Closing on a Positive Note for a Change

Stocks end the day, and the month, with strength. Plus, the latest news on housing.
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January came in with a thud but went out with a bang. Stocks gained on better economic news that should help maintain momentum in economically sensitive sectors such as steel and manufacturing.

The

Nasdaq Composite

led the way, posting a 1.3% gain to 2062.41. The

S&P 500

rose 0.9% to 1181.27 and the

Dow Jones Industrial Average

tacked on almost 63 points, or 0.7%, to 10,489.94. Still, for the month, the Dow lost 2.7%, the S&P shed 2.5% and the Comp slumped 5.2%.

Tech stocks got a bounce Monday as investors continued to digest last week's earnings and the Semiconductor Industry Association forecast only a modest decline in first-quarter sales, as expected. The Philadelphia Stock Exchange Semiconductor Index rose 1.6% but finished the month down 4.3%.

Weakness in drug stocks and fallout from the

SBC

(SBC)

bid for

AT&T

(T) - Get Report

held back the blue-chip averages Monday. SBC gained only 0.6% and

Verizon

(VZ) - Get Report

lost 0.3% while

Pfizer

(PFE) - Get Report

fell 0.8%.

Airline stocks rose after Merrill Lynch raised its ratings to buy on

Continental

(CAL) - Get Report

and

America West

(AWA)

.

Delta

(DAL) - Get Report

and

AirTran

(AAI)

were upgraded to neutral from sell. Continental rose 2.4%, America West flew up 6%, Delta gained 7% and AirTran added 5%.

Airlines also were aided by crude oil prices, which fell 1.6% to $46.40 per barrel after OPEC decided to leave production unchanged.

Blame Canada

Treasuries held their own despite a bevy of good economic news largely on the strength of one figure. Alan Greenspan's preferred measure of inflation -- the price index for personal consumption expenditures excluding food and energy -- was flat for December from the previous month and rose just 1.5% over the prior year. The yield on the 10-year Treasury note finished just about flat at 4.13%.

A more directly bullish, and unscheduled, tidbit appeared on the

Bloomberg

newswire. It seems that the Canadian agency responsible for calculating imports from the U.S. screwed up and undercounted for at least a portion of the fourth quarter. As a result, Friday's Commerce Department report on U.S. GDP growth for the fourth quarter was mistakenly low as a result.

Instead of growing at an annualized rate of 3.1%, with about 1.7 percentage points lost due to imports, the economy likely grew 3.4% to 3.6%,

Bloomberg

reported. The revision should show up in the next Commerce Department release.

In the short run, the effect is simply to further solidify the consensus belief that the

Fed

will raise its short-term benchmark by another 0.25 percentage points on Wednesday, sticking to the "measured" pace it has previously discussed.

Longer term, higher growth ought to help economically sensitive areas of the economy, and many such industries rose on Monday, including steelmakers and retailers.

Nucor

(NUE) - Get Report

rose 2.3% and

Target

(TGT) - Get Report

added 2.6%.

Wal-Mart

(WMT) - Get Report

was an exception, falling 3 cents, as investors continued to weigh the effect on the world's biggest retailer of

Procter & Gamble's

(PG) - Get Report

$57 billion acquisition of

Gillette

(G) - Get Report

.

Economically sensitive stocks also got a boost from the confusing report on personal income growth for December. Thanks to the mega $32 billion, one-time dividend paid by

Microsoft

(MSFT) - Get Report

, the annualized income calculation was thrown off. The report showed a 3.7% jump in personal income, with a $300 billion gain coming from a 12-month projection of Bill Gates' largesse. Backing out the dividend, however, still left a 0.6% income gain.

Finally, also in the bullish camp on the economy, the National Association of Purchasing Managers for Chicago said its index of manufacturing activity rose to 62.4 in January from 61.9 in December, better than forecasters expected. Any level over 50 indicates growth in the sector. Readings over 50 indicate expansion.

All in all, there was almost nothing to keep Greenspan and his cohorts from seeing the rosy economy that they have seen for the past six months or more.

Far From Crashing

Economic news was good with one exception: New-home sales for December, coming after a plunge in November, were a disappointment that homebuilding stocks managed to shrug off after an initial hit. Sales were just 0.1% higher than November, which was revised even further downward, at an annualized rate of 1.01 million. Fourth-quarter sales were down by an annualized rate of 0.7%, the second consecutive quarterly decline. For all of 2004, sales totaled 1.18 million, a 9% increase from 2003.

Median new-home prices were up slightly from November to $222,000, or 13% over the previous 12 months.

The real estate market's slowdown is "far from crashing to a halt," Economy.com's Celia Chen noted after the report came out. Mortgage rates have barely budged in recent months and are actually half a percentage point lower than six months ago on fixed-rate loans.

One warning sign came in inventories. As previously mentioned, the number of unsold new homes has been creeping upwards to levels not seen since the 1970s. But most investors were reassured that unsold homes wouldn't be a drag on the market because the inventory represented less than four months of sales. As has started to happen, however, a slowdown in sales from the record pace of the summer of 2004 is causing the ratio to deteriorate quickly. The number of unsold homes rose to 432,000 in December from 421,000 in November and the months' worth of sales ratio rose to 4.8 from 3.9 two months earlier.

Homebuilders initially sold off on the report, which was less than the expected bounce back. But with interest rates staying low and sentiment remaining extremely bullish on the sector, the stocks turned around to post strong gains.

The Philadelphia Exchange's Housing Index, which was as low as 457.63 in the morning, finished at 468.61, a gain of 1.2%.

Toll Brothers

(TOL) - Get Report

gained 1.6% and

D.R. Horton

(DHI) - Get Report

added 2.1%.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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