is up 4% for the year so far, was flat, as most of its sectors sank. Its energy and basic-materials sectors were especially weak, tumbling about 0.8% and 1.1%, respectively.

Energy stocks fell as crude-oil futures slipped after surging for much of the week. The front-month crude futures contract settled at $68.44 a barrel, down 37 cents, or 0.5%. For the week, crude rose 3.2%, or $2.13 a barrel.

"I think it's a little premature to get excited about the run in commodities as it's kind of a relief rally," said Stephen Lieber, chief investment officer for Alpine Dynamic Balance Fund. "There are people hopped up on the notion China and emerging markets will reinflate the world economy."

The Nasdaq Composite Index was up 0.1%. It has jumped more than 17% on the year.

Markets were volatile after the Labor Department said nonfarm payrolls shed 345,000 workers in May, well below Wall Street's expectation for a decline of 525,000 jobs and the smallest monthly job loss since September 2008, when Lehman Brothers collapsed. The smaller than-expected decline was met with a burst of enthusiasm in early trading, and stocks rallied sharply after the opening bell.

But the report's details provided little reason to hope that businesses will soon begin hiring more workers. The unemployment rate jumped half a percentage point to 9.4%, the highest since August 1983. That rise helped to damp traders' initial euphoria. Economists at BNP Paribas wrote to clients that the data show a job market "gripped in a very severe recession."

Scott Pollack

"Intuitively, it's hard for people to wrap their brains around this idea that one number beat expectations, the other missed, and what does all that mean," said market analyst Art Hogan, of Jefferies & Co. "I think we're getting back to the point, though, where the market is reacting about as it should," to the report's fundamental implications for the economy.

Some traders were also nagged by worries that inflation pressures may arise earlier than expected, causing the Federal Reserve to tighten rates before a firm growth trend is in place in the U.S. economy, said Anthony Conroy, head trader at BNY ConvergEx, a New York brokerage.

Treasury prices dropped, pushing yields up. The 10-year Treasury note was off 30/32, yielding 3.834%.

In a speech on Friday, Janet Yellen, president of the Fed's San Francisco branch, said it would be "disconcerting" if the recent increase in Treasury and mortgage yields has been fueled by inflation fears. The Fed has been buying longer-dated Treasury issues lately in order to prevent those yields from getting out of hand and derailing a broader economic recovery.

Strategist Jeffrey Kleintop, chief market strategist at LPL Financial Services in Boston, said that investors' fears of renewed inflation have been apparent in the relatively weak performance of financial stocks, which would suffer if the Fed tightened rates at some point to rein in growth in consumer prices.

State Street was off almost 4%, U.S. Bancorp was off more than 3%, and Zions Bancorp was down about 2%. But Fifth Third Bancorp bucked the trend, rising almost 2%. The KBW Banks Index was down 1.6%.

Obama's Radicalism Is Killing the Dow

A financial crisis is the worst time to change the foundations of American capitalism.

MICHAEL J. BOSKIN

It's hard not to see the continued sell-off on Wall Street and the growing fear on Main Street as a product, at least in part, of the realization that our new president's policies are designed to radically re-engineer the market-based U.S. economy, not just mitigate the recession and financial crisis.

Martin Kozlowski

The illusion that Barack Obama will lead from the economic center has quickly come to an end. Instead of combining the best policies of past Democratic presidents -- John Kennedy on taxes, Bill Clinton on welfare reform and a balanced budget, for instance -- President Obama is returning to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense drawdown.

Mr. Obama's $3.6 trillion budget blueprint, by his own admission, redefines the role of government in our economy and society. The budget more than doubles the national debt held by the public, adding more to the debt than all previous presidents -- from George Washington to George W. Bush -- combined. It reduces defense spending to a level not sustained since the dangerous days before World War II, while increasing nondefense spending (relative to GDP) to the highest level in U.S. history. And it would raise taxes to historically high levels (again, relative to GDP). And all of this before addressing the impending explosion in Social Security and Medicare costs.

To be fair, specific parts of the president's budget are admirable and deserve support: increased means-testing in agriculture and medical payments; permanent indexing of the alternative minimum tax and other tax reductions; recognizing the need for further financial rescue and likely losses thereon; and bringing spending into the budget that was previously in supplemental appropriations, such as funding for the wars in Iraq and Afghanistan.

