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Stocks hold steady amid latest earnings

July 24, 2009|Walter Hamilton and Tom Petruno

NEW YORK AND LOS ANGELES — The stock market has been on a tear as investors have become increasingly convinced that the recession is waning despite the highest unemployment in decades and corporate profits that remain severely depressed.

The euphoria intensified Thursday as the Dow Jones industrial average surged above 9,000 to its highest level since November, thanks to encouraging housing data and the latest crop of better-than-expected earnings reports.

The Dow jumped 188.03 points, or 2.1%, to 9,069.29, marking its first close above 9,000 since early January. The Nasdaq composite index, dominated by technology stocks, climbed 2.5% for its 12th consecutive daily advance. The Nasdaq is up a spectacular 25% this year.

A rally driven by companies' second-quarter results was the last thing many stock market professionals expected when companies began reporting numbers for the April-to-June period just over two weeks ago.

More than three-quarters of the companies that have released quarterly earnings so far have topped analyst estimates. Overall earnings are still on track to be down 30% or more from last year's second quarter, but that's a big improvement from the 36% average decline that Wall Street expected before "earnings season" began. And many companies have issued relatively upbeat statements about their prospects for the rest of the year.

Relative to expectations, "earnings have been off the charts, revenue has been pretty solid and [new profit forecasts have] been decent," said Joe Cusick, senior market analyst at OptionsXpress, a Chicago-based brokerage.

As a result, the Dow has shot up 922 points, or 11%, since July 10. The broader Standard & Poor's 500 index is also up 11% since then, and the Nasdaq is up 13%.

On price charts, many stocks have traced patterns that look like rocket launches. One of the more extreme examples: An index of 20 leading biotech stocks is up 24% just this week, fueled by optimism about trial results for Human Genome Sciences Inc.'s drug to treat lupus and by strong earnings at Celgene Corp.

Market bulls say buyers simply have become more confident that the economy will turn up sometime in the second half and figure that if they don't boost stock holdings now, prices may get away from them.

"A lot of people are so far underinvested, they're really behind the eight ball," said Anthony Conroy, head trader at brokerage BNY ConvergEx in New York.

Skeptics, however, say investors may be setting themselves up for a fall if the economy doesn't repair itself nearly as quickly as they expect.

"I think we're approaching way-overbought levels," said Barry Savitz, a senior partner at Greenwich Prime Trading Group in Stamford, Conn.

Lending credence to such pessimism, several bellwether companies, including Microsoft and Amazon.com, released disappointing earnings after the market closed Thursday and their shares tumbled in after-hours trading.

Savitz attributes a good chunk of the recent buying to "short sellers" who had borrowed stock and sold it, expecting prices to drop. As the rally has gained steam, they have been scrambling to buy shares and close out their wrong-way bets.

"People are panicking to get in," he said.

The rally's doubters also contend that the market, to a greater extent than normal, is under the thumb of hyperactive short-term traders who are surfing the wave of a rising market, but who are just as likely to turn around and force stock prices sharply lower once the rally runs out of steam.

"The next move we're looking at is down," said Tom O'Brien, who writes a market newsletter.

But bullishness won the day Thursday as several high-profile companies including EBay and Ford Motor reported better results than expected. EBay shares rose 11% and Ford climbed 9.4%.

Stocks of telecom, financial and raw-material companies -- sectors that prosper in a rising economy -- led the market higher.

Also boosting share prices was news that sales of previously owned homes rose 3.6% in June over May -- more than expected and the third straight monthly improvement. The report signaled a possible thaw in the housing market and helped to relieve worries about debt-strapped consumers not being able to keep up their spending.

Investors appeared willing to brush aside bad news.

United Parcel Service reported disappointing second-quarter earnings and wasn't positive about the next few months.

"We don't have any confidence that either demand or activity is going to pick up substantially" soon, UPS Chief Financial Officer Kurt Kuehn said in a conference call with analysts.

The package-delivery giant is viewed as a key barometer of the economy because it would be among the first to experience any improvement in business activity.

The company's shares fell early in the day but were carried higher by the market's rising tide to end up 2.3%.

Another reminder that all is not well came in Microsoft's report, issued late Thursday, of a 29% drop in earnings. To get back on track the company pledged to do more of what's already ailing the economy: cost cuts.

Sal Arnuk, a principal at Themis Trading in Chatham, N.J., conceded that much of the news on the economy and from major companies had been brighter than anticipated.

But that doesn't make him want to jump into a roaring market.

"Rallies in general end not on bad news but on good news," Arnuk said. "We hope people who get in now have strong stomachs."

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walter.hamilton@latimes.com

tom.petruno@latimes.com

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