MIDDAY ACTION, August 31

Stocks are trading broadly higher midday Friday on hopes that the economy, with the help from the Fed and the President, can withstand the recent housing slump and credit market turmoil. In midday action, the Dow Jones Industrial Average () was up 150 points. The NASDAQ () had added almost 30.

Comments from President Bush seemed to help ease some investor anxiety Friday morning after he announced plans to help troubled borrows. Mr. Bush said the Federal Housing Administration [FHA] stands ready to help those that have fallen behind on mortgage payments by allowing them to refinance at more favorable rates. Mr. Bush is also seeking to help homeowners by making changes to the tax code and through stricter enforcement of predator lending laws.   

Fed Chairman Ben Bernanke was also getting some attention, as he delivered a speech at the central bank’s annual conference in Jackson Hole, Wyoming. The head of the Fed said that he was ready to act to prevent further harm to the economy. That seemed to fuel some speculation about a possible rate cut at the next FOMC meeting on September 18.  

Mortgage stocks are higher. Accredited Home Lenders () rallied $2.43 to $8.74 on news Lone Star Funds has made a new offer to buy the firm for $214 million, or $8.50 a share. Fannie Mae (), Freddie Mac (), and Countrywide Financial (), which have all suffered losses lately due to credit concerns, are all trading higher as well.

Energy-names are seeing relative strength as crude makes a run higher. Crude was recently trading up 89 cents to $74.25. The Oil Service HOLDRS (), which holds a basket of oil drilling companies, was recently up $4.38, or 2.5%, to $179.89.

Tech stocks remain strong. Apple Computer’s () run continues as players buy shares in anticipation of a new iPod product announcement early next week. AAPL is up $1.60 to $137.85. Research In Motion () continues its run higher the day after a flurry of merger speculation infected the stock. RIMM is up another $2.13 to $85.00 a share today. However, Dell Computer () gave back early gains despite reporting better than expected earnings and revenues. DELL fell 46 cents to $28.00 a share.

The day’s economic news came in better than expected. A report early in the day showed personal incomes rising .5% and spending increasing by .4% during the month of July. Economists were looking for both spending and incomes to increase by .3%.  Meanwhile, the core Personal Consumption Expenditures [PCE] index, a gauge of inflation, rose just .1% last month. Economists were looking for a .2% increase.

The Chicago Purchasing Manager’s Index [PMI] topped expectations. The gauge of regional manufacturing activity rose to 53.8 from 53.4. Economists were looking for a decline to 53.0.  A separate report on factory orders showed a 3.7% increase in July, topping analyst estimates for a 3.0% rise. Finally, the University of Michigan sentiment index edged up to 83.4 in late August from 83.3, compared to expectations for a decline to 83.

Bonds are heading lower on the heels of today’s strong economic numbers. However, losses have been contained by rate cut hopes. The benchmark ten-year Treasury bond (September) fell 20/32^nd in early trade. It is now down 7/32nds and its yield sits near 4.55%.

For the stock market, the news is indeed supportive of higher prices. The stronger-than-expected economic numbers along with soothing words from policy-makers has the major averages sporting solid gains in midday action. Now, trading is likely to thin out as many players leave early for the three-day Labor Day weekend. However, late-day strength is also a possibility, as many market bulls would like to see the market end the month of August on a strong note.   

Frederic Ruffy
Senior Writer & Index Strategist
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