Stocks have best week in 5 years<Week Breakdown>
Market Dispatches 4/18/2008 7:50 PM ET
The Dow finishes with a 229-point gain, and Wall Street hopes there's more to come. International business fuels Caterpillar and Google profits. Citigroup jumps on hopes that the mortgage-and-credit mess is near an end. Crude oil, however, tops $116 a barrel for the first time.
By Charley Blaine and Elizabeth Strott
Stocks finished their best week since 2003 with a big rally built on gains for Google (GOOG, news, msgs), Caterpillar (CAT, news, msgs) and Citigroup (C, news, msgs).
Google had its best day ever as a public company, jumping $89.87 a share, or 20%, to $539.41 after reporting better-than-expected earnings Thursday.
Caterpillar led the Dow Jones industrials Friday with an 8.5% gain to $85.28, also on the strength of earnings that topped expectations. The gain for the maker of construction equipment and engines added 52 points to the blue-chip index.
Citigroup was up 5.5% to $25.25 because the $5.1 billion loss it reported Friday could have been worse. The company had lost $9.8 billion in the fourth quarter of 2007, and, given its troubled portfolio of mortgage-related securities, there were worries the first quarter might produce similar results.
The Dow closed up 229 points, or 1.8%, to 12,849, its highest close since Jan. 10. The Standard & Poor's 500 Index added 25 points, or 1.8%, to 1,390, and the Nasdaq Composite Index was up 61 points, or 2.6%, to 2,403.
The Nasdaq-100 Index ($NDX.X), which tracks the largest Nasdaq stocks, was up 59 points, or 3.2%, to 1,900.
Google's gain led the S&P 500 and the Nasdaq-100. Caterpillar was fourth among S&P 500 stocks.
Mostly thanks to rallies on Wednesday and Friday, the Dow and S&P 500 had their best weeks since March 2003. The Nasdaq, which is dominated by tech stocks, had its best week since August 2006. (The Dow was up 257 points on Wednesday.)
The market's big gains on Friday came despite another record close for crude oil, which finished at $116.69, up 1.6% from Thursday. Energy shares were mostly higher.
At its high during the day, the Dow was sporting a gain of 273 points. Though the rally faded a bit, it was strong enough to give traders confidence that a bottom from this winter's slump is now firmly in place.
It would be too much, however, to expect the market to make another run at peaks reached in October. The Dow is still down 9.3% from its all-time high of 14,164.53 on Oct. 9. The S&P 500 is off 1.7% from its high on Oct. 9. The Nasdaq is down 16% from its most recent peak on Oct. 31.
Fueling the confidence are three assumptions:
Despite a recession in the United States, companies with significant sales outside the U.S. continue to do well and are benefiting tremendously from a lower dollar.
Many technology companies appear to be weathering the domestic slowdown.
Investors believe the big financial companies appear, finally, to be close to understanding the depths of the problems from the subprime-mortgage crisis. That's why Citigroup and Merrill Lynch (MER, news, msgs) both moved higher Friday. Merrill Lynch was up 1.4% to $47.35 on Friday and ended the week with an 8.4% gain.
Also pushing stocks higher Friday was a strong earnings report from former Dow component Honeywell (HON, news, msgs), up 6.3% to $60.99, also because of strong non-U.S. business.In addition, the market saw what may have been an important technical breakthrough: The Dow finished above its intraday high in February, which suggests the market may be headed higher. Whether that occurs remains to be seen.
Some big earnings are due next week, including:
Monday: Dow components Bank of America (BAC, news, msgs) and Merck (MRK, news, msgs), plus Texas Instruments (TXN, news, msgs).
Tuesday: Baker Hughes (BHI, news, msgs) and Yahoo (YHOO, news, msgs).
Wednesday: Amazon.com (AMZN, news, msgs) and Apple (AAPL, news, msgs).
Thursday: Dow components American Express (AXP, news, msgs) and Microsoft (MSFT, news, msgs). (Microsoft is the publisher of MSN Money.)
Important economic reports are also due, including reports on existing-home sales on Tuesday and new-home sales on Thursday.
There was life after GE's miss
To get to Friday's improved position, the market got past a big earnings miss on April 11 from Dow component General Electric (GE, news, msgs) and a loss from Wachovia (WB, news, msgs) on Monday. GE fell nearly 13% on April 11 but gained back just a tenth of the loss during the week. Wachovia fell 8.3% on Monday but recovered most of the loss by the end of the week.
Twenty-six Dow stocks were higher on the day, as were 416 S&P 500 stocks and 88 Nasdaq-100 stocks. Oil service, financial, tech and industrial stocks, such as Caterpillar, were the market leaders.
With Friday's close, the Dow is up 4.8% in April but down 3% on the year. The S&P 500 is up 5.1% this month but down 5.3% on the year. The Nasdaq is up 5.4% on the month but down 9.4% on the year.
The markets for the week
Close for week Wk. ago close % chg. YTD. chg.
