Rally Before the (Fed) Storm

Strong consumer confidence boosts stocks but gives Greenspan & Co. reason to tighten more, not less.
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Stocks bounced back Tuesday as oil prices retreated sharply, allowing investors to focus on a much higher-than-expected surge in consumer confidence in June and positive earnings news from companies such as

Wyeth

(WYE)

and

Paychex

(PAYX) - Get Report

.

The major stock indices, which had plunged since oil began flirting with the $60 level last week, rebounded strongly as oil for August delivery fell $2.29 to $58.25 a barrel. The

Dow Jones Industrial Average

jumped 114.85 points, or 1.12%, to 10,405.63; the

S&P 500

index gained 10.88 points, or 0.91%, to 1201.57; the

Nasdaq Composite

advanced 24.69 points, or 1.21%, to 2069.89.

Notable gainers included

Advanced Micro Devices

(AMD) - Get Report

, which rose 6.3% after bringing charges against

Intel

(INTC) - Get Report

, claiming the chip giant used illegal tactics to lure away customers and businesses. But in a reflection of the day's positive tone, Intel rose 1.2%.

Elsewhere,

SeeBeyond

(SBYN)

leapt 31% after agreeing to be acquired by

Sun Microsystems

(SUNW) - Get Report

for $4.25 a share, valuing the deal at about $387 million. Sun shares climbed 1.4%.

Advancing stocks outpaced decliners by 23 to 8 on the

NYSE

and 11 to 4 in Nasdaq trading, but volume was modest, especially compared with the volume surge during last week's big declines. Big Board volume was under 1.8 billion, while 1.6 billion shares traded over the counter.

In addition to the lackluster volume, skeptics say the fundamental rationale for Tuesday's advance was sketchy at best.

With Thursday marking the end of the second quarter, there was very likely some window-dressing by fund managers helping stocks. The practice of buying what has worked to make quarter-end holdings look smarter is somewhat complicated this week, as the quarter's end coincides with the

Federal Reserve's

two-day policy meeting, starting Wednesday.

Recent hopes that the Fed will consider ending its year-old tightening campaign were boosted as Bill Gross, head of bond powerhouse Pimco, was heard on TV saying that an economic recession was a distinct possibility for 2006 and 2007. But he was quickly rebutted by Treasury Secretary John Snow, who reiterated strong faith in the U.S. dollar. The greenback did remain strong Tuesday, thanks to the June surge in consumer confidence.

Meanwhile, although the Conference Board's confidence index surged to a three-year high, the survey was conducted mostly before oil prices had again started edging toward $60. It does appear that consumers were more confident about employment prospects. But if consumers are correct in their assessment of improving labor markets, the Fed can make a stronger case for continued "measured" rate hikes.

That was also the impression in bond pits. The benchmark 10-year Treasury note fell sharply, down 17/32 while its yield jumped back to 3.96%.

Finally, if oil averages $55 per barrel for the year, "it will take out $50 to $60 billion in non-energy consumer spending, mostly out of durable goods and the like," says Vadim Zlotnikov, an equity strategist at Bernstein.

Energy Bill Comes Due

All the hoopla about oil prices is attracting increasing attention at the political level. Not coincidently, Snow again advocated for a reduction in dependence to foreign sources of oil. And the U.S. Senate passed the latest energy bill, which provides incentives to boost domestic production.

But major oil stocks headed downward along with crude prices. Boosting domestic production won't necessarily do much for U.S. oil companies.

Exxon Mobil

(XOM) - Get Report

fell 0.35%, and

Chevron

(CVX) - Get Report

dipped 0.44%.

The energy bill, more interestingly, also seeks to double the use of corn-blended-ethanol in the economy by 2012. And that created interesting action in renewable energy stocks.

The Wilderhill Clean Energy index, which normally trades in the same direction of oil prices, gained 2.42% on the day. The index has gained over 10% since June 9. That compares with 5.6% for the Amex Oil Index.

Among renewable energy stocks,

Fuel Cell Energy

(FECL)

soared 10% Tuesday,

Avista Corp

(AVA) - Get Report

rose 1.7%, and

Plug Power Systems

(PLUG) - Get Report

advanced 5.4%.

These stocks have been trading higher since oil prices started rising last year, but their long-term growth prospects, with crude oil at $60, seem to have improved even more.

The energy bill's nudge to ethanol-based energy could prove significant. Ethanol works as an automotive fuel and additive that improves the efficiency of gasoline use. It can even make up 85% of the fuel mix in specially-designed fuel-cell vehicles.

Automakers, scrambling to find alternatives now that consumers are increasingly shunning gas-guzzling SUVs, are also increasingly getting into the game.

Ford

(F) - Get Report

and

DaimlerChrysler

(DCX)

recently bought the German unit of

Ballard Power Systems

(BDLP)

, which makes vehicular fuel-cell and electric drive systems.

General Motors

(GM) - Get Report

,

Toyota

(TM) - Get Report

and

Honda

(HMC) - Get Report

have all boosted their spending on fuel-cell production and research.

Ethanol, the commodity, is also gaining in attraction as an alternative to play off high oil prices. In a sign of the times, the Chicago Mercantile Exchange even began trading ethanol futures in March of this year, with the firm Sempra Commodities serving as market maker.

Another play to avoid the crowded oil game is sugar, another source used to produce ethanol, according to Jim Rogers, head of the $1.5-billion Rogers International Commodities Index Fund.

Sugar, he says, remains extremely cheap yet should benefit from increased demand, as Brazil, one of the largest sugar producers in the world, supports its farmers by encouraging the use of ethanol, especially in cars. A large portion of cars in Brazil are already using ethanol.

In the U.S., 30% of gasoline contains ethanol. But in a typical ethanol-using car, the additive is only 15% while gasoline makes about 85% of the mix, according to the Renewable Fuels Association.

More and more countries, Rogers believes, will increasingly encourage, or even force, the use of ethanol as oil prices continue powering ahead.

Less obvious, cotton is another oil play Rogers recommends. New synthetic fabrics are based on petroleum derivatives, which are getting more expensive. So, Asian countries, including China, are increasingly using cotton to keep the costs of textile products low.

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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