January 29, 2008

Wall Street edges up on earnings

US stocks advanced again on Tuesday as some better-than-expected corporate earnings and a surprising jump in durable goods orders helped boost fragile sentiment on Wall Street.

Equities ploughed a narrower trading range than in recent days as investors awaited Wednesday's Federal Reserve Open Market Committee decision on interest rates.

Traders found strength in telecommunications, homebuilders and financial companies, while transport stocks became one of the few sectors to move into positive territory for the year. However the technology again lagged the market as concerns about growth prospects continued.

The S&P500 closed up 0.6 per cent at 1,362.30. The Dow Jones Industrial Average rose 0.8 per cent to 12,480.30 while the Nasdaq Composite gained only 0.4 per cent to 2,358.06.

Many analysts are cautious on the near-term outlook for stocks amid fears of a US recession, further writedowns in the financial sector and continued uncertainty surrounding bond insurers.

"We are still to be convinced that the strategic case for equities has improved sufficiently," said David Shairp, global strategist at JPMorgan Asset Management. In order to make a stronger case, Mr Shairp said the market needed to see "central banks ease, the banking system recapitalises itself, equity valuations are compelling and technical indicators are supportive".

But others have pointed to signs of improvement, with the S&P avoiding late-session sell-offs in four of the past five trading days.

"The market has shown a little bit of stability over the last few sessions," Richard Sparks, senior equities analyst at Schaeffer's Investment Research, said. "The Fed holds a big wild card - they have the power to make or break the market."

In spite of delivering a 75 basis point cut last week, the Fed is expected to continue easing rates on Wednesday with the futures market pricing in a 72 per cent likelihood of a 50bp cut. Traders have warned that any deviation from this line could spark another sell-off in equity markets.

Tuesday's economic news was dominated by a larger-than-expected rise in durable goods orders, which provided solace to investors fearing a manufacturing slump. Orders for big ticket items rose 5.2 per cent in December against a forecast gain of 2.1 per cent.

Among Dow components benefiting from the improved outlook were Boeing (NYSE:BA), up 4.3 per cent at $80.96, and Caterpillar (NYSE:CAT), up 1.1 per cent at $68.99.

"There is no doubting the strength of the December data but there is plenty of doubting how sustainable this is and what this says about future trends," Alan Ruskin, chief international strategist at RBS Greenwich Capital, said.

Other analysts were more upbeat. TJ Marta, fixed income strategist at RBC Capital Markets said: "We are witnessing the positive impact of the cheap US dollar on the economy, and the reason we only believe the economy will flirt with recession rather than falling into a full fledged one."

There was little sign of optimism for US consumers after the S&P/Case-Shiller 10-city home price index fell a record 8.4 per cent in the year during November, an 11th straight monthly decline. Meanwhile the latest reading of the Conference Board's US consumer confidence index fell from an upwardly revised 90.6 to 87.9 in January, slightly better than expected.

Earnings news was more upbeat, with 20 of 26 S&P500 companies reporting results before the close beating estimates.

An exception was Countrywide Financial (NYSE:CFC), which posted a wider-than-expected $422m loss after the mortgage lender set aside $924m to cover rising loan losses. In spite of the loss, the shares rose 6.1 per cent to $6.31 after Bank of America's chief executive said its takeover was a "go".

Also in the financial sector, American Express (NYSE:AXP), up 0.8 per cent to $47.80, posted a 10 per cent decline in net income as it set aside a $438m charge to cover bad loans.

Meanwhile bond insurers including Ambac Financial, up 16.2 per cent at $12.93 rallied on hopes they may keep their triple-A ratings.

In industrials Dow Chemical (NYSE:DOW)said fourth quarter earnings fell by more than half to $472m as agricultural and energy costs rose sharply. However, the results beat estimates and the shares rose 0.9 per cent to $37.94. .

Technology was among the weakest sectors after VMware, the virtualisation software firm, missed Wall Street's revenue target and its growth outlook disappointed. The shares plunged 33.9 per cent to $54.87.

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