Dow Closes Above 14,000
Earnings Reports, Mergers Sustain Long Market Rally

By Tomoeh Murakami Tse
Washington Post Staff Writer
Friday, July 20, 2007

NEW YORK, July 19 -- The Dow Jones industrial average closed above 14,000 for the first time Thursday, having climbed 1,000 points in three months as strong corporate earnings overpowered fallout from the deteriorating housing market.

U.S. stocks had been gaining steadily since last Thursday on corporate merger activity and solid earnings reports, while investors fought off concerns about inflation and growing evidence that troubles in the mortgage industry were worse than originally thought.

On Tuesday, the Dow reached the 14,000 level but slipped in late trading. Stocks took a hit on Wednesday after Bear Stearns told investors in two of its hedge funds that their holdings had been reduced, at best, to pennies on the dollar. The funds included bonds backed by mortgage loans to high-risk borrowers.

But investors refocused on good earnings news and stocks recovered Thursday. At the close, the Dow stood at 14,000.41, up 82.19 points, or 0.6 percent, from the previous session.

The Dow, which measures 30 blue-chip stocks, hit 13,000 just 12 weeks ago. It crossed 12,000 in October.

The Standard and Poor's 500-stock index also reached a record high Thursday, rising 6.91 points, or 0.5 percent, to 1553.08. The Nasdaq composite index rose 20.55 points, or 0.8 percent, to 2720.04.

While the Dow is up 12.3 percent for the year, the S&P, a broader market measure, is up 8.7percent. The Nasdaq is up 12.6 percent, although far from its peak of 5049 during the dot-com boom in 2000.

Market analysts said U.S. stocks were in the classic position of "climbing a wall of worry."

"Everyone is worried about everything, and that means they're sitting with a boatload of buying power on the sidelines," said James W. Paulsen, chief investment officer of Wells Capital Management. "Every time it doesn't get quite as bad as they thought, they're kind of enticed back in. . . . There's constant chronic negative sentiment. But that's a positive for the market."

Paulsen and other money managers also noted that market and economic conditions were largely healthy. The economy, while slowing, is growing despite the housing slump. Unemployment remains low.

Corporate earnings, while also slowing, have come in above Wall Street expectations. Strong global economic growth and a weak dollar have boosted the bottom line for large companies with overseas operations.

On Thursday, IBM reported better-than-expected second quarter results. Profit rose 12 percent from the comparable quarter last year, helped by strong sales from the company's global services division. IBM shares rose 4.3 percent. Honeywell International said its earnings rose 17.3 percent, also beating Wall Street estimates. Both companies are components of the Dow.

Stocks, while moving higher, are still trading at reasonable prices, analysts said.

"There's lots to like still -- that's what keeps it going higher, " Paulsen said.

Still, some analysts cautioned that the shakeout in housing is far from over. Problems with subprime mortgages, or loans made to home buyers with shaky credit, will affect more than just Bear Stearns, they said. In two days of congressional testimony that ended Thursday, Federal Reserve Chairman Ben S. Bernanke cited estimates that credit losses related to subprime mortgages could reach $100 billion.

Subprime-loan troubles have also put into question the continuing access to cheap money. A global low-interest environment and investors' willingness to take on risk have fueled corporate dealmaking. The leveraged buyout boom, in which private-equity firms rely on generous credit conditions, buy companies and load them with debt to pay for the acquisitions, has been a main driver of stock prices. But investors have resisted several loans and bonds floated for such deals, demanding better terms.

Access to low-interest loans have also played a role in the rush of corporate buyback of stocks because some companies are using borrowed money to buy their shares.

"The market can stay irrational longer than you can stay solvent," said Axel Merk, manager of the Merk Hard Currency Fund.

The question, Merk said, is whether these are just road bumps or signs of larger problems.

"I think people are misreading that we've just had a little hiccup," he said. "I do think that it will take a while for the market to come to terms with that. . . . I am rather concerned that we're more in a 1987 scenario and not in a Goldilocks world that will go up forever."