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STOCK BULL RIDERS EYE HOME SALES, EARNINGS
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| By Cal Mankowski
Fri Jul 20, 10:17 PM ET
NEW YORK (Reuters) -
Home sales and a report on economic
growth may help investors decide if they want to keep riding a
bull market in stocks, while a torrent of quarterly earnings
reports will no doubt cause some anxious moments.
A sharp drop in shares of equipment-maker Caterpillar Inc.
(NYSE:CAT - news) on Friday showed just how badly a stock can be hurt
when there is an earnings shortfall. The company reported an
earnings decline that was greater than expected. The stock fell
4.4 percent and spoiled the Dow's day.
Despite Caterpillar's problems, multinational corporations
have been in a position to benefit from stronger economies
overseas.
"One of the reasons big-cap stocks have done so well is
that they have a lot of foreign exposure and that is where
profit growth has been coming from," said Bob Schaeffer,
portfolio manager at Becker Capital Management in Portland,
Oregon. "Domestic profitability has been flagging for some
time."
In the coming week, earnings are due from the likes of
pharmaceutical companies Merck & Co. Inc. (NYSE:MRK - SGP - LLY - news) and
Bristol-Myers Squibb (NYSE:BMY - news).
Others on the list include such high-profile names as
Boeing Co.(NYSE:BA - XOM - news) and Ford Motor Co.
(NYSE:F - news)
Although investors have been caught off guard by the
occasional earnings disappointment from companies such as
Caterpillar and Pfizer Inc. (NYSE:PFE - news), U.S. stock indexes have
been reaching new lifetime and closing highs, with the Dow
industrials closing above 14,000 for the first time on
Thursday.
The Standard & Poor's 500, which earlier in the month
finally surpassed its old all-time set in 2000, also ended
Thursday at a new closing high.
But worries about earnings shortfalls and subprime
mortgages led to Friday's sharp pullback and broke a three-week
streak of gains for the three big U.S. stock indexes. The
subprime problem is tied to a weak housing sector, where sales
have faltered and prices have slumped.
After losing ground on Friday, the Dow Jones industrial
average (^DJI - ^IXIC - news) declined 0.7 percent.
For the year to date, though, stocks are sharply higher:
The Dow is up 11.1 percent, while the S&P 500 is up 8.2 percent
and the Nasdaq is up 11.3 percent.
TIME FOR A HOUSING CHECK-UP
The health of the housing sector is due for a check-up in
the form of new figures on sales of both new and existing
homes.
On Wednesday, the National Association of Realtors will
report on sales of existing homes in June. According to the
consensus in a Reuters poll of economists, sales fell to a
5.87-million-unit annual rate from 5.99 million in May.
The following day, the Commerce Department issues a report
on new home sales. The consensus view is for an annual rate of
895,000 in June, which would be down from 915,000 in May.
The housing sector has been a concern to investors as
subprime mortgages sold to less credit-worthy borrowers have
experienced rising defaults. Some hedge funds with investments
in securities linked to the mortgages have had huge losses.
"One of the things that has puzzled us is that with the
weakness seen in housing, the jobs picture has remained so
strong," said Schaeffer of Becker Capital Management, which has
$2.7 billion in assets under management.
Schaeffer said a lot of the jobs created from 2003 to 2006
were associated with a booming housing sector, so for
employment to hold up while housing is in a slump seems to be
"a little bit of a disconnect."
In addition to the report on new home sales on Thursday,
other data that day includes durable goods orders. According to
the median forecast in the Reuters poll, orders rose 1.8
percent last month after May's revised drop of 2.4 percent.
Schaeffer said while some improvement in durable goods
orders is to be expected after the May decline, Caterpillar's
problems, in part due to weak sales, could cause expectations
to be scaled back somewhat. Durable goods are washing machines,
refrigerators and other big-ticket items expected to last three
years or more.
Friday will bring the first report on how the U.S. economy
did in the second quarter of 2007. A rebound to an annual
growth rate of 3.2 percent is forecast after a dismal pace of
just 0.7 percent in the first quarter.
A final July reading of consumer sentiment will come out on
Friday in a report from the Reuters/University of Michigan
Survey of Consumers.
TOO BULLISH?
Despite the occasional sharp pullbacks in stocks such as
Friday's downturn, some worry that investors are getting too
enthusiastic about stocks. This can be seen as a "contrary"
sign that things have gotten out of hand.
"The thing that concerns me and what to look for in the
relatively near-term is that sentiment has turned fairly
dramatically," said Jon Merriman, chief executive of Merriman
Curhan Ford & Co., an investment bank in San Francisco. "It's
gotten quite positive and I hate that."
Merriman noted that the price of oil has climbed well above
$70 per barrel.
"When they whack the (stock) market, people will be
focusing on oil again," he said.
Michael Sheldon, chief market strategist for brokerage
Spencer Clarke in New York, suggested that investors keep an
eye on the dollar, which is back to making new lows.
He said if the U.S. Dollar Index (^DXY - reuters.com)
(Additional reporting by Jennifer Coogan and Kristina
Cooke)
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