Planets Align for Big Advance

Strong macro data, weak oil and quarter-end consideration combine to lift stocks.
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The theory that higher oil prices will knock the U.S. economy for a loop took a couple of hits on Wednesday, crushing crude futures and sending stocks soaring. In a reversal from the pattern of the past few weeks, crude fell 5% and stocks of energy producers took the hit, while retailers and technology shares -- especially semiconductors -- took flight.

The

Nasdaq Composite

led the way, gaining 2% to 1969.99 and moving firmly above its 200-day moving average. The

S&P 500

added 1% to 1125.40 and the

Dow Jones Industrial Average

rose 1% to 10,002.03.

Among big-cap movers,

Intel

(INTC) - Get Report

gained 3%,

Advanced Micro Devices

(AMD) - Get Report

rose 4% and

Wal-Mart

(WMT) - Get Report

added 2%. Conversely,

Exxon Mobil

(XOM) - Get Report

lost 1%,

ChevronTexaco

(CVX) - Get Report

fell 2% and

Teekay Shipping

(TK) - Get Report

shed 3%.

Oil futures settled at $52.46, down $2.71 in the biggest one-day decline in five months. Crude's fall, which was accompanied by hints of a stronger economy in the durable goods report, the Fed's beige book survey of regional conditions and the top-line of the new home sales report, also hit bonds and bolstered the dollar.

The yield on the Treasury's 10-year note rose to 4.09% after being as low as 3.93% on Monday. The euro fell to $1.2702 from $1.2769 on Tuesday while the dollar rose to 106.59 yen from 106.69 yen.

Wednesday's action was also a reversal from Tuesday in the sense that macroeconomic factors drove the market. Oil fell after the Energy Department reported that U.S. stockpiles for the past week increased about four times more than expected.

An outpouring of economic data showed mostly stronger growth ahead.

New orders for all durable goods rose 0.2% last month after dropping 0.6% in August. That headline was initially disappointing because forecasters predicted a bigger gain. But the more significant number, orders minus the volatile transport segment, rose 1.7%. And business orders for capital goods minus aircraft and defense spending rose 0.6% after falling 7.2% in August. Orders for communications equipment leapt 36% and computer orders rose 4%.

"Corporate America may be loosening up the capital spending purse strings a bit, just a little bit, as we head toward the new year," Smith Barney economist Mitchell Held wrote about the durable goods report. "At some point, higher energy prices may play a role in suppressing this urge but it clearly wasn't evident in the September data."

The Fed's beige book survey of business conditions in each of the central bank's 12 regions "generally indicated that economic activity continued to expand in September and early October," the report said. Consumer spending and borrowing was mixed to weaker across the country while business spending picked up. Hiring activity increased "modestly."

In the all-important housing construction and sales sector, activity "was robust again in September, although it appeared to soften further from the last Beige Book." Boston and Kansas City reported sales of high-end homes slipped and Cleveland reported weakness in all segments of the market. Home prices increased at a "healthy pace" in most areas.

The report leaves the Fed's Open Market Committee, which is particularly interested in housing, on track to raise short-term rates again next month and probably in December as well.

Daily Dish on Housing

The headline of the September new home sales report certainly supports that conclusion as well. The pace of new-homes sales increased 3.5% on a seasonally adjusted basis last month instead of slowing as forecast. Without the seasonal adjustment, sales fell 9% from August. But the adjustment itself seems a little curious because comparing the unadjusted September sales total to the same month last year shows a 3% increase, while comparing the seasonally adjusted totals indicates a 7% increase.

Shouldn't the same month in 2003 and 2004 be "seasonally adjusted" in the same way? A spokeswoman for the Census Bureau that prepares the report said the seasonal adjustment included a hurricane adjustment as well, which certainly wasn't included in 2003.

In fact, the seasonal adjustment to the 2003 September data had the opposite effect. Seasonally adjusted sales increased 6.8% for the month from 2002 while unadjusted numbers rose 9.7%.

The median sales price tumbled in September to erase almost all of the 2004 gain as sales of high-end homes plunged and low-end sales gained. The median sale price of $197,700 was down 8% in one month to the lowest since last December's median price of $196,000. The median sales price is now down 11% from its peak in April. Prices fall 8% and volume increases 3.5% (even seasonally adjusted); the market can't be coming out ahead.

On its earnings call on Tuesday, Las Vegas price-slasher

Pulte

(PHM) - Get Report

admitted that it was cutting prices in Texas, saying the cuts were part of a strategy to dump low margin inventory more quickly. Also, the

Orange County Register

reported Wednesday that economists at California State Univeristy-Fullerton are predicting home prices will drop 20% there in the next two years.

The Mortgage Bankers Association came out with a more bullish nationwide forecast, predicting that the median price of new homes will rise 3% next year and in 2006. Sales are expected to slow from 1.17 million in 2004 to 1.04 million in 2005 and 953,000 in 2006.

Shares of the builders finished with a third consecutive day of gains after

Centex

(CTX)

issued guidance for its fiscal year ending March 31, 2006. Earnings of $8.75 to $9.25 represent as much as a 25% gain over the company's 2005 projection. The stock gained 2%, Pulte Homes gained 1% and the Philadelphia Stock Exchange Housing Index gained 0.7%.

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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