Closing Market Report

Star-Bulletin news services

Wednesday, June 16, 1999

Flat consumer prices
ignite markets

The Nasdaq gains more than 100 for the
first time as pressure subsides for
multiple rate hikes

Staff and wire reports


NEW YORK -- Stocks rallied, sending the Nasdaq composite index to its first 100-point gain, after a government inflation report eased concern that the Federal Reserve would start a series of interest-rate increases.

"If the CPI remains under control, it's good for all stocks, because it will sustain the good relationship between high growth and simultaneous low inflation," said Colin Glinsman, who oversees $65 billion as chief investment officer for Oppenheimer Capital, a unit of Pimco Advisors.

Oracle Corp. sparked the Nasdaq's advance with fourth-quarter earnings that beat analysts' expectations. Financial stocks such as Citigroup Inc. gained after declining since mid-May on concern rates would rise.

The Nasdaq soared 103.16 points, or 4.27 percent, to 2,517.83. It was the index's ninth-biggest rise in percentage terms and the largest since the Fed cut interest rates on Oct. 15. The Dow Jones industrial average rose 189.96, or 1.79 percent, to 10,784.95. The Standard & Poor's 500 index climbed 29.25, or 2.25 percent, to 1,330.41.

Advancers outnumbered decliners by a 13-to-7 margin on the New York Stock Exchange, with 1,996 up, 1,038 down and 503 unchanged. NYSE volume totaled 801.36 million shares vs. 697.09 million in the previous session.

The NYSE composite index rose 9.89 to 632.17, and the American Stock Exchange composite index rose 1.00 to 764.92. The Russell 2000 index of smaller companies rose 7.19 at 441.20.

The 30-year Treasury bond was up at 88 26/32, pushing its yield down to 6.07 percent from 6.11 percent yesterday.

Stocks haven't set records since May 13, the day before the last Consumer Price Index report, which showed a surprising surge in April and spurred concern that the Fed would raise rates. Higher interest rates hurt stocks because the present value of companies' expected future earnings declines when discounted using a higher rate. The Dow average is still 2.9 percent below its record.

The Labor Department said CPI was unchanged and the core inflation rate, which excludes the volatile food and energy components, rose 0.1 percent. Economists surveyed by Bloomberg News had forecast increases of 0.2 percent for both. The news suggested that although Fed officials may still raise interest rates at their meeting at the end of the month, they may refrain from increasing them more than once.

"A lot of people expect the rate hike is already built in, and no matter how the number came out, people were poised today for a rally in the bond market, which in turn affects stocks positively," said Craig Curtis, a trading desk manager at Prudential Securities in Chicago.

Some 802 million shares changed hands on the New York Stock Exchange, above the daily average of 785 million. Trading had been lighter in the days leading up to the CPI report.

Computer and online stocks led the rally after being battered in April and May as concern deepened the Fed would raise rates. Investors tend to buy those stocks for profits projected far into the future, and the present value of those profits falls when that expected earnings stream is discounted using a lower interest rate.

Oracle rose 7 13/16 to 32 15/16 after the No. 1 maker of database management software reported after the market closed yesterday that fiscal fourth-quarter net income was $527 million, or 36 cents a share, from $402.8 million, or 27 cents, a year ago, beating the 32 cents expected by analysts polled by First Call Corp. The company said the outlook for first-quarter software sales looked good.

More than 100 million Oracle shares changed hands. The stock had fallen 38 percent from its high on Feb. 3.

The Bloomberg U.S. Internet Index jumped 11 percent, its biggest one-day gain since Jan. 11. The index slid 43 percent from its April 13 peak through yesterday, including a 12 percent drop on Monday.

Many Internet companies aren't profitable yet, so they don't have P/E multiples. Still, they've soared in market value in the past year, indicating that investors expect the future stream of earnings to be bountiful.

America Online Inc., the biggest Internet service provider, gained 11 7/8 to 106 5/8, Yahoo! Inc., the No. 1 online search directory, rose 16 3/8 to 141 5/8 and Inc. surged 15 3/16 to 111 11/16.

The CPI report reinforces the view that "reasonable economic growth and low inflation will last a little bit longer," said R. Lynn Yturri, who runs the $1.5 billion One Group Income Equity Fund for Banc One Investment Advisors Corp. That's good for fast-growing companies, he said.

"It favors the price-earnings multiples of growth stocks, which have been under a lot of pressure lately," Yturri said. Those stocks suffered in recent weeks as investors worried that inflation would push interest rates higher, he said. "This alleviates that fear."

Still, Glinsman said, "the jury is still out on the long-term trends," and investors will be focusing on economic numbers in coming months for indicators of future Fed action.

Financial stocks climbed, after being hurt in recent weeks because higher interest rates lessen demand for financial services, such as loans.

"There's quite an opportunity in the financial area --those stocks have underperformed as the long bond has risen," Glinsman said. He owns and Citigroup, which gained 2 3/16 to 46, and Chase Manhattan Corp., up 5 5/16 at 80 7/16. The PHLX/BKW Bank Index rose 3 percent, led by Citigroup.

Biotechnology company Sugen Inc. gained 6 3/4 to 29 1/4 after Pharmacia & Upjohn Inc., the world's No. 1 maker of human growth hormones, agreed to buy it for $31 a share, a 38 percent premium to Sugen's closing stock price.

General Motors Corp. rose 2 7/8 to 64 7/16. "Much of the weakness in auto stocks in the last few weeks is tied to fears of higher interest rates and those may be put to rest," said J.P. Morgan Securities Inc. analyst David Bradley. "GM had been getting pounded more than the others so it' setting more of a bounce today." GM has fallen 16 percent since May 1.

Jabil Circuit Inc. tumbled 6 9/16 to 47 7/16 in NYSE trading. The maker of circuit boards warned after the exchange closed yesterday that fourth-quarter net income may be reduced by as much as 10 percent because of last-minute design delays on new products. It was expected to earn 33 cents, the average estimate of analysts surveyed by First Call.

Circuit City Group rose 8 3/8 to 90 3/8 after the No. 2 U.S. consumer-electronics retailer, said it will pull the plug on its unprofitable Divx digital video disk venture, resulting in a $114 million fiscal first-quarter charge. The company also said it will split its stock 2 for 1 and reported better-than-expected first-quarter earnings before the Divx charge.

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