What a Week: Indices Rise on Bad News (to Chorus of Derision)

Micron's big loss, the GE-Honeywell nondeal and a slew of warnings couldn't sink the week. Financials shone ahead of Fed meeting.
By Robert Mann ,

SAN FRANCISCO -- Overcoming a mountain of skepticism, a steaming pile of profit warnings and a sharp downturn Friday, major averages ended the week with a positive bias. Yes, you read that correctly: Despite the dour rhetoric and seemingly endless avalanche of bad news, major averages finished the week higher, albeit modestly and mixed.

Micron Technology

(MU) - Get Report

embodied the period. Despite posting a much wider-than-expected loss Thursday evening, the chipmaker's shares rose 1.8% on Friday.

For the week, the

Nasdaq Composite Index

rose 0.3%, despite having traded below 2000 for the first time since mid-April on Monday. The Comp overcame a slew of warnings from tech companies, including

Manugistics

(MANU) - Get Report

Sanmina

(SANM) - Get Report

,

On Semiconductor

(ONNN)

,

Exodus

(EXDS)

,

Tellabs

(TLAB)

, and

Symantec

(SYMC) - Get Report

. Big board-traded tech firms

Solectron

(SLR)

,

Jabil Circuit

(JBL) - Get Report

, and

Iomega

(IOM)

also joined the litany of tech shame.

The

S&P 500

rose 0.9% for the week while the

Dow Jones Industrial Average

shed 0.2%, its weekly gain spoiled by a 1% decline Friday.

In addition to a resilient performance by big-cap tech names, blue-chip averages were aided this week by strong

financial stocks. The group was buoyed by solid earnings results from

Morgan Stanley Dean Witter

(MWD)

,

Lehman Brothers

(LEH)

and

Bear Stearns

(BSC)

, although

Goldman Sachs

(GS) - Get Report

disappointed.

But the S&P and Dow, particularly, were hurt early in the week by European regulators' nixing of the proposed

General Electric

(GE) - Get Report

-

Honeywell

(HON) - Get Report

merger. Additionally, energy stocks tumbled as prices fell -- at least in the futures markets -- and the political debate heated up. The

Federal Energy Regulatory Commission

approved price caps on wholesale electricity sales in the West early in the week.

Heightened tensions in the Middle East helped stem the decline in crude prices on Friday; still the

Amex Oil & Gas Index

fell 2.4% for the week while the

Philadelphia Stock Exchange Oil Service Index

shed 8.6%.

Also on Friday,

Merck

(MRK) - Get Report

issued a

profit warning, sending drug stocks reeling. The

Amex Pharmaceutical Index

shed 3.6% Friday and lost 1.4% for the week.

Some observers expressed consternation that major averages held up fairly well this week in the face of that array of (mainly) bad news.

Micron's rally Friday "just illustrates the fact lots of people are prepared to look across the valley," said Donald Coxe, chairman and chief strategist at

Harris Investment Management

in Chicago. "There is still too much belief we're about to come to the end of bad news, and good news is about to begin."

Micron's revenues fell from $1.55 billion a year ago to $818.3 million in its

just-reported fiscal third quarter. Additionally, the company was forced to take an inventory write down of $260 million, or 40 cents per share.

To some, that meant Micron posted better-than-expected results when the charge is excluded. To Coxe, it again demonstrates the folly of so-called new era thinking, which declared companies such as Micron were in control of their inventories because of "just in time" processes.

Although a

NYSE

-traded stock, Micron is a "perfect example" of how so many tech companies are "awash in inventory," Coxe said. "These companies were built for fast growth and, like a cyclist, have got to keep moving forward or they'll fall over."

Notwithstanding the Comp's decent showing this week, "I do believe by the end of the third quarter these

tech stocks will be palpably lower than they are today," he said, recommending investors use rallies to lighten up on tech or reallocate to stronger names within the group. "I think what we're facing here is a situation where more disappointment will come."

Coxe's views aren't unique, as Friday's action indicated. But contrarian investors can take solace in knowing the market's rally this week was met with skepticism bordering on derision. Indeed, disbelief that any sustainable rally is in the offing continues to be a predominant view among market participants.

Here Comes the Fed

Somewhat obscured by myriad profit warnings was that the stock market's rally this week was underpinned by a solid Treasury market advance, particularly in 10-year and 30-year securities.

Following another big advance for bond prices on Friday, yields on both the benchmark 10-year note and 30-year bond each were down about 11 basis points for the week. Bond yields move in the opposite direction of their price.

The bond market's rally this week reflects that traders are "becoming increasingly convinced the

Federal Reserve

will have to drive the fed funds rate below 3.75%," said Anthony Karydakis, senior financial economist at

Banc One Capital Markets

in Chicago. "The market is increasingly positioning itself for the prospect of additional Fed easing."

The Fed's rate-setting body meets next Tuesday and Wednesday. Fed funds futures are pricing in 100% odds for a 25 basis-point ease and slightly less than 50% odds for a half-point reduction.

Karydakis forecast a quarter-point cut, but acknowledged it's a "relatively close call."

Despite a stronger-than-expected report on the

Index of Leading Economic Indicators

, signs of life in the

Philadelphia Fed's

business outlook survey, and a decline in jobless claims this week, "there's a growing sense the softness in economic activity is turning out to be more pronounced and prolonged than people anticipated," he said. "There's a lack of evidence telling us the economy is turning, and the Fed is increasingly losing patience."

Asked about the apparent inconsistency between Fed officials' repeated comments that a rebound is approaching and the market's anticipation of more easing, Karydakis replied with refreshing candor.

"You shouldn't confuse the Fed's concerns with their public pronouncements because they have a P.R. function to perform," he said, noting Fed officials have been talking about a turnaround since January.

The action this week suggests investors still are taking some comfort in believing the Fed is prepared to act. But the

overriding question remains how long the central bank can maintain its credibility unless the economy and financial markets start producing more concrete improvements.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.

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