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Rally Was More Than Bottom-Fishing

Tuesday's price action suggests a market rethinking its opinion on the economy.

Wall Street might have doubted him, but Alan Greenspan's soothing words were written all over the rally that shook stocks out of their two-week funk on Tuesday.

Consumer stocks rallied, financials stood still, and bond prices plummeted after the Conference Board's consumer confidence index rose to its highest level in two years. Broader market proxies had their best day in almost two months, with the

S&P 500

gaining 1% to 1,094.83, the


jumping 1.6% to 1,869.1 and the


crossing solidly above the symbolic 10,000 mark to 10,085.14.

Providing the first point of hard data for July after signs of weakness emerged in June, the confidence index jumped to 106.1 instead of declining slightly to 102, as forecast. Assuming the reading holds in upcoming measures of job creation and corporate purchases, it's good news for the enduring power of the economic recovery, and especially for stocks that sell goods to consumers.

Reflecting that,


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added $1.25 to $53.90,


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gained $4.19 to $78.46, and

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climbed $2.04 to $35.38.


some skepticism, Greenspan predicted last week that June's economic softness "should prove short-lived." Investors who doubted the

chairman's testimony before the Senate Banking Committee -- the S&P 500 made a small move that day -- found his view a lot more persuasive yesterday.

To be sure, the S&P 500 and Nasdaq were coming off lows for the year, and even many bearish analysts expected a bounce. But data embodied in the consumer confidence report -- a better-than-expected home sales reading for June and strong earnings from


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Lockheed Martin

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-- drove the market higher; it wasn't just reflexive bottom-fishers.

And that's also likely why the big financials were left out of the general trend yesterday. Amid his confidence about the economy, Greenspan signaled that he expects to continue raising short-term rates for the foreseeable future at a measured pace. In the futures market, the yield on December eurodollar interest rate contracts rose to almost 2.5%, showing that traders expect about 1 percentage point more from Greenspan by year-end.

Big banks and mortgage lenders, beneficiaries of the steep difference between long-term and short-term rates that Greenspan is slowly erasing, could see earnings contract in that scenario. On Tuesday, they lagged.

Fannie Mae


gained just 2 cents to close at $70.22,

Washington Mutual

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added 7 cents to $38.95, and


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rose 9 cents to $43.90.

Looming Fed hikes also hit the bond market, which had its worst day in almost three months. The yield on the U.S. Treasury's 10-year note increased to 4.60% from 4.48%.

The drop in the bond market erased gains made since the beginning of July, when the Labor Department's June nonfarm payrolls report sparked a minirally in fixed-income prices. The report showed only 112,000 jobs were added in the month, fewer than half what were forecast, which ended a streak of three better-than-expected months of payroll gains.

The yield on the 10-year note had declined from 4.56% to 4.35% before Greenspan gave his semiannual state of the economy briefing to the Senate Banking Committee last week. The Fed chairman's confident remarks about job gains, consumer spending and inflation capped the bond rally -- and Tuesday buried it.

Bonds had other negatives to contend with when an auction of 20-year Treasury Inflation Protected Securities went off weaker than expected. Investors demanded a yield of 2.47% to buy the $11 billion worth of bonds, several basis points, or hundredths of a percentage point, higher than expected before the auction. There was less than $1.50 in bids for every $1 of bonds being auctioned, well below the 1.89 bid-to-cover ratio seen at the previous auction of 10-year TIPS.

Predictably, retail stocks were among the top gainers from Tuesday's consumer confidence report, with additional support from reports late Monday that July same-store sales were on track for gains of 2% to 4% at Wal-Mart and more than 1% to 2% at Target. Also, analysts at Deutsche Bank issued a note Tuesday naming eight retailers selling for less than the value of their assets, including



, Sears and




It's not all rosy for retailers. Some analysts are flashing warning signs that the torrid spending by consumers in the first half of the year isn't likely to be replicated for the rest of 2004 as home sales slow.


Meredith Derby

pointed out yesterday, chains such as

Best Buy

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Bed Bath & Beyond

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have benefited disproportionately from the nesting impulses of new homeowners. They're at risk if Greenspan's "measured" pace of rate hikes continues unabated and mortgage rates follow, curbing home sales. After all, how many more chintze bed spreads and 50-inch flat-screen TV sets do America's couch potatoes need?

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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