Stocks End Slightly Higher

Energy, pharma and tech shares gained while retail issues fell as investors waited for words from Fed Chairman Bernanke

by David Bogoslaw

Investors held their breath Thursday, awaiting further signs from the Fed that they can count on further easing of rates in the near future.

Major U.S. indexes ended modestly higher after a jittery session as the market struggled to find direction ahead of Federal Reserve Chairman Ben Bernanke's remarks about the national and regional economies at an awards ceremony in North Carolina Thursday night. Gains by oil stocks such as Exxon Mobil (XOM) were offset by pressure on retailers amid some tough earnings and outlook reports, while traders didn't seem to be paying much attention to a raft of new economic data.

The Dow Jones industrial average rose 22.28 points, or 0.17%, to 13,311.73. The broader S&P 500 index edged up 0.70 points, or 0.05%, to 1,469.72. The tech-heavy Nasdaq composite index was up 5.22 points, or 0.20%, at 2,668.13.

On the New York Stock Exchange, 18 stocks climbed higher for every 15 that ended lower, while Nasdaq breadth was 16-14 negative. Financial stocks and certain other issues that rebounded in the prior two sessions underwent some profit taking, but trading overall was sluggish with most investors staying on hold until hearing what Bernanke may say to get more clarity on the likelihood of further rate cuts.

Optimistic interpretations of Federal Reserve Vice Chairman Donald Kohn's comments on Wednesday, which suggest a Fed rate cut is nigh, continue to support equities markets. Some market observers believe Bernanke will be forced to put Kohn's remarks in context as they seem to contradict the messages the Fed has been sending the markets since its quarter-point rate cut on Halloween.

While Bernanke will probably be less specific in his remarks tonight than Kohn was on Wednesday, Ray Stone, an economist at Stone & McCarthy Research Associates in Princeton, N.J., said he believes Bernanke is essentially philosophically aligned with Kohn's view on the higher risks of economic distress from the credit crisis.

"I don’t think [his comments] will be dismissive of the prospect for Fed easing," he said. Stone doesn't think Bernanke "would do anything [in his Nov. 29 speech] that would necessarily handcuff the committee," adding that he expects the FOMC to cut rates on Dec. 11.

Given the likelihood of rising rates of delinquencies, defaults and ultimately foreclosures as more mortgages -- mostly subprime -- reset to higher rates early next year, the Fed would minimize the damage by front-loading any rate cuts it has in mind for the next year, since then these mortgages would reset to rates that not as high as they would have been, Stone said.

George Feiger, Chairman of Contango Capital Advisors in San Francisco, said he's bewildered by the euphoria that greeted the prospect of a quarter-point rate cut on Wednesday, given that the interest rates the government pays have much less impact on economic growth than the rates that companies and individuals pay. With junk-rated credit spreads up between 100 and 200 basis points over the past couple months, the Fed's easing rates by 25 or even 50 basis points won't do much to lower the rates that companies pay and that are used to determine what level of capital spending they can afford, he said.

"Credit spreads have widened much more than the Fed is capable of reducing interest rates by," he said. "As credit problems emerge in the coming year, these credit spreads will keep jumping up."

The average high-yield 10-year corporate bond is now paying 500 basis points over Treasury yields and was paying as little as 250 basis points over Treasurys a few months ago, he said. And that spread was as wide as 1,300 basis points in the 1990s, so junk spreads are capable of jumping much more than they have already, he added.

In economic news Thursday, initial jobless claims jumped 23,000 to 329,000 for the week ended Nov. 24. The early Thanksgiving holiday may have contributed to the unexpected increase, Action Economics said. November's initial claims averaged 338,000, compared with averages of 327,000 in October, 313,000 in September and 324,000 in August.