Stocks in U.S. Fall for a Second Day on Concern Interest Rates Will Rise
By Phil Serafino
U.S. Stocks Fall a Second Day on Concern Rates Will Rise
New York, July 30 (Bloomberg) -- U.S. stocks fell, ending a
second week of losses, on concern inflation will pick up and
prompt the Federal Reserve to raise interest rates. General
Motors Corp. and Ford Motor Co. slumped, making auto stocks the
biggest losers in the Standard & Poor's 500 Index.
''Ultimately earnings drive stock performance, but in the
short term stocks have proven to be more dependent on the
direction of interest rates,'' said Charles Crane, chief market
strategist at Key Asset Management Inc., which oversees $75
billion.
The Dow Jones Industrial Average fell 136.14, or 1.3
percent, to 10,655.15, led by American Express Co. The S&P 500
lost 12.31, or 0.9 percent, to 1328.72. The Nasdaq Composite
Index dropped 1.52, or 0.1 percent, to 2638.49.
American Express
Economic reports this week heightened concern the Fed will
raise interest rates soon. Higher rates reduce demand for loans
and cut into the value of bonds owned by banks and brokers. J.P.
Morgan & Co. gets 40 percent of its revenue from trading stocks
and bonds, and its shares dropped 2 3/4 to 127 7/8.
American Express, which derived one third of its profit in
the latest quarter from money management and securities
brokerage, lost 6 13/16 to 131 3/4.
Some 721 million shares changed hands on the Big Board,
below the three-month daily average of 747 million.
The 30-stock Dow average ended July with a loss of 2.8
percent, the S&P 500 3.1 percent and the Nasdaq 1.8 percent. The
declines came in the last two weeks since all three set record
highs July 16.
For the week, the Dow industrials lost 2.3 percent, the S&P
500 2.1 percent and the Nasdaq 2 percent. Stocks posted a second
consecutive weekly loss for the first time since the last two
weeks of May.
Two economic reports indicated stronger-than-expected growth
today, bolstering the view the Fed may raise short-term interest
rates at its Aug. 24 meeting. The Chicago branch of the National
Association of Purchasing Management said its monthly index of
regional manufacturing unexpectedly rose in June, and the
Commerce Department said new home sales increased faster than
expected last month.
On Watch
The yield on the 30-year Treasury bond rose 4 basis points
to 6.11 percent after briefly reaching 6.13 percent.
''We're seeing a shift from earnings to Fed watch,'' said
Bryan Piskorowski, a market strategist at Prudential Securities
Inc. ''Every economic indicator will be under the microscope from
here on.''
Stocks usually fall when rates rise as investors demand
higher earnings to justify the risk of owning stocks.
Stocks initially rallied today on reports of better-than-
expected profits from Lam Research Corp. and BMC Software Inc.
and on optimism that declines yesterday were overdone. Those
gains fizzled as investors pushed bond yields to a one-month
high.
''People are willing to sell any rally that might show up,''
said Bill Schneider, head of listed stock trading at Warburg
Dillon Read LLC in Stamford, Connecticut. ''In the absence of any
real news, people are going to sell off.''
Lam Research
Lam Research rose 9 to 55 3/8. The maker of equipment used
to build circuits on computer chips said net income for the
fiscal fourth quarter was 28 cents a share, beating the 12-cent
average estimate of analysts surveyed by First Call Corp.
BMC Software gained 5 1/2 to 53 7/8 The company said its
fiscal first-quarter profit rose 34 percent, more than expected,
on higher corporate purchases of its software that helps computer
systems manage data more efficiently.
''The stock is cheap for the growth you're getting,'' said
Christian Koch, senior technology analyst at Fifth Third
Bancorp., which manages $20 billion and owns BMC shares. BMC
sells for about 25 times this fiscal year's expected earnings per
share, according to First Call, yet profits are forecast to grow
25 percent a year or more.
Investors snapped up oil, oilfield service and natural gas
stocks amid increasing confidence that economic growth around the
world is picking up, lifting demand for energy.
S&P Earnings
Companies in the S&P 500 are expected to post a 14.7 percent
growth in profit from operations for the second quarter,
according to First Call, the best growth since the first quarter
of 1997.
Investors shifted money out relatively richly valued large
stocks and into small- and mid-sized companies, which are much
cheaper. The S&P MidCap 400 rose 1.83 to 407.46 and the Russell
2000 gained 3.19 to 444.77.
The companies in the S&P 500 sell for 24.4 times the
expected earnings for the next four quarters, near the highest in
50 years, according to First Call, which tracks analysts'
earnings forecasts. The companies in the S&P MidCap 400 Index, in
contrast, sells for 18.5 times expected earnings, the firm said.
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Top Financial News
Fri, 30 Jul 1999, 8:01pm EDT
U.S. Personal Incomes, New Home Sales Rise More Than Expected in June
By Noam Neusner, Vincent Del Giudice and Liz Enochs
U.S. Economy: Rising Incomes in June Boost Home Sales (Update2)
(Closes markets.)
Washington, July 30 (Bloomberg) -- U.S. personal incomes
rose more than expected and new homes sold at a stepped-up pace
in June, signs of economic strength that renewed investors'
inflation concerns.
