Powerful Rally Starting to Make Some Believers

Stocks were feeling no pain at midday after swallowing the weaker-than-expected July

Producer Price Index

whole.

The PPI gained 0.2% in July, against a forecast of 0.3% in the

Reuters

poll. That modest increase came despite a 3.4% jump in gas and oil prices; the core rate, which excludes the food and energy sectors, was flat. Economists had expected a gain of 0.1%.

And investors had no problem grasping the PPI's confirmation that worries about a 50-basis-point rate hike at the

Fed's

Aug. 24 meeting are overblown. The

Dow Jones Industrial Average

was up 167, or 1.6%, to 10,956, led by

American Express

(AXP) - Get Report

, which was happy to entertain the notion that interest rates won't be scaling up at as inexorable a pace as some have been fearing lately.

Broad strength was taking the

Nasdaq Composite Index

up 72, or 2.1%, to 2622. The

S&P 500

was advancing 27, or 2.1%, to 1325, and

TheStreet.com Internet Sector

index was up 17, or 3.5%, to 524. The small-cap

Russell 2000

was up 4, or 1%, to 433.

Notwithstanding the market's notorious faint-heartedness of late, things seemed pretty solid on the upside at midday, with the indices holding their morning gains nicely. "I kind of get the sense that it'll stick for right now, said Tim Grazioso, manager of Nasdaq trading at

Cantor Fitzgerald

. "We'll sustain most of these gains."

But there was little consensus on the larger question of whether the PPI data could help the market find a bottom to its recent declines.

Richard Cripps, chief market strategist at

Legg Mason

in Baltimore, wasn't buying any of it. "The market has a fair amount of technical damage done to it. I don't think this is going to be the kind of day that changes that. We'd need a big, high-volume day, and you're not going to get that on a Friday in August."

Volume was indeed moderate. The

New York Stock Exchange

had traded 427 million shares, while 559 million shares had changed hands on the

Nasdaq Stock Market

.

"No matter what the market does, people will still question the conviction of investors ahead of Aug. 24," Cripps said. "If you want to find inflation, you'll find it in the pipeline numbers. This report won't move any fence sitters." (Cripps was referring to the index's core intermediate index, which rose 0.4% in July, the second big monthly jump in a row. Intermediate prices gained 0.5% in June.)

Others were much more optimistic. Thomas McManus, equity portfolio strategist at

Banc of America Securities

, speculated that this rally could mark a near-term bottom, drawing comparisons to the market's rebound after the May PPI came out in line on June 11. On that day, after sliding since early May, the S&P 500 bottomed out at a close of 1293.64 and started a rally that lasted until, well, the recent slide.

With the help of a good

Consumer Price Index

, McManus says, "the stock market is well-poised to move significantly higher, once it realizes that the Fed won't need to pursue an aggressive series of hikes, as it did in 1994."

The market, however, hasn't yet come to that realization. McManus pointed out that the December

federal funds futures contract has priced in 98% of a 50-basis-point hike. That implies two hikes in the Fed's three remaining meetings this year. "In my view, the market's still too worried about the need for a series of hikes," he said.

It was hard to find a soft sector at midday. Check the sector proxies: The

Morgan Stanley High-Tech 35

index, up 3.3%; the

Philadelphia Stock Exchange/KBW Bank Index

, 3% higher; the

American Stock Exchange Pharmaceutical Index

, up 2.1%; the

Philadelphia Stock Exchange Forest & Paper Products Index

, up 1.3%.

Commodities, those old inflation barometers, alone looked droopy toward midday, with the

Philadelphia Stock Exchange Gold & Silver Index

off 0.5% and the

Philadelphia Stock Exchange Oil Service Index

off 1.3%.

Breadth was looking encouraging. Advancers were topping decliners 1,844 to 975 on the NYSE, where there were 32 new 52-week highs against 102 new lows. In Nasdaq action, advancers were beating decliners 2,259 to 1,271, with 65 new highs and 39 new lows.

Friday's Midday Watchlist

By Tara Murphy
Staff Reporter

Lucent Technologies

(LU)

was up 2 1/8 to 65 7/8 after it said it has forged an agreement to buy privately held

Xedia

for about $246 million in stock, increasing its presence in the data networking market. Xedia manufactures routers for virtual private networking services. With help from Xedia, Lucent would heighten its data networking capability, a weak spot for the number one telecommunications equipment maker.

Xedia's customer list includes

MCI WorldCom

(WCOM)

,

PSINet

(PSIX)

, and

Sprint

(FON)

. Lucent expects the deal to be inked by the end of the fiscal quarter and said it will not affect fiscal 2000 earnings.

Mergers, acquisitions and joint ventures

Disney

(DIS) - Get Report

was up 1 to 27 1/8 on a report that it may sell its

Fairchild Publications

magazine division, which includes

W

,

Women's Wear Daily

,

Los Angeles

and

Jane

magazines, as well as many trade publications,

The New York Times

reported, citing execs involved in the deal. There are two bidders for the titles:

Conde Nast Publications

and

Hearst Magazines

. S.I. Newhouse Jr., the chairman of Conde Nast, has offered $650 million for the Fairchild group, the

Times

reported, citing the Disney exec.

Falcon Building Products

is selling its air power tools division,

DeVilbiss Air Power

, to

Pentair

(PNR) - Get Report

for $460 million. Pentair was up 1/2 to 41 1/2.

Two top execs of a proposed three-way aluminum merger refused to rule out a potential counterbid for

Reynolds Metals

(RLM) - Get Report

, up 1/2 to 67, for which

Alcoa

(AA) - Get Report

bid earlier this week,

Reuters

reported. Shares of Alcoa dropped 9/16 to 67 3/16 on the news. The execs were from Canada's

Alcan

(AL) - Get Report

, which was off 7/16 to 35 1/8 and France's

Pechiney

(PY) - Get Report

, also down, 5/8 to 30 1/2. Alcan, Pechiney and

algroup

earlier this week set a three-way merger.

