"Invention, my dear friends, is 93% perspiration, 6% electricity, 4% evaporation and 2% butterscotch ripple." -- Willy Wonka

A mix of good and bad news had the markets in a lull for much of Wednesday before a late breakout to the upside. The witch's brew of conflicting corporate, economic and technical data ultimately resulted in the strongest gains yet of 2005.

Whether the market stew justified that result is less clear, bringing to mind Willy Wonka's refrain that the ingredients of progress don't always add up in a logical way. The final hour of trading was strong, when the supposed "smart money" is placing bets but the open was also strong, when the alleged "dumb money" comes online.

The

Dow Jones Industrial Average

gained almost 62 points, or 0.6%%, to 10,617.78, as

Intel

(INTC) - Get Report

rose 3% on its improved outlook issued Tuesday night. Additionally,

Honeywell

(HON) - Get Report

,

Boeing

(BA) - Get Report

and

United Technology

posted gains of 2% to 3% each.

The

S&P 500

lagged, as it rose 0.4% to 1187.70 although it managed to close above its simple 50-day moving average at 1186 after trading below it intraday. Bad news on a variety of components, including

King Pharmaceuticals

(KG)

, down 7%,

OfficeMax

(OMX)

, down 5%, and

United Parcel Service

(UPS) - Get Report

, which lost 7%, among many others, held back the large-cap index.

The

Nasdaq Composite

gained 0.6% to 2092.53 after sliding past its low for the year of 2076.69 early on. That touched the index's pre-Thanksgiving low and provided room for an immediate bounce. Advancers slimly outnumbered losers but up volume was almost three times bigger than down volume. Ultimately, the Intel 'halo effect' held, as the Philadelphia Stock Exchange Semiconductor Index gained 1.4% and a Goldman Sachs upgrade lifted telecom equipment makers.

Deficits, Inflation & Housing, Oh My!

Causing consternation early in the day, the pesky U.S. trade deficit again expanded to a monthly record in November instead of declining from the previous month as economists had projected. With the dollar sliding, economists figured foreigners would be buying more goods at lower prices while we'd buy fewer exports thanks to the currency-induced price rise. That didn't happen and the trade deficit hit $60.3 billion from $56 billion in October.

In fact, imports increased 1% from October and almost 20% from a year earlier to $155.8 billion. Exports slid 2% on the month to $95.6 billion, although that was 6% higher than a year earlier.

The higher trade deficit has implications for gross domestic product forecasts as well. Goods produced outside of the country and bought here don't count in the GDP, so more imports and less exports means slower growth. In theory that should be good for the fixed-income market because slower growth implies less inflation and fewer

Federal Reserve

rate hikes.

But bonds sold off instead as the deficit pushed the dollar down, reigniting fears that the foreign buyers who propped up Treasury prices last year finally might move their money into non-dollar-denominated assets. A weak dollar also could generate more Fed rate hikes and inflation by raising the costs of imports.

The yield on the 10-year Treasury note, which moves in the opposite direction of its price, initially spiked to 4.27%. Later, a speech by Cathy Minehan, president of the Boston Fed, helped reassure investors that central bankers aren't expecting inflation to get too out of hand and the benchmark note finished virtually where it started at a yield of 4.24%.

Noting that the dollar has been falling and productivity growth has been slowing -- two factors that could drive up inflation -- Minehan didn't sound worried.

"The key question here is whether these factors, combined with the expected above-trend rate of growth in 2005, will result in a more rapid pace of inflation than we now forecast," she said. "My best guess is that is possible but not likely."

Raising a topic that came up in the minutes of the December Fed Open Market Committee meeting, Minehan questioned whether consumers can continue to count on rising home prices. Price appreciation should slow but more plentiful jobs could provide additional support to consumers, she said.

In another sign of the slowing, applications for mortgage loans fell 3% last week, the third consecutive decline, the Mortgage Bankers Association said. The index of purchase and refinance loans is 16% below its year-ago level. Economy.com's Celia Chen attributes the recent weakness to increases in adjustable rate mortgages that have followed the Fed's five rate hikes last year. Rates on ARM loans are about three-quarters of a point higher than a year ago.

"The substantive back-to-back declines indicate that a change is occurring in the underlying trend for home buying toward softening," Chen wrote. "With house prices rising as quickly as they have been, however, some buyers must rely on

adjustable-rate mortgages. Because they typically have lower monthly payments, ARMs are easier for which to qualify. Many marginal buyers are getting squeezed out as ARM rates rise."

Chen has been calling for a modest slowdown in the housing market of late, and while she doesn't expect a pricing bubble to pop nationwide, hot markets like Las Vegas, California and Boston are at greater risk. Contrary to the tales spun by some in the homebuilding industry regarding the demographic demand for homes, Chen says the country generates underlying long-term need for about 6.5 million sales per year, far less than the pace of the past two years.

In 2003, 6.1 existing homes and 1.1 million new homes sold. Last year had already surpassed those levels through the end of November with December reports due Jan. 25 and 31.

Flag on the Play

As a final note, Tuesday's discussion of the so-called

Super Bowl indicator was flawed. The indicator, which I don't put much stock in despite its 80.5% success rate, says that whenever a team from the original NFL wins the championship stocks will rise, while a winner from the old American Football League dictates a bearish outlook.

A win by the New England Patriots would indeed be bearish but a win by the Pittsburgh Steelers would not; as numerous readers emailed to point out, the Steelers were part of the original NFL before moving to the AFC after the leagues merged in 1970. The same holds true for another contender this year, the Indianapolis Colts. Of course, the AFL-alumni Patriots won last year and stocks still rose.

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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