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Omens aside, earnings send Dow to record 14,000
[July 20, 2007]

Omens aside, earnings send Dow to record 14,000

(Milwaukee Journal Sentinel, The (KRT) Via Thomson Dialog NewsEdge) Jul. 20--Oil is expensive, mortgages are harder to get, the economy is slow -- and the stock market loves it.

The Dow Jones industrial average closed above 14,000 for the first time Thursday, reflecting a few key upbeat earnings reports as investors turned their focus away from worries about the economy.

But a disappointing report from Internet giant Google Inc., released after the market closed, sent its shares tumbling in after-hours trading.

When trading begins today, "I think people will get unnerved," said Ignatius Smetek, president and chief investment officer for Arcataur Capital Management in Milwaukee.

The Dow, a widely watched index of 30 large American companies, finished Thursday's session at 14,000.41, up about 7.7 percent from April, when it crossed the 13,000 threshold. The index has doubled since 1997, when it first hit 7000.

The more broadly based Standard & Poor's 500 index also set a record Thursday, closing up 6.91, or 0.45 percent, at 1553.08.

"The market is chasing earnings during earnings season, and we had a couple of good reports today," said Thomas J. Eck, principal and portfolio manager at Cortina Asset Management of Milwaukee.

Almost half of the Dow's gain of 0.6 percent, or 82.19 points, was the result of a $4.78 jump in the price of International Business Machines Corp., which came after the computer company posted stellar earnings.

While the earnings reports helped the Dow to set its record, overall the market is reacting to broader forces, said Bruce Bittles, chief economist for Robert W. Baird & Co.

"The market has been going up primarily because inflation has behaved very well," said Bittles, who is based in Nashville. That the economy in general is expanding at a measured pace also benefits investors, he said. When that happens, businesses are more tempted to use profits to buy back their stock than invest in new equipment, he explained. That helps push up share prices.

"Typically, the market does best in a slow growth environment in the absence of inflation because liquidity goes into financial assets," he said.

Helping that trend Thursday was a pullback in the bond market, making returns on stocks more competitive.

The most attractive stocks were those of the larger companies that compose the Dow, said Arcataur's Smetek. "There is rotation to some of the larger names," he said.

In addition to IBM, other Dow stocks that gained more than 1 percent Thursday included Microsoft Corp., Wal-Mart Stores Inc. and ExxonMobil Corp.

The state of the global economy is helping some large companies. With economies in Europe doing well, demand is being created for U.S. goods that can be purchased with a weakened dollar. The softer dollar also means profits earned in foreign currencies help to fatten dollar-denominated earnings statements.

Worries about the collapse of the subprime mortgage market in the U.S. had spooked investors earlier in the month, but that seems to be abating, said Alan Purintun, principal and portfolio manager at Milwaukee's Oarsman Capital.

Even though Federal Reserve Board Chairman Ben Bernanke told a congressional committee Thursday that foreclosure problems for holders of subprime mortgages are "likely to get worse before they get better," investors chose to focus on the earnings reports.

"We have one more week under our belts of this housing problem," Purintun said. "Maybe we are getting a little bit closer to the end of the tunnel."

As the summer goes on, the stock market may be in for a bit of a pause, said Bittles.

"After a few good earnings reports, we might go into a consolidation phase in August," he said. "There is no evidence that we are going to suffer a stiff correction very soon."

"There is no particular reason why" the market can't continue to rise, Purintun said. "Valuations are still very reasonable; interest rates don't seem to be in a rising pattern anymore."

"The market is definitely approaching the end of a mid-cycle slowdown," said Smetek. "People were very much concerned in the first quarter that we were heading into a recession. . . . Now we think the economy looks pretty good, and there will be reacceleration of the economy as we get to the back of '07 and get into '08."

Because of that, he expects increased volatility in stocks as investors search for the companies that will do best in the next, expanding environment.

If earnings reports continue to be the focus of investors in the short run, that volatility might start as soon as today, given the reaction to Google's report.

Even so, it is more important to watch longer-term trends than daily blips in the Dow, the money managers said.

"There is nothing particularly significant about crossing some line on the chart," said Purintun. "Fourteen thousand really isn't any different from 13,995."

The Associated Press contributed to this report.

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