More Worries, More Gains For Stocks

Higher crude prices, rising interest rates and geopolitics fail to hinder many buyers.
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The market again showed impressive signs of resilience Monday, or some might say denial. Oil touched new highs after news of Saudi King Fahd's death, yet bulls remained emboldened with only the

Dow Jones Industrial Average

(DJI)

, failing to finish in positive territory.

More evidence of economic strength also helped investor sentiment, never mind that it led the bond market to continue its orderly selloff.

Crude oil for September delivery finished at $61.55 a barrel, up 98 cents on the day in Nymex trading. Intraday it rose to an all-time high of $62.30. Besides King Fahd's death, crude also received a bid after more refinery outrages over the weekend and as Iran announced it would resume nuclear activities.

That contributed to pressure for blue-chip industrial stocks, and the Dow finished down 17.76 points, or 0.2%, at 10,623.15. Even

Procter & Gamble

(PG) - Get Report

, which posted better than expected earnings, fell 0.6% and weighed on the average.

Yet just as it did with the London bombings, the broader market has taken higher oil, higher interest rates and geopolitical uncertainty in stride.

After hitting new highs last week before retreating Friday, the

Nasdaq Composite

(NASDAQ)

led Monday's gains. It advanced 10.55 points, or 0.5%, to 2195.38. The

S&P 500

(SPX)

, rose 1.17 points, or 0.1%, to 1235.39.

Major averages were buoyed by strength in big-cap tech names such as

eBay

(EBAY) - Get Report

, which received an upgrade from Smith Barney, and

Microsoft

(MSFT) - Get Report

, the recipient of positive comments in

Barron's

. In addition, health care stocks were strong after better than expected quarterly results from

Humana

(HUM) - Get Report

.

"The market continues to climb the 'wall of worry' composed of rising short-term interest rates, slowing corporate earnings growth, renewed terrorist activities, the budget and trade deficits, growing debt burdens, and numerous other concerns," as Merrill Lynch market strategist Rich McCabe put in a research note.

Quite a wall indeed. But there is also rationalization behind investor optimism if one looks at the price of oil as a factor of a strong economy that's absorbing the pricier commodity without any apparent inflationary heartburn -- so far.

That's the read of John Forelli, portfolio manager at Independence Investments. Manufacturing activity continued to rebound strongly in July, according to Monday's Institute of Supply Management's July manufacturing survey, which also noted declining price pressures.

Little evidence of inflation so far has not been enough to counter rising expectations in the bond market that the

Fed

will continue lifting short-term interest rates to at least 4% by year-end. The benchmark 10-year Treasury bond fell 10/32 while its yield rose to 4.32%.

The ISM survey confirms a rebound from the so-called soft patch in the economy seen in the spring, when energy prices took their toll on consumer sentiment and production. "Oil can remain high as long as inflation remains low. As long as we can absorb that well, that's all that the market cares about," Forelli says.

That's a good thing then, because it doesn't seem like the price of oil is about to make an about-face and substantially come back down from current levels. Phil Flynn, senior oil market analyst at Alaron Trading in Chicago, believes oil also received a bid from the "super strong ISM number," which showed the "economy is weathering high energy prices and needs more."

Long Live the King

Monday's rise in crude oil was most likely a knee-jerk reaction to King Fahd's death, which isn't to say that any resulting rise in crude prices won't stick.

Since Fahd's health had deteriorated over the past few years, everyone knew that his half-brother Crown Prince Abdullah -- who will now ascend to king -- was already running the show.

The House of Saud's statement that it intended to continue its current policy on crude oil production was therefore no surprise. The fact that it had to issue the statement to reassure everybody, however, does emphasize existing uncertainties for the region -- and for oil prices.

"The death of King Fahd could be seen as a weakening of the Saudi regime. Their opponents might be emboldened and more instability could arise," says Thorsten Fischer, senior oil economist with Economy.com.

The Saudi regime is not exactly popular in the Middle East and relies mostly on American support to fend off attempts to overthrow it, or at least to destabilize it. Such attacks intensified after the Sept. 11, 2001, terror attacks but were quelled by Crown Prince Abdullah over the past year. Yet at age 81, Abdullah is not exactly a guarantee of continuity -- at least not for the oil market.

"I would say that King Fahd's death has given an uncertainty premium that should keep oil above $60 for quite a while," says Fischer.

The other big story of the day for oil was Iran's announcement that it would resume nuclear activities, which may lead to an escalation of tensions with the U.S. Iran is the second-largest exporter of crude oil behind Saudi Arabia.

All this uncertainty is hitting an oil market that will react to any hint of a threat to production and supply, as it did at the beginning of hurricane season. "There's enough supplies for now, but not much excess capacity, which means any supply disruption of volatility gets a premium," Fischer says.

Lack of excess capacity is also a theme for the oil majors, of course, several of which have actually managed to post disappointing earnings last week as their production fell -- just as oil prices continued to surge.

Chevron

(CVX) - Get Report

, also busy with its bid for

Unocal

(UCL)

, announced a 6% decline in output, following an 11% drop last year.

Exxon Mobil

(XOM) - Get Report

, likewise, said production dipped 4% in the second quarter.

To view Aaron Task's video take on today's market, click here

.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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