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Dow bounces back to 9,000

Fri., July 24, 2009, midnight

Analysts caution that improved profits so far based largely on cost-cutting

NEW YORK – The Dow Jones industrial average jumped above 9,000 on Thursday for the first time since early January as favorable home-sales data combined with another round of encouraging earnings reports to boost optimism about the economy.

The stock market’s best-known indicator closed at 9,069.29, its highest level since November, and all the big indexes gained more than 2 percent.

“I don’t think the market is signaling that we are fully healed at all but it is telling us that there is a strong likelihood that a recovery is under way,” said Ciaran O’Kelly, head of equities, Americas, at Nomura Securities Intl. Inc. in New York.

Investors were buoyed by news that sales of previously owned homes rose 3.6 percent in June – more than expected and the third consecutive monthly improvement.

Several positive earnings reports from companies including Ford Motor Co. and eBay Inc. also reinforced some people’s view that the recession might be lifting and that corporate profits could improve the rest of the year.

Headlined by companies such as Goldman Sachs Group, second-quarter corporate profits have been stronger than expected, fueling a rally in the major averages over the past week and a half that has tacked almost 1,000 points onto the Dow.

Of the companies that have reported second-quarter earnings so far, 76 percent have topped analyst estimates, according to Thomson Reuters.

“Earnings have been off the charts, revenue has been pretty solid and guidance (about future prospects) has been decent,” said Joe Cusick, senior market analyst at OptionsXpress, a Chicago-based brokerage. “There really hasn’t been a lot of reason why people would take profits.”

Still, the economy, and in turn, the market, are likely to face more quicksand pits in the months ahead. Many more companies, including retailers, who are a barometer of consumer spending, have yet to announce second-quarter earnings. And many of the corporations that have already released their reports said they made money because they had cut costs so deeply, something that they can’t keep doing indefinitely.

There was already some troubling earnings news after trading ended Thursday. Microsoft Corp. missed analysts’ expectations for revenue, sending its shares lower in extended trading. American Express Co. and Amazon.com also traded lower after releasing their earnings.

Another ongoing problem is the banking business. Banks are forecasting that they’ll continue to suffer losses from loans as consumers keep getting laid off.

“What we’re seeing is an abatement of bad news rather than an emergence of good news,” said Diane Swonk, chief economist at Mesirow Financial. “The economy is stabilizing at a low level, and demand from consumers is still weak.”

Some analysts warn that stocks won’t be able to hold their gains if companies can’t increase earnings by boosting revenue rather than slashing costs.

“It’s like going on a diet. You can only starve yourself for so long,” said Lawrence Creatura, portfolio manager at Federated Investors in Rochester, N.Y. “You cannot cost-cut your way to prosperity.”

Creatura noted that companies are reducing costs in large part by getting rid of workers. That could wind up hurting other businesses as the ranks of unemployed people grow. Unemployment is at a 26-year high of 9.5 percent, and the Federal Reserve predicts it will top 10 percent by year-end.

Analysts also caution that volume remains relatively light, as is typical of the summer months when many traders take vacations. It’s easier for the market to make big swings when there are fewer trades.

The Associated Press and the Washington Post contributed to this report.


 

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