Blue Chips On Top

Mixed earnings and a hint of inflation sent large caps slightly higher and the rest slightly lower this week:

Dow ……………. 12,002 +0.3%
Nasdaq …………. 2,342 -0.6%
Nasdaq 100 ……… 1,710 -1.0%
S&P; 500 ………… 1,369 +0.2%
S&P; Midcap 400 ….. 780 -0.6%
S&P; Smallcap 600 … 388 -0.3%

Monday began with profit taking but quickly got back to the recent bullish tone. Good reports from Eaton (ETN) and Grainger (GWW) along with a solid October manufacturing read lent credence to the Fed’s soft landing scenario.

The financial sector merely treaded water when Schwab (SCHW) topped estimates but Wachovia (WB) only met them. Schwab has risen more than 30% since July, leaving some investors concerned about it having come too far too fast.

Oil rose more than 2% to nearly $60 per barrel, putting the energy sector back in the limelight. Some analysts credited cold weather in parts of the U.S. while others pointed to the likelihood of OPEC cutting production. I wrote two weeks ago that I thought it would.

The Dow rose 0.2% and the Nasdaq 0.3%.

Tuesday brought a mini sell-off thanks to the producer price index report. Total PPI fell 1.3%, but the core PPI rose a stronger than expected 0.6%, resurrecting concerns about inflation.

Then, Goldman Sachs worried that expectations had become too high around Intel’s Q3 report. The firm said that the chip giant was overvalued, downgraded it, and sent the stock down 3%.

It wasn’t all bad, though. Johnson & Johnson (JNJ) and United Tech (UTX) gave good reports, although the latter was sold into strength. Merrill Lynch shined another light on the financial sector by doubling Q3 net income. The outlook for another quarter of double digit gains improved again.

The Dow fell 0.3% and the Nasdaq 0.8%.

Wednesday was IBM (IBM) day. The tech leader rose 4% at the opening bell to a new 52-week high after beating earnings estimates. Intel, thumbing its nose at Goldman Sachs, also beat estimates. The two Dow components pushed the average over 12,000, although it wouldn’t close above 12k until the next day.

The consumer price index core rate rose only 0.2%, just what economists had expected. Hawks could still point out, and wasted no time in doing so, that the core rate stood at a year-over-year 2.9%, the highest it’s been in ten years and far above the Fed’s 2% target. Doves held the day, however, by emphasizing that the early year trend higher was slowing and that over time the rate should come down. All in all, the street concluded that the Fed will probably not raise interest rates next week.

Econoday, however, urged caution: “While the markets were celebrating the moderate core number, the Fed probably was looking at the detail and noting the strength still in the numbers outside of energy and motor vehicles. Today’s report will not change the views of Fed officials who have been making recent hawkish comments.”

The tech sector as a whole had a rough day. Linear Tech (LLTC) and Novellus (NVLS) both guided lower for next quarter, dragging down the semiconductor equipment group. Motorola’s (MOT) earnings fell 45% year-over-year. Yahoo guided lower for Q4.

Financials, however, stayed strong. JPMorgan Chase (JPM) beat estimates, although CEO Jamie Dimon reminded investors that the firm is riding an ideal credit backdrop that won’t last forever.

Oil fell 2% to less than $58 per barrel.

The Dow rose 0.4% and the Nasdaq fell 0.3%.

On Thursday, the Dow closed at 12,012, its first ever close above 12,000. The breaching of that psychological milestone brought mixed reactions from investors. Bulls cheered and bears snickered at the impending downslope that they believe waits on the other side of Dow 12k.

In any case, it wasn’t much of a party. There was no dramatic percentage increase that hurled the market to a new shelf. It was a mild increase on blase news that happened in the proximity of a round number. Hard number crunchers looked up from their graph paper just long enough to say, “and so?”

It might have been oil’s 1.5% increase to $58.50 that kept the party streamers in their packages. It might have been Advanced Micro Devices (AMD) saying that its margins had come down a lot. It might have been news that Dell’s (DELL) worries are far from over as Hewlett-Packard (HPQ) passed it in global PC shipments. The latter seems unlikely. After all, such bad news for Dell was rather happy news at HP. The market, though, saw fit to sell Dell down a lot more than it bid HP up.

Then, Citigroup (C) and Washington Mutual (WM) both missed Q3 earnings estimates with grumblings about the inverted yield curve and something about net interest margin compression.

Even Honeywell (HON) beating expectations didn’t bring much joy. Worries that the global economy would derail next year led to profit taking in its stock.

The lone smiling face in the crowd was United Parcel Service (UPS), which beat Q3 forecasts and said it’s looking forward to a solid holiday season.

How’s that for a mixed celebration of Dow 12k?

The Dow rose 0.2% and so did the Nasdaq.

Friday was a tired day on Wall Street. After the recent climb to Dow 12k, the urge to take a rest was palpable.

It was certainly helped along by Caterpillar (CAT), which missed Q3 earnings, reduced its full-year forecast, and provided estimates for 2007 considerably below what analysts had been expecting. That added to the previous day’s fretting over the global economy. CAT stock fell 14%, the worst day it’s had since the October 1987 crash 19 years ago.

Then there was Google (GOOG), the golden child of the internet that opened its conference call the night before with these words from CEO Eric Schmidt: “Business is very, very good…” The internet search trendsetter beat earnings again, the eighth time in just nine quarters since going public. Its stock rose 8%.

Google was countered by a 20% sell-off of SanDisk (SNDK) when it missed Q3 estimates as prices of its flash chips fell more quickly than expected. Broadcom (BRCM) fell 5% when it lowered Q4 sales estimates.

Oil, though, dropped nearly 3% to its lowest price this year at $56.82 per barrel. As predicted here, OPEC agreed to reduce production by 1.2 million barrels a day, but traders believe members will cheat and that the true reduction will be less than that, hence the sell-off.

The Dow fell 0.1% while the Nasdaq gained 0.1%.

This was a good week for us in the sense that three of our four current buy targets came closer to our desired prices. Although I’ve been calling for an end of year rally since the beginning of the year and went to a bullish stance a little over a month ago, I’m still looking for bargains. They appear in every market environment and we’ve done well buying them over the years. Our existing positions are appreciating well, but we’re looking to get new ones going.

We’ll get them yet.

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