The major stock indices all got on track Monday thanks to good fundamental news and a bevy of analyst upgrades ahead of earnings season. But the late-session fade that bedeviled stocks last week re-emerged, just with reduced ferocity.

After trading as high as 10,663.74, the Dow Jones Industrial Average dropped briefly into negative territory after 3 p.m. and then recovered to close up 17 points, or a 0.2% gain, to 10,621.03. The Nasdaq Composite hit resistance when it crossed 2111 intraday and finished up 0.4% at 2097.04. The S&P 500 gained 0.3% to 1190.24.

Breadth was positive, with 60% of New York Stock Exchange issues and 52% on the Nasdaq ending up with gains. But it's hard to have much conviction about a market that tails off late day after day without much explanation.

The fade struck all the usual candidates that have been leading the market downward this year. The Philadelphia Stock Exchange's Semiconductor Index, for example, was as high as 511.55 by midafternoon, a 1% gain, before dropping to 406.25 at the close, a 0.3% loss.

The fade hit even the strongest groups of the day. Fund manager Ron Baron, quoted in Barron's, and a report on Hovnanian ( HOV) by UBS analyst Margaret Whelan stirred excitement in the homebuilding sector, which dropped last week. The Philadelphia Housing Index hit a high of 464.36 before dropping to close at 460.72 on Monday, still an impressive 2% gain. Hovnanian added almost 6%.

Similarly, biotech stocks jumped and then faded on news that the Food and Drug Administration approved American Pharmaceutical Partners' ( APPX) new breast cancer drug. American flew up 28% while the Nasdaq Biotech Index hit 758.96 before closing at 751.22, still holding a 1.2% gain.

Economic reports were slight and the yield on the 10-year Treasury note finished nearly unchanged at 4.28%.

M&A No Panacea

There was talk that the spate of mergers and acquisitions activity on Monday was giving stocks a boost, but it wasn't happening for companies closest to those making the deals. For example, regional wireless carrier Alltel ( AT) will acquire Western Wireless ( WWCA) in a stock and cash deal for more than $4 billion to create the fifth-biggest wireless operator in the country. Western Wireless rose 2.3% to $37.37, while Alltel slid 2.4% to $54.75.

Among other wireless carriers, United States Cellular ( USM) lost 4%, Sprint ( FON) dropped 1% and SBC ( SBC) was down 0.7%.

Elsewhere, French auto-parts maker Valeo said it would pay 330 million euros for the engine electronics unit of Johnson Controls ( JCI). Johnson gained 0.7% but competitors Delphi ( DPH) lost 1.2%, TRW Automotive ( TRW) gained just 2 cents and Magna International ( MGA) fell 0.1%.

In other M&A news, movie-rental chain Movie Gallery ( MOVI) outbid a possible offer from Blockbuster ( BBI) in an incipient bidding war for rival Hollywood Entertainment ( HLYW). Movie Gallery's $13.25-a-share offer beats Blockbuster's announced -- but not yet formally offered -- $11.50 bid. Movie Gallery rose nearly 5% and Hollywood Entertainment gained 6.2% on the news, while Blockbuster dipped 1.8%.

Untidy Fedspeak

Federal Reserve members were out in force on Monday and over the weekend but it was tough to glean any new messages. Most of the talk was consistent with previous speeches touting the strength of the economy and sounding warnings about the current account and fiscal deficits.

Atlanta Fed President Jack Guynn gave a bullish forecast for the economy in 2005 in a speech on Monday. Labor markets have gotten on "the path of growth" and economic growth "has been and should remain pretty doggone good," he said.

"My personal view is that if the economy stays on the present path of solid growth, then rates have not yet returned to equilibrium," Guynn concluded. "As I noted earlier, I do not see an imminent threat of inflation, and I am comfortable with our gradual monetary policy adjustments -- at least for now."

In remarks after the speech, he warned that the Fed might deviate from its recent practice of raising interest rates just one-quarter percentage point at each meeting.

"It bothered me that some people interpreted that we would raise rates in a very neat progression," Reuters reported Guynn said. "This business is just not that tidy."

The most interesting speech came from Fed Vice Chairman Roger Ferguson in Philadelphia on Friday. Addressing the complexities of analyzing the labor market, Ferguson sought to explain why job growth has been weak in the current recovery. The issue is of paramount importance to the Fed because the amount of slack remaining in the labor market will help determine how quickly wages -- and prices -- are likely to rise.

Although it's easy to get caught up in esoteric statistical measures comparing the current recovery to previous postwar cycles, it's indisputable that something different has happened this time for the workforce. In the nine previous postwar recoveries, the number of people working pretty quickly got back to the levels who were working when the recession hit.

On average, the economy took only 11 months from the end of a recession to return to the number of people working at the start of the recession. So far, it's more than three years, or 37 months, since the official end of the last recession in November 2001, and payrolls still are below the level of the beginning of the recession.

Looking at all the data available to the Fed, Ferguson said the problem has been not in the loss of jobs but in the failure to create more jobs. The rate of "job destruction" has followed a typical cyclical path but the rate of "job creation" fell until the end of 2003, much longer than in prior recoveries.

Quite a bit of the problem can be traced to industries that are restructuring, Fedspeak for permanent downsizing beyond just the vagaries of the economic cycle. Industries that contributed most to weak payroll growth were manufacturing, information technology, transportation (which includes the airlines) and technical services.

These types of permanent job losses leave former employees without the skills to get new jobs quickly as they have to change fields. That's also consistent with the decline in the labor force participation rate, as a growing proportion of those leaving the workforce in recent years said they were either going back to school or retiring. And that likely also means the labor market has less slack than many realize, adding another inflationary note to the new year.
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 your feedback.