Stocks on the Loose as Tightening Talk Passes

The market is taking in stride the Fed's move to a tightening bias.
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When it's the devil you know, the market heads higher.

That's what it looks like the morning after the

Federal Open Market Committee

moved to a tightening bias. Fears that the Fed would do exactly that had investors watching yesterday's meeting as if they feared a rate hike.

So now the Fed's got a tightening bias. Guess what? It's not the same as a rise in rates. It's an indication that the risks are running toward inflation rather than recession. This is news?

"Even though they changed their bias, that does not necessarily mean they have to follow through," Kevin Flanagan, money market economist at

Morgan Stanley Dean Witter

, said of FOMC members. "A lot can happen that can change Fed thinking."

Bonds are doing better this morning. With hopes of a little stability in the bonds, institutions are beginning to build yen carry trades again. The carry trade takes advantage of the difference between Japanese and U.S. interest rates. Yen are borrowed at a low rate and put in U.S. Treasuries, which have a significantly higher rate of return. This helps both the Treasuries and the dollar.

The strength in bonds has stocks set to open well.

"They look a little better," said Todd Clark, head of listed trading at

Charles Schwab

. But "I'm not sure they'll get carried away."

Clark has been watching the June

S&P 500

futures contract, which has consistently bounced off the 1325 level -- most recently yesterday. "We're at the bottom of the range we've been in and it continues to hold," he said. "Basically as long as it does, the market can stay in shape."

At 9 a.m. EDT, the

S&P 500

futures were up 1, about 5 above fair value and indicating good strength at the open. The 30-year Treasury was up 9/32 to 91 6/32, dropping the yield to 5.88%.

Asian markets reacted badly to the Fed's decision to move to a tightening bias. Tokyo's

Nikkei

fell 250.44, or 1.5%, to 16,128.44 with exporters, dependent on U.S. sales, seeing some of the heaviest losses. Banks took some lumps, too, after the

Nihon Keizai Shimbun

reported that under the new, more rigorous rules set down by the government, the bad loans of the top 15 banks total 20.19 trillion yen (about $160 billion). That's 6.3 trillion yen more than the previous tally.

With the Hong Kong dollar pegged to the greenback, changes in the U.S. rate outlook mean a lot to the Hong Kong economy. Fears that Hong Kong interest rates will have to rise sent the

Hang Seng

down 223.96, or 1.8%, to 12,403.14.

Expectations of a better U.S. open helped European stocks overcome early negativism. In Frankfurt, the

Dax

was up 28.18 to 5183.12. In Paris, the

CAC

was up 32.01 to 4344.75.

London's

FTSE

was basically flat despite a strong performance by its second-largest component,

British Telecom

(BTY)

. BT's fourth-quarter results shone, with the company citing heavy Internet use as a factor.

The FTSE was down 7.1 to 6202.9. BT was up 4.5%.

Wednesday's Wake-Up Watchlist

By

Brian Louis

Staff Reporter

  • Healtheon (HLTH) and privately held WebMD are expected to announce a stock-swap merger valued at about $5.5 billion, which will include major investments by a group of strategic partners, including Microsoft (MSFT) - Get Report, Excite (XCIT) and Intel (INTC) - Get Report, The Wall Street Journal reported.
  • Tyco International (TYC) is buying Raychem (RYC) , an electronics components maker, in a stock and cash deal valued at $2.87 billion. The deal values Raychem at $37 a share. Raychem closed yesterday at 31 1/8. Under terms of the transaction, Tyco will pay Raychem shareholders $1.4 billion in cash and issue 16.1 million Tyco shares.
  • Dell (DELL) - Get Report after the close posted first-quarter earnings of 16 cents a share, in line with the First Call 31-analyst estimate and up from the year-ago 11 cents. TheStreet.com wrote about Dell's earnings in a story last night. In other news (earnings estimates from First Call):
  • Analog Devices (ADI) - Get Report posted fiscal second-quarter earnings of 25 cents a share, excluding a charge, beating the 17-analyst forecast and up from the year-ago 23 cents.
  • Applied Materials (AMAT) - Get Report yesterday reported fiscal second-quarter earnings of 36 cents a share, beating the 25-analyst view of 27 cents but below the year-ago 37 cents. TheStreet.com wrote about the results in a story last night.
  • Consolidated Stores (CNS) - Get Report posted a first-quarter loss of 3 cents a share, narrower than the 15-analyst forecast of a loss of 4 cents but reversing the year-ago earnings of a penny. Meanwhile, Consolidated said it will combine forces with BrainPlay.com to form a new subsidiary, KBToys.com, to operate its kbtoys.com online retail business offering toys, video games, software and videos. Consolidated Stores will own 80% of the new venture while BrainPlay.com will own 20%.
  • Lehman Brothers upgraded J.C. Penney (JCP) - Get Report to buy from outperform.
  • LSI Logic (LSI) - Get Report set a $120 million technology licensing and manufacturing pact with Maylaysia's Silterra, which is a wholly owned unit of Wafer Technology of Malaysia.
  • Lycos (LCOS) after the close set a 2-for-1 stock split and reported a narrower-than-expected loss for its third quarter. The company reported a loss of 2 cents a share before goodwill amortization, a penny narrower than the 19-analyst forecast and narrower than the year-ago loss of 11 cents. Merrill Lynch upgraded Lycos to long-term buy from long-term accumulate. It kept Lycos at a near-term accumulate.
  • Lehman Brothers upgraded SAP (SAP) - Get Report to buy from neutral.
  • Sports Authority (TSA) announced the creation of TheSportsAuthority.com, a joint venture with Global Sports Interactive (GSPT) .
  • Talbots (TLB) reported first-quarter earnings of 62 cents a share, in line with the 13-analyst forecast and up from the year-ago 45 cents.
  • Washington Mutual (WM) - Get Report is buying Long Beach Financial (LBFC) for $15.50 a share. The companies anticipate the $350.4 million deal will close by the end of the third quarter. Long Beach closed Tuesday at 12 5/16.