The specific problems, however, far outweigh the positives. First are the quite optimistic forecasts, despite the higher taxes and government micromanagement that will harm the economy. The budget projects a much shallower recession and stronger recovery than private forecasters or the nonpartisan Congressional Budget Office are projecting. It implies a vast amount of additional spending and higher taxes, above and beyond even these record levels. For example, it calls for a down payment on universal health care, with the additional "resources" needed "TBD" (to be determined).

Mr. Obama has bravely said he will deal with the projected deficits in Medicare and Social Security. While reform of these programs is vital, the president has shown little interest in reining in the growth of real spending per beneficiary, and he has rejected increasing the retirement age. Instead, he's proposed additional taxes on earnings above the current payroll tax cap of $106,800 -- a bad policy that would raise marginal tax rates still further and barely dent the long-run deficit.

Increasing the top tax rates on earnings to 39.6% and on capital gains and dividends to 20% will reduce incentives for our most productive citizens and small businesses to work, save and invest -- with effective rates higher still because of restrictions on itemized deductions and raising the Social Security cap. As every economics student learns, high marginal rates distort economic decisions, the damage from which rises with the square of the rates (doubling the rates quadruples the harm). The president claims he is only hitting 2% of the population, but many more will at some point be in these brackets.

As for energy policy, the president's cap-and-trade plan for CO2 would ensnare a vast network of covered sources, opening up countless opportunities for political manipulation, bureaucracy, or worse. It would likely exacerbate volatility in energy prices, as permit prices soar in booms and collapse in busts. The European emissions trading system has been a dismal failure. A direct, transparent carbon tax would be far better.

Moreover, the president's energy proposals radically underestimate the time frame for bringing alternatives plausibly to scale. His own Energy Department estimates we will need a lot more oil and gas in the meantime, necessitating $11 trillion in capital investment to avoid permanently higher prices.

The president proposes a large defense drawdown to pay for exploding nondefense outlays -- similar to those of Presidents Carter and Clinton -- which were widely perceived by both Republicans and Democrats as having gone too far, leaving large holes in our military. We paid a high price for those mistakes and should not repeat them.

The president's proposed limitations on the value of itemized deductions for those in the top tax brackets would clobber itemized charitable contributions, half of which are by those at the top. This change effectively increases the cost to the donor by roughly 20% (to just over 72 cents from 60 cents per dollar donated). Estimates of the responsiveness of giving to after-tax prices range from a bit above to a little below proportionate, so reductions in giving will be large and permanent, even after the recession ends and the financial markets rebound.

A similar effect will exacerbate tax flight from states like California and New York, which rely on steeply progressive income taxes collecting a large fraction of revenue from a small fraction of their residents. This attack on decentralization permeates the budget -- e.g., killing the private fee-for-service Medicare option -- and will curtail the experimentation, innovation and competition that provide a road map to greater effectiveness.

The pervasive government subsidies and mandates -- in health, pharmaceuticals, energy and the like -- will do a poor job of picking winners and losers (ask the Japanese or Europeans) and will be difficult to unwind as recipients lobby for continuation and expansion. Expanding the scale and scope of government largess means that more and more of our best entrepreneurs, managers and workers will spend their time and talent chasing handouts subject to bureaucratic diktats, not the marketplace needs and wants of consumers.

Our competitors have lower corporate tax rates and tax only domestic earnings, yet the budget seeks to restrict deferral of taxes on overseas earnings, arguing it drives jobs overseas. But the academic research (most notably by Mihir Desai, C. Fritz Foley and James Hines Jr.) reveals the opposite: American firms' overseas investments strengthen their domestic operations and employee compensation.

New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president's budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government.

From the poorly designed stimulus bill and vague new financial rescue plan, to the enormous expansion of government spending, taxes and debt somehow permanently strengthening economic growth, the assumptions underlying the president's economic program seem bereft of rigorous analysis and a careful reading of history.

Unfortunately, our history suggests new government programs, however noble the intent, more often wind up delivering less, more slowly, at far higher cost than projected, with potentially damaging unintended consequences. The most recent case, of course, was the government's meddling in the housing market to bring home ownership to low-income families, which became a prime cause of the current economic and financial disaster.

On the growth effects of a large expansion of government, the European social welfare states present a window on our potential future: standards of living permanently 30% lower than ours. Rounding off perceived rough edges of our economic system may well be called for, but a major, perhaps irreversible, step toward a European-style social welfare state with its concomitant long-run economic stagnation is not.

Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.

Dow Could Hit 4,000