Parker Drilling

(PKD) - Get Report

was down 1/8 to 4 5/8 after it announced plans to sell 13 land-based drilling rigs to

Unit

(UNT) - Get Report

. The $48 million transaction is Parker's way out of U.S. onshore oil and gas drilling, the core of its business. President and CEO Bob Parker Jr. said the sale was in line with its long-term growth strategy. Unit shares were up 1/2, or 6.2%, to 8 1/2 on the news.

Time Warner

(TWX)

and

Advance Publications

have suspended plans for a television network aimed at women, only two months after announcing an ambitious strategy to combine their cable assets and women's content,

The Wall Street Journal

reported. Time Warner shares traded up 1 3/8 to 68 3/4.

Earnings/revenue reports and previews

The world's largest household appliance maker, Sweden's

Electrolux

(ELUX)

was off 1 to 42 3/4 even after forecast the company forecasted higher 1999 profits.

Fortune Brands

(FO)

was up 13/16 after it said it scaled down its second-quarter noncash goodwill write-off, reducing EPS charges for the quarter to 58 cents from 59 cents. The company told

Reuters

that the changes have no impact on current or future prospects.

Sabtratek

(SBTK)

dropped 3 27/32, or 34.8%, to 7 7/32 after announced that it would postpone its second quarter earnings report. The company said it was awaiting results from an independent auditors review.

TheStreet.com's

Herb Greenberg

has written several times on Sabratek, most recently

Aug. 4.

Offerings and stock actions

Active Software

(ASWX)

was up 5 1/16, or 46.6%, to 16 1/16 in its trading debut. The stock is up from its initial price of $11 a share.

Quest Software

(QSFT)

popped up 14 1/8, or 102.6%, to 28 1/2 in its first day of trading. The stock was priced at $14.

Analyst actions

Cox Communications

(COX)

was up 3/8 to 34 7/8 after

Morgan Stanley Dean Witter

raised its rating from an outperform to strong buy.

Flagstar Bancorp

(FLGS)

was up 1/2 to 22 after

PaineWebber

upgraded it to buy from attractive.

Merrill Lynch

biotech analyst Eric Hecht started coverage on

Genentech

(DNA)

with an near-term accumulate and long-term buy rating. Shares of Genentech was up 2 1/4 to 170 3/4.

KeySpan

(KSE)

was up 5/8 to 27 1/2 after PaineWebber upgraded it to attractive from neutral.

Philips Electronics

(PHG) - Get Report

popped up 2 3/16 to 100 when

Lehman Brothers

upgraded it to buy from outperform.

SG Cowen

boosted

Scientific-Atlanta

(SFA)

to buy from neutral. Shares of Scientific-Atlanta soared up 4 5/8 to 44 7/16.

Merrill Lynch downgraded

Stewart Enterprises

(STEI)

to near-term neutral from near-term accumulate and the firm downgraded it to long-term accumulate from long-term buy. After the close Stewart warned it expects to earn 25 cents to 27 cents a share in the third quarter, lower than the current three-analyst estimate of 29 cents a share; and 17 cents to 19 cents a share in the fourth quarter, below the current nine-analyst estimate of 25 cents. Stewart shares were off 3, or 32.5%, to 6 on the news.

Teligent

(TGNT)

dropped 1 3/8 to 61 1/2 when PaineWebber downgraded it to attractive from buy.

Miscellany

Computer Associates

(CA) - Get Report

was up 1 3/4 to 47 15/16 on news that a federal court threw out a suit filed by

Computer Sciences

(CSC)

for its unsuccessful $10 billion takeover bid for Computer Sciences. Computer Associates said a U.S. district court found no evidence to support accusations that it used confidential information when bidding for Computer Sciences in early 1998. Computer Sciences was up 1 3/8 to 66 1/16.

Hasbro's

(HAS) - Get Report

stock may have been unfairly pounded by sky-high expectations for toy sales related to

Star Wars Episode I -- The Phantom Menace

, and now some think the stock is a bargain, the Heard on the Street column in the

Journal

reported. Shares of Hasbro were up 1 3/8 to 26 15/16.

The New York Stock Exchange suspended

Red Roof Inns

(RRI)

common stock from trading today, after hotel group

Accor

acquired more than 99% of its shares. A tender offer by Accor, which expired yesterday, left fewer than 600,000 Red Roof Inn shares left for the public. The NYSE usually suspends or eliminates a stock if public shares dip under 600,000.

Texaco

(TX) - Get Report

was off 1/16 to 65 15/16 after it said it's cutting 2,500 jobs worldwide, about 1,100 more than it planned when it unveiled a cost-savings program late last year.

The Inside Wall Street column in

Business Week

, penned this week by Jeffrey M. Laderman, offers up a bullish article on

American Tower

(AMT) - Get Report

. Elsewhere in the column, William S. Brennan of

Pacific Growth Equities

likes

U.S. Plastic Lumber

(USPL)

and has a target on the stock of 16 within the next 12 months. It closed yesterday at 8. American Tower shares were up 3/8, while U.S. Plastic Lumber was up 1 1/4, or 15.6%, to 9 1/4.

Zebra Technologies

(ZBRA) - Get Report

, the dominant maker of bar-code printers, was up 5/8 to 47 3/8 after Andrew Stephens, portfolio manager of the

Artisan Mid Cap Fund

, said in Inside Wall Street that he thinks the stock will reach 60 to 65 in the second half of next year.