Thursday's Market: Microsoft Ruling Adds Fuel to Fed Rally

(Updated from 4:34 p.m. EDT)

Investors tipped their hats to a court decision that overturned the Microsoft (MSFT Quote) breakup ruling today and assented to a 25 basis-point reduction in short-term interest rates yesterday.

The major indices rose sharply today, but finished off their highest levels of the session. The Dow Jones Industrial Average closed up 131.37 points, or 1.3%, to 10566.21, while the Nasdaq Composite ended ahead 50.7 points, or 2.4%, to 2125.4. The broad S&P 500 Index finished higher by 15.13 points, or 1.3%, to 1226.20.

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Just after 11:30 a.m. EDT, the U.S. Court of Appeals for the District of Columbia set aside a lower court's decision to break up Microsoft (MSFT Quote) as a remedy in the government's antitrust case against the software giant. Trading of Microsoft shares was halted until 2:50 p.m. EDT. They closed up 2.3% to $72.74, below where they were trading before the legal decision.

In its decision, the court sent the Microsoft case back to a lower court and removed U.S. District Judge Thomas Penfield Jackson from the case. In a unanimous 7-0 ruling, it also reversed Jackson's findings that Microsoft engaged in monopolistic behavior by bundling its Internet Explorer browser to its Windows operating system. But the court upheld the finding that Microsoft illegally defended its Windows operating system monopoly.

Market analysts said the market's pullback in late-afternoon trading had to do with the fact that the news was not overwhelming. "The news paves the way for a settlement, but the case is certainly not over," said Peter Blatchford, a stock trader at Miller Tabak.

But Blatchford was optimistic about the decision's impact on the broader market. "I think it instills confidence in the tech market, whether you believe in a turnaround in corporate profits [or not]," said Blatchford, a stock trader at Miller Tabak. "A hurdle has been lifted; it's a reason for happiness."

Other traders said the decision seemed like an isolated event. "It gives investors something else to think about," said Jim Volk, co-head of institutional trading at D.A. Davidson. "But it doesn't change much." (Since the beginning of the year, shares of Microsoft are up 67%.)

Market observers had been expecting a ruling on Microsoft's appeal in the case for months, and most predicted that at least a portion of Jackson's findings would be reversed. The court setting aside Jackson's breakup remedy was among the most widely expected outcomes.

Increasingly, investors are looking for signs that the Fed's aggressive rate-cutting is taking hold, but they haven't gotten many indications of that yet from corporate America.

"People are trying to lull themselves into thinking the economy is OK," Volk said. "But there is no earnings visibility."

In the latest tech warning, PMC Sierra (PMCS Quote) warned that its second-quarter loss would be wider than expected.

"The market continues to tiptoe through a minefield of earnings warnings," said Bryan Piskorowski, market commentator for Prudential Securities. "The fact that the market is trading higher means that the earnings news is discounted." Shares of PMC Sierra were lately moving up 3.8% to $30.25 on Instinet.

Yesterday's move by the Federal Open Market Committee brought short-term interest rates to 3.75%, their lowest level since May 1994. In its statement announcing the rate cut, the Fed said the economy is still at risk for weakness, leaving open the possibility for more cuts. But the Fed also signaled that it could be near the end of its easing cycle.

Investors got a mixed picture this morning from the employment front. The government reported that initial jobless claims fell last week, but the number of people on the unemployment roster is still growing. Initial claims for the week ended June 23 fell to 388,000 from 404,000. Economists had expected claims to rise to 412,000.

Once again, the ongoing $41.2 billion General Electric (GE Quote) takeover of Honeywell (HON Quote) made headlines today.

In a last-minute effort to win the approval of European regulators, GE said it would divest 19.9% of its aircraft-leasing operation, GE Capital Aviation Services. Honeywell rose 3.2% to $38.20, because it revives the chances the deal could happen, while GE gained 1.3% to $48.87.

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Market Internals

Market Internals
Exchange	Advancers	Decliners	New Highs	New Lows	Volume
New York Stock Exchange	1,882	1,213	148	40	1.3 billion
Nasdaq Stock Market	2,319	1,396	148	49	1.9 billion

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Most Active Stocks

NYSE Most Actives
Company	Shares Traded
General Electric (GE Quote)	23.6 million shares
Honeywell (HON Quote)	22.6 million shares
Schering-Plough (SGP Quote)	21.4 million shares

Nasdaq Most Actives
Company	Shares Traded
Oracle (ORCL Quote)	71.4 million shares
Cisco (CSCO Quote)	69.6 million shares
Microsoft (MSFT Quote)	63.7 million shares

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Major European indices, which were down earlier in the day, finished up. London's FTSE 100 gained 30.5 to 5638.4. The Paris CAC-40 tacked on 75.84 points to 5133.6. Frankfurt's Xetra Dax gained 138.7 points to 5971.8.

Tech stocks suffered after mobile giant Nokia (NOK Quote) said it would fire as many as 1,000 people at its network unit as demand slows.

Asian markets closed down. Tokyo's Nikkei 225 fell 1.16%, or 149.10 points, to 12,679.88. Hong Kong's Hang Seng dropped to 12827.82 after losing 1.36%, or 176.39.

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