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Stocks Like Fed's New Language

Robert Holmes

Stocks ended higher Tuesday after the Federal Reserve made its first public gesture toward ending the current cycle of interest rate hikes.

The Dow Jones Industrial Average rose 55.95 points, or 0.52%, to 10,823.72, having been essentially flat prior to the Fed meeting. The S&P 500 rose 7 points, 0.56%, to 1267.43, and the Nasdaq Composite gained 4.05 points, or 0.18%, to 2265.

"The market reacted positively to the change in the Fed statement today," said Peter Cardillo, chief market analyst with SW Bach & Co. "The debate now is where the Fed will stop. Tomorrow we can get back to focusing on economic data and oil prices."

The policymaking Federal Open Market Committee raised its federal funds rate by 25 basis points to 4.25%, saying it believes that "possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures." The Fed has raised rates at 13 straight meetings.

Wall Street keyed on the statement that accompanied the decision, and the FOMC didn't disappoint the bulls. The most prominent change in the statement was a revision to the Fed's description of its own stance, which until now it described as "policy accommodation." That phrase was dropped.

In the statement, the Fed went from saying in November that "the committee believes that policy accommodation can be removed at a pace that is likely to be measured" to saying now that "some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance." The Fed will "respond to changes in economic prospects as needed to foster these objectives."

"It is becoming more likely that the Federal Reserve may pause at the 4.50% rate level and may want to prepare the market for this change at least one meeting in advance," said Paul Mendelsohn, chief investment strategist with Windham Financial, said before the decision was announced. Mendelsohn also said he expected to see "fireworks" because the market was anticipating a change in the policy statement.

About 1.77 billion shares traded on the New York Stock Exchange, with advancers beat decliners by a 9-to-7 margin. Trading volume on the Nasdaq was 1.91 billion shares, and eight stocks fell for every seven that rose.

The 10-year Treasury went from down 1/32 in price before the Fed's announcement to up 6/32 afterward, lowering the yield to 4.53%. The dollar firmed against the yen and fell against the euro.

On the economic front, the Commerce Department said retail sales rose 0.3% in November. Excluding automobiles, sales were down 0.3% for the month. Economists expected the headline number to rise 0.4% and for sales excluding autos to increase by 0.1%.

Separately, the Commerce Department said business inventories rose 0.3% in October. Economists expected a 0.5% gain, following a 0.5% increase in September

Energy prices rose, as ConocoPhillips'(COP Quote) $36 billion acquisition of Burlington Resources(BR Quote) sent natural gas futures up 54 cents to $15.38 per million British thermal units. January crude added 7 cents to $61.37 a barrel.

Gold futures closed lower. The February contract, which broke to record highs Monday, finished down $7.40 at $524.10 an ounce.

Aside from Conoco's acquisition, other corporate dramas were playing out at Vodafone(VOD Quote) and Wendy's(WEN Quote).

At Wendy's, Nelson Peltz, the Milken-era corporate raider who ran Triarc(TRY Quote), reportedly is proposing a further restructuring for the fast-food chain, including the complete spinoff of Tim Hortons. Wendy's previously agreed to a partial spinoff of the doughnut-store operator under pressure from other activist hedge funds. Peltz owns a 5.5% stake in Wendy's, according to The New York Times. Wendy's rose $3.63, or 7.1%, to $55.

Vodafone reportedly has made the highest offer in an auction for Turkish mobile phone operator Telsim, outbidding Kuwait's MTC for the company. Vodafone reportedly offered $4.55 billion for Telsim, which has about a quarter of the Turkish cell-phone market. Vodafone lost 57 cents, or 2.5%, to $22.09.

General Motors(GM Quote) was lowered further into junk territory by credit analysts at Standard & Poor's, who warned that a bankruptcy filing might ultimately be the only way for the automaker to cure its ills. GM was lower by 75 cents, or 3.3%, to close at $22.30.

Best Buy(BBY Quote) said its third-quarter earnings rose 11% to $138 million, or 28 cents a share, on a 10% rise in revenue to $7.3 billion. The Thomson First Call consensus was for earnings of 30 cents a share on revenue of $7.34 billion. Shares of Best Buy dropped $5.90, or 11.8%, to $43.94.

Best Buy's loss pressured the S&P Retail index, which still finished higher by 0.3%, thanks to gains of 0.3% in Circuit City(CC Quote) and 1.6% in Wal-Mart(WMT Quote).

By sector, the Amex Oil index rose 0.3% and Philadelphia Oil Service Sector index lost 1.5%. Meanwhile, the Philadelphia Semiconductor Sector index added 0.5%, and the Philadelphia/KBW Bank Sector index was higher by 1.3%.

In other earnings news, Lehman Brothers(LEH Quote) posted fourth-quarter income of $823 million, or $2.76 a share, up from $585 million, or $1.96 a share, a year ago. Revenue jumped 28% to $3.7 billion. Analysts expected earnings of $2.64 a share on revenue of $3.6 billion, according to Thomson First Call. Lehman finished up 33 cents, or 0.3%, to $128.50.

Procter & Gamble(PG Quote) updated its second-quarter outlook, saying it now expects sales growth of 25% to 26% for the quarter, compared with its previous guidance of 23% to 26%. P&G also expects EPS of 68 cents to 69 cents in the second quarter, toward the high end of its previous forecast range of 66 cents to 69 cents. The stock was up $1.60, or 2.8%, to close at $58.51.

Cendant(CD Quote) says weakness in its travel division will lead to lower-than-expected earnings in the company's fourth and first quarters. For the three months ending this month, Cendant expects to earn 23 cents a share, a penny below estimates. Cendant tumbled $1.83, or 10%, to $16.55.

Altria(MO Quote) finished up 2.1% after Goldman Sachs said it expects the Illinois Supreme Court to decertify a ruling that the company's Philip Morris unit led consumers to believe its light cigarettes were less harmful than regular ones. The decision would dismiss the original ruling of $10 billion in damages. Altria rose $1.52 to $74.03.

Among ratings moves, Banc of America downgraded Sirius Satellite Radio(SIRI Quote) to sell from neutral, citing valuation relative to the company's rival XM Satellite Radio(XMSR Quote). Sirius fell 45 cents, or 6%, to $7.01.

Another big call came from Citigroup, which said it expects IBM's(IBM Quote) fourth-quarter, full-year 2006 and 2007 financial results to come in below consensus estimates. IBM was down $2.25, or 2.6%, to close at $83.71.

Overseas markets were mostly higher with London's FTSE 100 up 0.1% to 5507 and Germany's Xetra DAX gaining 0.2% at 5310. In Asia, Japan's Nikkei added 0.3% overnight to 15,779, and Hong Kong's Hang Seng lost 0.3% to 14,943.