U.S. Stocks Are Mixed After Fed Raises Rates; DJIA Falls, Nasdaq Advances
By Nick Olivari
U.S. Stocks Are Mixed After Fed Raises Interest Rates
New York, Aug. 24 (Bloomberg) -- The Dow Jones Industrial
Average fell after the Federal Reserve raised short-term interest
rates a quarter percentage point, as expected. The Nasdaq
Composite Index gained, led by Microsoft Corp. after a court
victory in a copyright dispute.
Stocks swung between gains and losses after the Fed's
announcement at 2:15 p.m. New York time, settling about where
they were before.
The Dow average declined 16.46, or 0.2 percent, to
11,283.30, rebounding from a 105-point drop. The average briefly
touched a second-straight record within minutes of the Fed's
announcement, then tumbled 172 points in 18 minutes, mirroring a
1.7 percent drop in Standard & Poor's 500 futures.
''The market's using the Fed's move as a rationale to do
whatever it wants,'' said Dan Mathisson, head stock trader at
D.E. Shaw Securities. ''It's not economics; it's psychology.
Nothing changed in 10 minutes for us to be up 70 points and then
down 90.''
The Nasdaq rose 32.80, or 1.2 percent, to 2752.37. The S & P
500 gained 3.28, or 0.2 percent, to 1363.50. Four stocks fell for
every three that rose on the New York Stock Exchange.
Some 719 million shares changed hands on the New York stock
Exchange, down from the three-month daily average of 724 million
shares.
Through for Now?
Today's rate increase, the second this year, put the
overnight rate for loans among banks at 5.25 percent. The Fed
signaled it will wait for evidence that inflation is accelerating
in the U.S. before it increases borrowing costs again.
In addition to raising the federal funds rate, the Fed
surprised investors by increasing the discount rate a quarter-
point. ''Raising both of them is a fairly aggressive move, so it
signals they're probably done,'' said Bill O'Hearn, a portfolio
manager at McKinley Capital Management in San Francisco, which
has $2.3 billion under management.
Investors have been focused since June 30, when the Fed
raised the fed funds rate 25 basis points to 5 percent, on
whether more increases were in store. Now, strategists said,
attention will shift to corporate profit growth, which bodes for
higher stock prices -- particularly because investors had built
up cash before the Fed meeting.
Growth in operating earnings for the companies in the S&P
500 is expected to average 21.4 percent in the third quarter, the
best since the first quarter of 1995, according to First
Call/Thomson Financial.
''People are wondering, 'Where are you going to put your
money?' They can put it into a mattress or put it in
securities,'' said Doug Myers, vice president of equity trading
at Wachovia Securities Inc., which manages $18.9 billion in
Charlotte, North Carolina. ''Despite the short-term wild
fluctuations, investors are feeling it's OK to get back into the
water.''
Money market funds -- a place where investors typically set
aside cash for short periods -- have seen huge inflows in recent
weeks. AMG Data estimated that $9.5 billion flowed into money
market funds last week, up from $7.1 billion a week earlier,
according to investment strategist Gail Dudack at Warburg Dillon
Read LLC. Inflows to money market funds averaged $6.1 billion a
week for the four weeks ended Aug. 11.
Movers
Microsoft, the No. 1 software maker, rose 5 3/4 to 92 3/16
and was the most-active U.S. stock after a court victory in a
copyright dispute with rival Sun Microsystems Inc. Sun fell 13/16
to 74.
A U.S. appeals court reversed a November preliminary
injunction blocking Microsoft from using its own version of Sun's
copyrighted computer language software, Java. Microsoft says its
licensing agreement with Sun allows it to modify Java.
Time Warner Inc., the world's largest media company, dropped
4 13/16 to 61 3/8, shaving three-quarters of a point from the S&P
500.
Merrill Lynch & Co. analyst Jessica Reif Cohen cut her 1999
cash-flow estimate for Time Warner because its share of the U.S.
music market is declining. Cohen reduced her estimate to 9
percent to 10 percent growth in cash flow, or earnings before
interest, taxes and amortization, from 13 percent.
Options to sell Time Warner for 55 in December gained 13/16
to 2 1/8 with 5,255 contracts changing hands. Before today's
trades, open interest was reported at 210 contracts on the
December 55 puts.
Oil
Oil producers fell with crude, which suffered its biggest
drop of the month, on news Germany will auction almost 32 million
barrels from its reserves. That followed reports that the Royal
Dutch/Shell Group will restart production at its Odidi flow
stations in Nigeria, adding to global supplies.
Exxon Corp. fell 1 3/16 to 81 5/8, Mobil Corp. slid 1 5/8 to
105 7/16 and Texaco Inc. declined 3/4 to 63 15/16.
BioCryst Pharmaceuticals Inc. rose 9 1/16 to 32 after the
fledgling biotechnology company reported positive results from a
trial of an influenza drug to be marketed by Johnson & Johnson.
