Saddam Rally Fades - TheStreet

Saddam Rally Fades

Stocks close lower as investors look beyond the capture of the Iraqi dictator.
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Updated from 4:03 p.m. EST

Stocks finished lower Monday afternoon despite the dramatic news that Saddam Hussein had been captured over the weekend. An early emotional response slowly fizzled out across the financial markets, as investors turned their focus to fundamental issues.

After an opening rally faded, the

Dow

finished down 19.34 points, or 0.2%, to 10,022.82 after hitting consecutive 18-month highs last week; the

S&P 500

lost 6.10 points, or 0.6%, to 1068.04; and the

Nasdaq Composite

declined 30.74 points, or 1.6%, to 1918.26, lagging the other averages as investors continue to rotate out of technology stocks.

Volume on the

New York Stock Exchange

was 1.46 billion shares, while 1.80 billion shares changed hands on the Nasdaq. Decliners beat advancers on the NYSE by about 3 to 2 and by more than 2 to 1 on the Nasdaq.

Hussein's Capture: Global Market Impact

News of Saddam's capture reverberated throughout the global financial markets following the announcement Sunday. Yet by the time the U.S. markets opened, the initial enthusiasm was already waning and many investors were left disappointed when the Dow's gains failed to top 100 points.

Saddam's arrest increased "the general level of optimism in the market by removing some

lingering concern," said Robert Pavlik, portfolio manager at OakTree Asset Management. "But I don't think there is that much goodwill to be brought by this because the markets are already up sharply on the year and close to key levels."

Jeffrey Kleintop, chief investment strategist for PNC Advisors, expressed a similar sentiment. "Certainly this is a key event within developments in Iraq. However, the value of the capture has been decreasing over the past few months, given the market's strong rally on economic and earnings improvements. The market is increasingly looking towards fundamentals, rather than geopolitical issues."

The realization that Hussein was most likely not in contact with his followers and was not directing the insurgency against coalition forces contributed to the lackluster market response, according to traders.

Kleintop said his long-term outlook on stocks was unchanged by the event; his S&P 500 target remains between 1125 and 1200 by the end of 2004.

Despite the dramatic news, the dollar's gains evaporated and it set a new record low against the European single currency. In late New York trading, one euro fetched $1.231. The dollar also slipped against the Japanese yen.

"The sensational images of Saddam Hussein's capture failed to evoke any sensational rally in the U.S. dollar due to the imbalance between the symbolic meaning of the capture and its practical implications on currency markets," said Ashraf Laidi, chief currency analyst with MG Financial Group. "The capture will neither alter the U.S. twin deficits, nor alter the state of unattractively low U.S. yields relative to their Australian, British, Canadian and Eurozone counterparts."

The 10-year Treasury note was down 6/32, its yield rising to 4.26%. Crude oil futures rose 0.6% to $33.23 per barrel, after initial declines. Gold was up 0.1% to $410.60 an ounce, after declines in Asia overnight.

"I initially thought Treasury yields would move lower, and take out more of the flight-to-quality premium," said Pavlik. But from the market's reaction, it is evident that the Saddam issue was not "really holding the markets too far back."

Overseas stocks finished mixed; London's FTSE 100 rose 0.01% to 4348 and Germany's Xetra DAX rose 0.4% to 3875. In Japan, the Nikkei closed 3.2% higher at 10,491, while the Hang Seng in Hong Kong declined 0.6% to 12,520.

Other News

Secretary of State Colin Powell underwent prostate cancer surgery today.

In economic news, the N.Y. Empire State Manufacturing Index declined to 37.4 from 41.0, but was stronger than the consensus expectation for a dip to 35.0.

Movers

S.G. Cowen upgraded shares of

Texas Instruments

(TXN) - Get Report

,

National Semiconductor

(NSM)

and

Cypress Semiconductor

(CY) - Get Report

to strong buy from outperform, based on these companies being positioned to benefit the most from an industry upswing. Texas Instruments shares fell 38 cents, or 1.3%, to $28.34; National Semi dropped $1.57, or 4%, to $38.00; and Cypress Semi gained 19 cents, or 1%, to $20.18.

Deutsche Bank upgraded both

General Motors

(GM) - Get Report

and

Ford

(F) - Get Report

to hold from sell. Shares of GM lost 86 cents, or 1.7%, to $48.93, while Ford improved 56 cents, or 4.1%, to $14.28.

AT&T

(T) - Get Report

was downgraded by both Bear Stearns, which lowered its rating to peer perform from outperform, and CSFB, which reduced its outlook to neutral from outperform. The company's shares lost 2 cents, or 0.1%, to $18.96.

Shares of

DoubleClick

(DCLK)

rallied 34 cents, or 3.5%, to $9.96 after U.S. Bancorp Piper Jaffray upgraded the company to outperform from market perform. The broker expects a recovery in online advertising, and has high expectations for the company's new Motif unit. CIBC World Markets also upgraded the company, moving its rating to sector outperform from sector underperform.

After the closing bell,

Oracle

(ORCL) - Get Report

reported fiscal second-quarter earnings of 12 cents a share, a penny ahead of the consensus estimate and 2 cents more than a year ago. The company's shares declined 13 cents, or 1%, to $12.70.

Tomorrow's economic calendar is packed. Highlights include the consumer price index, which is expected to rise 0.1% in November, after holding stable in the previous month. The

Federal Reserve

surprised the market when it said the risk of inflation was equal to that of disinflation in its December policy statement.

In addition, capacity utilization is expected to improve marginally to 75.3% in November; excess capacity has been a key factor, helping to keep inflation under control and the Federal Reserve on hold.

Finally, the current account deficit is expected to narrow to $136.1 billion from $138.7 billion. Along with the budget deficit and low Treasury yields, the ever-expanding current account deficit has put significant pressure on the dollar of late.