Gold nearly hits $1,300; Dow off 22

Unease about the economy fuels gold buying, but oil drops. Adobe weigh on techs. Microsoft sells $4.75 billion in debt. Sears will partner with Forever 21 chain, hoping for 'pizzazz.'

By Charley Blaine Sep 22, 2010 1:55PM

Charley BlaineUpdated: 7 p.m. ET

Gold surged to nearly $1,300 an ounce today before falling back slightly, and stocks drifted lower. Weakness in technology stocks and a disappointing report on home prices were offset by gains in pharmaceutical and staples stocks. 

Gold's surge was in reaction to the Federal Reserve's announcement Tuesday that it stood ready to do more to support the economy. The announcement also dropped interest rates and pushed the U.S. dollar lower against major currencies. 

The tech decline was centered on an earnings warning from  Adobe Systems (ADBE) and disappointment with the size of a dividend increase from Microsoft (MSFT). (Microsoft is the publisher of MSN Money.)

The Dow Jones industrials ($INDU) closed down 22 points to 10,739, ending a five-day winning streak. The Standard & Poor's 500 Index ($INX) was off 6 points to 1,134, and the Nasdaq Composite Index ($COMPX) was off 15 points to 2,335. The losses for the S&P 500 and Nasdaq were their second in two days.

Among stocks seeing big activity:

  • Carmax (KMX), up 8.5% to $26.16, the top performer among S&P 500 stocks. The biggest U.S. used-car dealer earned 48 cents a share in the fiscal second quarter, better than Street estimates. Revenue was up 13%, and the company plans to open five superstores in 2012.
  • Jefferies Group (JEF), down 5.2% to $23. The brokerage house's third-quarter earnings missed analysts’ estimates as trading revenue declined. Other Wall Street firms are expected to report similar results.
  • EBay (EBAY), down 1.6% to $24.34. Lorrie Norrington, president of its main Marketplaces business, is leaving for personal reasons. The company said his successor may come from outside the company.
  • Netflix (NFLX), up 6.6% to $156.93. The company hit an all-time high of $156.67. Netflix has launched a streaming-video service in Canada. The stock may be gaining from reports that Blockbuster (BBI) may file for bankruptcy protection.
  • General Mills (GIS), up 2.7% to $36.63. Fiscal-first-quarter earnings rose 12% to $472.1 million, or 70 cents a share. Excluding one-time items, the cereal maker earned 64 cents a share. The Street estimate was 63 cents. 
The pullback came a day after the Federal Reserve said explicitly that it will move to keep the economy from falling into a recession. That was some uncertainty about what the trigger might be.

But the market's performance was better than after the Fed's Aug. 10 meeting, where it was even less clear about how it might respond to the slowing economy. The Dow fell 54 points that day and 265 points on Aug. 11 and tumbled more than 700 points by Aug. 26. It wasn't until Monday that the blue chips had recovered all those losses.

The market will start Thursday with one bit of good news. Bed Bath & Beyond (BBBY) shares jumped 4.6% after hours to $44 after reporting better-than-expected earnings.

Futures trading suggest stocks will open higher.

The market faces one big earnings report on Thursday. Nike (NKE) will report after the close. The National Association of Realtors will report on existing-home sales, and the Labor Department will report on jobless claims.

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Housing is still weak
Housing was a weight on today's market. U.S. home prices dropped 3.3% in July from a year earlier, the eighth consecutive decline,  a Federal Housing Finance Agency report said today.

Prices fell 0.5% from June.

"We have a lot of homes for sale, and a lot of them are distressed properties," housing economist Thomas Lawler told Bloomberg News. "That is putting downward pressure on home prices."

But gold shoots higher
Gold for December delivery hit $1,298 an ounce this morning on worries that the Fed seems interested in preventing deflation and could unleash a new round of inflation.

But the Fed's announcement was a bit of a disappointment for investors who wanted a clearer sense of where the Fed sees the economy heading.

Part of gold's rally was due to declines in the dollar's value against the Japanese yen and euro. But those declines were trimmed by this afternoon, and gold settled at $1,292.10 an ounce, up $17.80, or 1.4%, and a new closing high.

Gold experts believe $1,300 an ounce is just days away, with the metal perhaps hitting $1,500 by the end of the year.

Gold-mining shares were higher. Newmont Mining (NEM) rose 1.3% to $64.94. Barrick Gold (ABX) was up 0.9% to $47.22.

The dollar had fallen quickly after the Fed's Tuesday afternoon announcement.

Silver settled at $21.055 an ounce, up 2% on the day and silver's first close above $21 since March 2008. Copper was up 2.4% to $3.565 a pound. Silver is up 25% this year while gold is up 17.9%. Copper is up 6.5%.

Crude oil for November delivery was off 84 cents, or 1.1%, to $74.13 after the Energy Department reported a larger-than-expected expansion of domestic supplies. The increase reflects less overall demand because of the continuing fallout from the 2007-09 recession.

Energy stocks were generally lower.

Interest rates were lower, with the 10-year Treasury yield down to 2.51% from 2.594% on Tuesday and 2.746% on Friday. The iShares Barclays 20+ Year Treasury Bond exchange-traded fund (TLT) was up 0.9% to $104.61.

Adobe's warning clobbers shares

Adobe shares tumbled 19% to $26.67 and were the biggest drag on the Nasdaq-100 Index ($NDX.X) after the software maker slashed its November sales forecast to 25% less than analysts' estimates Tuesday.

At least four analysts downgraded the stock today. 

Adobe wasn't the only tech stock to disappoint on guidance. PMC-Sierra (PMCS) shares were down 6% to $7.32. The chip-maker cut its third-quarter sales forecast, saying it expects $163 million at most. Analysts were looking for $173 million or so.

Microsoft boosts dividend, sells debt
Microsoft disappointed investors with its dividend increase to 16 cents per share, a 23% increase. So, the shares were down 2.2% to $24.61. The dividend is payable Dec. 9 to shareholders of record on Nov. 18.

The problem is that, based on today's price, the increase boosts the yield only to 2.6% from a current 2.05%. Many investors were hoping for something closer to 24 cents a share, which would translate into a 3.9% yield.

The dividend announcement also said the software giant would $6 billion in new debt. Late today, the company did sell $4.75 billion in debt at the lowest corporate yields on record, Reuters said.

Microsoft sold $1 billion of three-year notes priced at a record coupon of 0.875%. That translates into a yield of 25 basis points more than comparable U.S. Treasuries. (A basis point is one one-hundredth of a percentage point.)

It also sold $1.75 billion of five-year notes priced at 40 basis points over Treasuries, $1 billion in 10-year notes priced at 55 basis points over Treasuries, and $1 billion of 30-year bonds sold at 83 basis points.

Many corporations are selling billions in bonds to take advantage of low interest rates.

A bias to the downside
Twelve of the 30 Dow stocks were higher, led by Alcoa (AA), up 4.7% to $11.70 on the dollar's weakness. Microsoft was the laggard.

Thirty-seven Nasdaq-100 stocks were higher, led by Sears Holdings (SHLD), up 5.3% to $71.77. Adobe was the the loser on the day. The index itself was off 6 points to 1,983.

Sears moved higher on news it plans to partner with fashion retailer Forever 21 at its store in Costa Mesa, Calif.

Forever 21 will take about 15% of the store's space, with an opening expected in the spring. Sears will get rental revenue and "some much-needed fashion pizzazz," The Wall Street Journal said today. If the idea works, they'll try it in other stores.

Short hits from the markets -- New York close


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