Incomes rose 0.7 percent in June, after growing 0.3 percent
in May, the Commerce Department said. Spending rose 0.3 percent
in June, following a 0.6 percent gain in May. New home sales rose
3.1 percent to a seasonally adjusted annual rate of 929,000,
keeping them on track to beat last year's record of 886,000.
Bonds fell as rising incomes and still-high consumer
confidence heightened investor fears that Federal Reserve policy-
makers will raise interest rates to keep inflation at bay. Such a
move could cool consumer demand, which has surged amid the best
job market in three decades.
''Certainly the economy is helping drive our business,''
said Richard Ruegger, chief financial officer at Playcore Inc.,
one of the nation's largest makers of playground equipment.
Janesville, Wisconsin-based Playcore said second-quarter earnings
rose 30 percent, helped by sales to schools and homes.
The economy is ''on fire,'' said Tom Schwartzbeck, president
of Duron Inc., a paint company based in Beltsville, Maryland, of
the market for construction supplies.
Consumer confidence shined through in the University of
Michigan's national index of consumer sentiment for July.
Although it fell to 106 this month from 107.3 in June, it has
remained above 100 for nine consecutive months.
Consumer spending rose at a 4 percent annual rate in the
second quarter of this year, the Commerce Department said in its
report yesterday on gross domestic product. Spending has risen at
that pace, or better, for the last 18 months, the longest such
stretch in more than a quarter century.
Bonds Fall, Stocks Mixed
Still, continued economic vigor, combined with signs of
higher wages and prices, fueled expectations that central bankers
will push interest rates higher -- perhaps as early as August.
The benchmark 30-year U.S. Treasury bond fell 3/8, pushing
up its yield 3 basis to 6.10 percent. The Dow Jones Industrial
Average fell 136.14, or 1.3 percent, to 10,655.15, while the
Nasdaq Composite Index dropped 1.52, or 0.1 percent, to 2638.49.
Manufacturing businesses also gave off signs of strength.
The National Association of Purchasing Management - Chicago's
regional factory index rose to 60.5 this month from 60 in June.
June's increase in personal incomes was the largest since a
0.9 percent gain in November 1998. The monthly increase in
spending, restrained by a seasonal pause in the growth of auto
sales, was the smallest since last November, the Commerce
Department said.
Farmers were among those to see an income boost in today's
report from Commerce. Farm proprietors' income rose $14.5 billion
after a previous decline of $3.3 billion. Government subsidy
checks accounted for the rise. Without the farmer payments,
incomes probably rose 0.5 percent.
Wages Rising
The report follows others suggesting increased spending
power. Yesterday, the Labor Department reported that wages,
salaries and benefits grew 1.1 percent in the second quarter, the
largest rise in employment costs since 1991.
Earlier this month, the department reported that workers'
average weekly earnings rose 0.7 percent in June after adjusting
for inflation. It was the largest gain in 17 months and more than
double the 0.3 percent increase in May.
While those gains trouble investors who don't want inflation
creeping into the nation's economy, they're good for companies
dependent on consumers.
Sears, Roebuck & Co. reported double-digit sales gains in
air-conditioners in June. Teen clothing retailer Gadzooks Inc.
said demand for swimsuits drove its 11 percent sales gain for the
five weeks that ended July 3.
Home Sales Gain
Concerns about what action the Fed may take has led to
higher interest rates on mortgages as well, which some economists
say is having a short-term positive impact on home sales. June's
increase followed a 4 percent decline in May.
Mortgage rates are surging. The average rate on a 30-year
fixed loan rose to more than 7.6 percent in July from less than
7.2 percent in May, according to No. 2 mortgage buyer Freddie
Mac. Moreover, mortgage applications have declined in six of the
last eight weeks, the Mortgage Bankers Association reported. That
suggests new home sales won't stay at the higher level.
Current sales reflect an earlier increase in mortgage
applications, said Ian Shepherdson, chief U.S. economist at High
Frequency Economics in Valhalla, New York. ''When these people
have bought their homes, activity will drop sharply, but it will
not happen overnight,'' he said.
For the housing sector, which accounts for 14 percent of the
nation's economy, such a decline would follow a record-setting
growth spurt. Sales of previously owned homes set a record in
June of 5.53 million at an annual rate, according to the National
Association of Realtors.
Builders, Suppliers
The housing market's strength is leading to extra profits to
home builders such as Pulte Corp., retailers such as Wal-Mart
Stores Inc. and building products companies, such as USG Corp.,
the world's largest maker of gypsum wallboard.
Second-quarter earnings at Chicago-based USG rose 27
percent. And Shaw Industries Inc., the No. 1 U.S. carpet maker,
said its fiscal second-quarter earnings nearly tripled.
The six largest builders have all exceeded analysts'
earnings estimates for the past six quarters.
Pulte, the largest U.S. home builder, said second-quarter
earnings rose 57 percent compared with the year-earlier period.
Earnings at Los Angeles-based Kaufman & Broad Home Corp., the
second-largest builder, rose by two-thirds for the quarter ended
May 31.
''Orders are strong across the board,'' said Bruce Karatz,
Kaufman & Broad's chairman and chief executive, in an earnings
statement. |