Dow Jones industrials 12,849.36 12,325.42 4.25% -3.13%
S&P 500 1,390.33 1,332.83 4.31% -5.31%
Nasdaq Composite 2,402.97 2,290.24 4.92% -9.40%
Russell 2000 721.07 688.16 4.78% -5.87%
Crude oil per barrel $97.91 $110.14 5.95% 21.58%
10-yr. Treasury yield 3.83% 3.47% 10.40% -5.03%
Gold per troy ounce $915.20 $927.00 -1.27% 9.21%
Does Citigroup's signal a bottom?
It may sound bizarre, but Wall Street clearly greeted Citigroup's first-quarter loss with relief.
The banking giant this morning reported a $5.1 billion loss in the period, $1.02 per share, a huge reversal from the profit of $5 billion, or $1.01 per share, that Citigroup earned in the first quarter of 2007. Analysts had expected a loss of 95 cents per share.Although Citigroup has lost money for two consecutive quarters, investors took Friday's news as more evidence that the financial crisis is nearing an end.
Citigroup's loss this quarter, while ugly, is not nearly as bad as the $9.83 billion loss the bank reported in the fourth quarter of 2007 -- its worst quarter ever.
Citi's revenue picture also brightened in the first quarter, coming in at $13.2 billion, a 48% decline from last year but up from the fourth quarter's $7.2 billion. Wall Street was looking for revenue of $14.3 billion.
Gains for Citigroup and Merrill Lynch suggested that credit and mortgage problems have been priced into financial stocks, "regardless of what kind of abysmal numbers they came out with," said Chris Conefry, a trader at Madison Proprietary Trading.
In addition, investment managers are sitting on huge amounts of cash, he said, and the rally has forced some short sellers with big positions to buy shares back.
This week's rallies have some observers speculating about how much the Federal Reserve will cut rates at its April 29-30 meeting.
"The dilemma the Fed faced with the moves they made at the last few meetings was sacrificing the dollar to save the economy," Conefry explained. "Now that their previous stimulus has appeared to invigorate the markets, they may be a bit mindful of making cuts to protect the dollar."
Write-down improvement, cost cutting
Citigroup also wrote down at least $13.9 billion in the quarter, half of which came from bad bets on subprime-related mortgages. Talk on The Street had placed Citi's write-downs as high as $20 billion.
"During the first quarter, valuations of our subprime-related exposures in fixed income markets and leveraged finance assets have further declined, and credit costs in our consumer lending businesses have increased," Chief Executive Officer Vikram Pandit said in a news release.
"This wasn't as bad as some people feared it would be," Sandler O'Neill analyst Jeffrey Harte said on CNBC this morning. "There was some fear out there that maybe there'd be more accelerated deterioration in consumer credit. The world isn't coming to an end, (but) there are still some big exposures to worry about."
Since taking over as CEO earlier this year, Pandit has been working to clean up the bank's balance sheet.
Citigroup said on a conference call that it will cut 9,000 jobs over the next 12 months, in addition to a previously announced 4,200 job cuts.
Pandit also told the Financial Times he will put more focus on Citigroup's core businesses: "Anything that smells like a conglomerate is going to be gone," Pandit said.
"Pandit is doing what needs to be done, focusing on capital management, allocating capital to areas that he wants to grow and exiting businesses that he doesn't think are core to the overall franchise," Peter Kovalski, a portfolio manager for the Alpine Dynamic Financial Services fund, told Bloomberg News.
Energy prices -- New York close
Fri. Thur. Chg. Month chg. YTD chg.
Crude oil (NYMEX) (per barrel) $116.69 $114.86 $1.83 14.87% 21.58%
Heating oil (per gallon) $3.2923 $3.2674 $0.0249 7.97% 24.27%
Natural gas (per million BTU) $10.5870 $10.3830 $0.2040 4.81% 41.48%
Unleaded gasoline (per gallon) $2.9893 $2.9578 $0.0315 14.26% 20.01%
Honeywell, Caterpillar power ahead
Adding to Friday's positive sentiment were those upbeat earnings reports from Honeywell and Caterpillar.
Honeywell reported first-quarter net income of $643 million, or 85 cents per share -- up 22% from the $526 million, or 66 cents per share, the company earned in the same period last year. The results topped analysts' expectations by 3 cents.
Honeywell said sales jumped 11% to $8.89 billion, thanks to strong demand for its aerospace products and contracts from Gulfstream and Airbus.
Honeywell boosted its 2008 guidance to between $3.70 and $3.80 per share, up from a previous forecast of between $3.65 and $3.80 per share. The consensus estimate for 2008 is $3.76 per share."We remain confident in Honeywell's outlook despite tougher global economic conditions," CEO Dave Cote said.
Shares of Honeywell rose $2.54, or 4.4%, to $59.94 this morning.
Meanwhile, Dow component Caterpillar (CAT, news, msgs), whose shares jumped 14% on the week, earned $922 million, or $1.45 per share, a 13% increase from the $816 million, or $1.23 per share, the heavy-machinery company reported in the same quarter last year.
