Steve Quayle News Alerts

January 16, 2003
The Wall Street Journal Online

Stocks turned modestly lower Thursday after United Nations inspectors said they discovered empty chemical warheads in Iraq, bringing worries about war once again to the forefront on Wall Street.

Earlier, earnings reports from bellwether companies such as Sears and United Technologies helped the stock market keep its head just above water. The Dow Jones Industrial Average ended down 25.31 at 8697.87, while the Nasdaq composite gave back 15.05, or 1.1%, to 1423.75. Treasurys slipped and the dollar was weaker.

In a surprise that could lift stocks on Friday, Microsoft announced after the close that it would start paying an annual dividend of 16 cents a share and declared a stock split. The company made the announcement in conjunction with its earnings release. For the fiscal second quarter, the software giant just beat per-share estimates, and its revenue climbed to $8.54 billion from $7.74 billion. Its shares edged higher in after-hours trading.

During the trading session, U.N. inspectors on Thursday said they found 11 empty chemical warheads in "excellent" condition at an ammunition storage area where they were inspecting bunkers built in the late 1990s. One more warhead was found that requires further evaluation, according to the statement by Hiro Ueki, the spokesman for U.N. weapons inspectors in Baghdad. Iraq said the warheads were included in their declaration of weapons to the U.N. A U.N. spokesman said the warheads were not included in the declaration.

Gold prices bolted near nearly six-year highs on the news, and the dollar at one point hit a fresh three-year low against the euro.

While earnings news had lifted stocks in the morning, geopolitical issues have remained the biggest wild card in the market since the Sept. 11 terrorist attacks, analysts say. Fears about a possible war with Iraq and nuclear capabilities in North Korea have been keeping a lid on market enthusiasm.

Earlier Thursday, speculation about a potential exile plan for Saddam Hussein that stemmed from a report in Germany's Der Speigel newspaper also helped a rally gain steam.

Given the amount of international uncertainty, the market has held up surprisingly well this year, with a nice rally in the first trading days of the year, followed by a number of somnolent side-to-side days.

But all is not as sleepy as the headline index numbers suggest.

"What's more significant than the events is the market's reaction to the events. What's been fascinating to watch is how resilient this market has been in the face of some negative news," said Barry Ritholtz, chief market strategist at Maxim Group in Woodbury, N.Y.

The market's stay-put performance -- even in the face of bad news like that coming out of Iraq on Thursday -- speaks volumes about Wall Street sentiment, he suggested.

"Instead of downside momentum gaining speed, it peters out. Buyers are using dips to pick up stocks," Mr. Ritholtz said. "That doesn't mean we're not a little overbought on the short-term, which is why these big one-day gains aren't sticking, but this market feels like it's a tightly loaded spring and wants to go higher."

Thursday's earnings calendar was the busiest of the week.

After the closing bell, IBM said its revenue climbed to $23.68 billion from $ 22.14 billion and that per-share operating earnings came in at $1.34, beating estimates. Its shares rose about 1.1% in after-hours trading.

John Joyce, IBM's chief financial officer said that information-technology spending is more stable than in the past, which bodes well for 2003. Mr. Joyce said IBM generated $8 billion in cash in 2002, and ended the year with $5.9 billion in cash, including the $2.1 billion it used to fund its pension plan. As a result of its healthy coffers, Mr. Joyce said the company is looking at different ways to return value to shareholders, which could include increasing its dividend. IBM currently pays a quarterly dividend of 15 cents.

Earlier in the day, defense contractor and manufacturer United Technologies rose 2.8%. The Dow component's fourth-quarter profit soared 54%, to $1.06 a share, beating estimates by two pennies as revenue rose 3.5%. Competitor and Dow component Boeing edged higher.

Sears, Roebuck shares surged 7% after the retailer said its fourth-quarter net income jumped 72%, thanks mainly to a gain from the sale of its remaining stake in an auto-parts retailer. Excluding items, earnings edged up to $2.11 a share, compared with $2.02 a share a year earlier. Revenue in the latest quarter rose 2.4% to $12.52 billion.

Meanwhile, Dow component GM slipped 1.2% after the auto maker said fourth- quarter profit surged fourfold on strong sales as aggressive incentives lured buyers to dealer lots despite the tepid economy.

Dow component McDonald's suffered a 5% setback after the burger giant's new chairman and chief executive officer said it would stick with its controversial Dollar Menu, which analysts say has cut profit margins and ignited furious fast- food price wars. Competitors got caught in the undertow, with Darden Restaurants -- owner of Olive Garden and Red Lobster -- off 1.9% and Yum Brands, owner of fast-food triumvirate KFC, Pizza Hut and Taco Bell, down 2.1%.

In economic news Thursday, the Labor Department said the number of Americans filing first-time applications for unemployment benefits for the week ended Saturday declined by a larger-than-expected 32,000 to a six-week low of 392,000, compared with a drop of 19,000 in the previous week.

The numbers were a pleasant surprise on Wall Street, given that the headline number remained comfortably below the watershed 400,000 mark. A consensus forecast of economists surveyed by Dow Jones Newswires and CNBC had called for claims to increase by 11,000.

Still, a Labor Department spokesman played down the significance of the decline. "Its just a volatile time of the year," he said.

Elsewhere, consumer prices rose 0.1% in December, the Labor Department said early Thursday. Excluding the more volatile food and energy prices, the core measure also rose 0.1%. Both numbers were basically in line with consensus. The fact that prices didn't rise more sharply -- or drop -- was good news for those keeping an eye on the economy. Consumer prices show the effects of deflation or inflation, both of which economists have been watching for as the economic slump lingers. In the current environment, deflation is the more serious concern.

Richard Berner, chief U.S. economist at Morgan Stanley, said consumer prices' inclusion of the cost of services is behind the figure's strength despite the 0.3% decline in core producer prices reported Wednesday.

Recent gains in service prices have balanced out drops in goods prices, which he said are more dependent on the effects of global competition and more cyclical in nature. Stocks pulled back somewhat after the Federal Reserve Bank of Philadelphia said its six-month outlook was darker.

"Manufacturers begin 2003 less optimistic about business growth over the next six months," the Philadelphia Fed said, noting that the future general activity gauge fell to 32.6 in January from 52.2 in December. The report is often seen as a proxy for the broader manufacturing sector.

In major U.S. market action Thursday:

Stocks were lower. On the Big Board, where 1.48 billion shares traded, 1,696 stocks rose and 1,575 fell. On the Nasdaq, where 1.55 billion shares changed hands, 1,850 stocks declined and 1,353 advanced.

Bonds slipped. The 10-year Treasury note edged down about 1/8 point, or $3.75 for each $1,000 invested. The yield, which moves inversely to price, rose to 4.072%. The 30-year bond was off less than 1/8 point to yield 4.970%.

The dollar was weaker. It traded at 117.83 yen, down from 118.13 yen late Wednesday in New York, while the euro rose against the dollar to $1.0617 from $ 1.0551.

Copyright (c) 2002 Dow Jones & Company, Inc.
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