Procter & Gamble Co., the largest U.S. maker of household
consumer products, rose 2 to 100 1/4 after being raised to
''attractive'' from ''neutral'' by analyst Andrew Shore at
PaineWebber Inc.
''We believe money could find its way into (consumer
product) over the next several months, as relative earnings
growth should be above average,'' Shore said in a report to
clients. Procter & Gamble has the ''best management'' and ''best
brand portfolio'' of U.S. household consumer products, he said.
The stock could reach 120 within 12 months, he said.
Periphonics Corp. gained 2 1/2 to 27 3/4 after Nortel
Networks Corp., North America's No. 2 phone-equipment maker,
agreed to buy Periphonics for US$436 million in stock to gain
equipment that links voice, data and Internet services. Nortel
fell 1/8 to 43 1/2.
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Treasury Bonds Rise as Investors Applaud Fed's Move to Contain Inflation
By Perri Colley Mckinney and Wes Goodman
U.S. Bonds Rise as Fed Lifts Rates; No More Expected (Update3)
(Updates rates. Adds other pricing information at end.)
New York, Aug. 24 (Bloomberg) -- U.S. bonds rose after the
Federal Reserve, as expected, raised interest rates and signaled
it may not need to do so again soon. The gains pushed yields to
their lowest levels in more than a month.
''This is textbook delivery -- we got the quarter-point
increase and the neutral bias,'' said Mark Hemenetz, who helps
manage $18 billion of bonds at Bank of New York. He bought
corporate bonds in the past few weeks and said the bond market
should ''do better as people see growth and inflation slowing.''
The 30-year bond climbed 23/32, or $7.19 per $1,000 face
amount, to a price of 102 22/32. Its yield fell 5 basis points to
5.93 percent, the lowest level since July 21. Yields on two-year
notes, which are more sensitive to Fed rate policy, dropped 7
basis points to 5.59 percent.
The Fed raised its target for overnight lending between
banks by 25 basis points to 5.25 percent, a move forecast by 29
of the 30 primary dealers authorized to trade directly with the
Fed. Bear, Stearns & Co. didn't expect the increase because it
said inflation -- with consumer prices rising just 2.1 percent in
the 12 months through July -- required no immediate action.
Today's increase is the second in a row for the Fed, which
boosted the target rate a quarter-point at its last meeting on
June 30.
''The Fed is acting, not hesitating'' to keep prices for
goods and services in check, said Paul Van Kampen, one of the
investors for the $4.4 billion at NCM Capital Management Group
Inc. in Durham, North Carolina.
The Fed's vigilance will help push bond yields to as low as
5.25 percent by year-end, he said. At that yield, bonds' losses
for the year would be 0.7 percent, including reinvested interest
payments and price changed. Losses now stand at 8.1 percent.
Neutral Stance
Other investors aren't convinced bonds have a green light to
recoup those losses. While soothed by the Fed's neutral stance
toward rates going forward, the lack of a bias doesn't mean the
Fed is on hold indefinitely. It was neutral going into today's
decision and, since the current economic expansion began in March
1991, it has taken a neutral stance every time it raised rates.
The risk is a real one as long as the economy keeps up its
breakneck expansion. It grew at a 4.1 percent annual pace in the
2nd quarter and a 4 percent pace in the January-March period.
It could take the economy until the first quarter of next
year to slow enough to bring bond yields below 5.75 percent, said
Michael Fields, chief investment officer at AMR Investments in
Fort Worth, Texas. He has added corporate and mortgage-backed
bonds to the $7 billion in fixed-income investments he oversees,
because they offer higher yields than Treasuries.
Below Average Trading
The hesitancy was evident today. At noon in New York,
trading through most major bond brokers was down 46 percent from
the average Tuesday in the third quarter of last year, according
to GovPx Inc., a bond pricing service. By 3 p.m. -- almost an
hour after the Fed's announcement -- trading remained 46 percent
lower.
Compared with the average Tuesday in the past month, trading
was 7.6 percent lower for the day.
The lone economist not predicting a rate increase today was
Wayne Angell, chief economist at Bear Stearns and a former
Federal Reserve governor. ''The Fed has everything going its way
in regard to inflation,'' he said.
Consumer-price inflation is on track this year to be the
third-lowest in more than a decade.
More Treasury Prices
At today's 5.82 percent, U.S. 10-year notes yield 382 basis
points more than the 2.0 percent yield on the most current 10-
year Japanese bond. That yield gap is 11 basis points lower than
a week ago. U.S. debt yields 102 basis points more than the 4.80
percent yield on 10-year German bonds, 1 basis point less than a
week ago.
The basis, which reflects the difference between the current
30-year bond and the September futures contract adjusted for a
conversion factor, rose 9/32 to 372/32, or 11 20/32 points.
Yields on three-month bills fell 1 basis point to 4.97
percent on a bond-equivalent basis. Yields on six-month bills
fell 7 basis points to 5.08 percent, while one-year yields fell 3
basis points to 5.15 percent.
The five-year note rose 3/8 to 101 1/4, with a yield of 5.70
percent. |