Sales jumped 18% to $11.8 billion on strong business in China, Indonesia and India. Analysts had pegged Caterpillar to earn $1.33 per share on revenue of $10.7 billion.
Caterpillar was a big winner from the dollar's decline. Machinery sales to Europe and the Middle East were up 27% to $2.3 billion, and about half the gain was a function of translating currencies back into dollars.
Google calms critics with profit jump
Google (GOOG, news, msgs) skeptics can settle down: The Internet giant late Thursday quashed any concerns about its ability to make money.
Google earned $1.31 billion, or $4.12 per share, in the first quarter, a 30% increase from the $1 billion, or $3.18 per share, it earned in the same period a year ago.
Excluding one-time items, Google earned $4.84 per share, topping analysts' expectations of $4.55 per share.
The stock surged on the news, jumping $84.98, or 18.9%, to $534.52 a share.
Google's revenue soared 42% to $5.2 billion. Excluding shared advertising sales, sales came in at $3.7 billion, ahead of expectations.
Analysts had positive comments about the results.
"The company remains extremely well-positioned to benefit from the growth in display and branded advertising on the Internet," Bank of America analyst Brian Pitz wrote in a note to clients. "We also see significant opportunities for Google in the mobile and local advertising spaces."
Google CEO Eric Schmidt dismissed worries about the economy. "We do not see an impact" from the slowdown, Schmidt told analysts on a conference call.
"Google continues to further refine its ad technologies in the display area," David Garrity, the director of research with Dinosaur Securities, told CNNMoney.com. "That will help Google outgrow the downturn in the U.S. economy."
Pressure for paid clicks
Analysts and observers have been skeptical about Google's paid click volume after Internet tracking company comScore (SCOR, news, msgs) recently said Google's growth rate rose only 1.8% in the first quarter from the fourth quarter.
Google countered comScore in its report Thursday, saying that paid clicks grew 20%; Google included its international search markets in tallying its rate.
Paid clicks measure how many site visitors click on sponsored ads.
Still, quarter to quarter, 2008 showed a slowdown from the 30% growth rate posted between the fourth quarter of 2006 and the first quarter of 2007. "It's a far cry from where it used to be," said First American Funds manager Jane Snorek to Bloomberg News.
Schmidt had an optimistic outlook. "We are working to improve the quality of search," he said, with "fewer but better-quality ads."
ComScore shares were knocked down 8.4% in after-hours trading last night but were down 1.7% to $23.18 Friday.
AMD reports a loss
Another tech company didn't fare as well in the first quarter.
Advanced Micro Devices (AMD, news, msgs) late Thursday said it lost $358 million, or 59 cents a share -- less than the $611 million, or $1.11 a share, the company lost in the same period last year. Shares were down 1% to $6.13.
On an adjusted basis, AMD lost 51 cents per share, worse than Wall Street's estimate of a loss of 47 cents.
Revenue rose 22% to $1.51 billion, slightly ahead of expectations.
AMD has been facing stiff competition and a price war from rival Intel (INTC, news, msgs), which reported strong first-quarter revenue earlier this week.
"A seasonally weak first quarter was amplified by a challenging economic environment for consumers and lower-than-expected revenues of previous-generation products, resulting in lower-than-expected revenues in all business segments," AMD Chief Financial Officer Robert Rivet said in a statement.
"It's no uglier than what they had painted," David Wu, analyst at Global Crown Capital, told Bloomberg News. "They're not dead yet."
Short hits from the markets -- 4 p.m.
Fri. Thur. Chg. Month chg. YTD chg.
Treasurys
13-week Treasury bill 1.380% 1.210% 0.170 2.22% -56.05%
5-year Treasury note yield 3.048% 2.897% 0.151 20.24% -11.78%
10-year Treasury note yield 3.832% 3.729% 0.103 10.56% -5.03%
30-year Treasury bond yield 4.570% 4.524% 0.046 5.18% 2.49%
Currencies
U.S. Dollar Index 72.255 71.925 0.330 0.12% -5.79%
British pound in dollars $1.9968 $1.9908 0.0060 0.66% 0.38%
Dollar in British pounds £0.5008 £0.5023 -0.0015 -0.65% -0.38%
Euro in dollars 1.5751 1.5901 -0.0150 0.00% 7.77%
Dollar in euros € 0.6349 € 0.6289 0.0060 0.00% -7.21%
Dollar in yen 104.50 102.49 2.01 4.70% -6.57%
Canadian dollar in U.S. dollars $0.990 $0.990 $0.0004 1.29% -0.27%
U.S. dollar in Canadian dollars $1.011 $1.010 $0.0004 -1.27% 0.28%
Commodities
Gold $915.20 $942.90 -$27.70 -1.27% 9.21%
Copper $3.8880 $3.9120 -$0.02 -1.43% 27.85%
Silver $17.8200 $18.3050 -$0.48 0.73% 19.44%
Corn $5.9950 $6.0350 -$0.04 5.69% 31.61%
Crude oil (NYMEX) (per barrel) $116.69 $114.86 $1.83 5.95% 21.58%
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