Dow edges higher on AOL shake out

cbs.marketwatch.com AOL Time Warner rises, Dell tumbles; crude prices ease By Allen Wan, CBS.MarketWatch.com Last Update: 3:47 PM ET Jan. 13, 2003

NEW YORK (CBS.MW) - While blue chips were barely afloat by late afternoon trade Monday and Dell Computer's losses threatened to drag down the Nasdaq, AOL Time Warner shares surged after chairman Steve Case resigned from the media and entertainment giant.

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The Dow Jones Industrial Average ($DJ: news, chart, profile) rose 23 points, or 0.3 percent, to 8,809. The Nasdaq Composite ($COMPQ: news, chart, profile) was flat at 1,447. The S&P 500 Index (SPX: news, chart, profile) was also steady at 927.

Trading remained volatile. Good news in the form of falling oil prices, changes at AOL Time Warner and optimism over fourth-quarter earnings were offset by broker downgrades of Dell Computer, Johnson & Johnson and Duke Energy.  Watch latest market update.

"It's basically a tug of war between the bears and the bulls," said Peter Cardillo, chief investment strategist at Global Partner Securities. "We have a market that wants to go higher but can't because of the geopolitical concerns and technical resistance."

The Dow was being supported by gains of around 2 percent or better from General Motors (GM: news, chart, profile), Home Depot (HD: news, chart, profile), Boeing (BA: news, chart, profile), J.P. Morgan Chase (JPM: news, chart, profile) and Disney (DIS: news, chart, profile). But Johnson & Johnson slipped 1.8 percent and Hewlett-Packard (HPQ: news, chart, profile) eased 1.2 percent.

Shares of AOL Time Warner (AOL: news, chart, profile) surged 2.6 percent after Steve Case resigned as chairman Sunday. He'll remain a company director, with responsibility for corporate strategy. Case was a mastermind of the disastrous America Online merger with Time Warner two years ago. AOL stock rose 38 cents to $15.26. Read full story.

David Joyce, senior equity analyst at Guzman & Company, said Case's resignation was "all in all a positive step," but noted that AOL Time Warner still has many "overhanging issues."  Listen to Joyce.

With Case stepping down, some analysts say it's possible the company will take quick, decisive action to solve the 2-year-old problem with its troubled America Online division. Read due diligence.

It was a busy day in the AOL Time Warner empire as the chairman of cable news unit CNN Walter Isaacson also resigned to take a job with the Aspen Institute. Read full story.

Donald Selkin, director of equity research at Joseph Stevens, blamed some of the market gloominess on broker downgrades of Dell and Johnson & Johnson. Weak London markets were also a factor, as was profit taking after heady gains so far this year.

Shares of No.1 PC maker Dell Computer (DELL: news, chart, profile) fell 4.8 percent to $25.85 after J.P. Morgan Securities cut the stock to neutral from overweight. "We believe the temporary budget flush in the hardware sector benefited the PC segment less than other areas of the computer hardware sector," J.P. Morgan Securities told clients Monday.

"Dell's share gains should continue in this period, but with an increasingly aggressive industry pricing environment, these share gains could come at a higher cost," the broker said. It cut estimates for the year ending January 2004 to earnings of 95 cents a share, from an earlier forecast of 98 cents, and lowered its revenue estimates to $40.4 billion, from $41.6 billion."

Selkin, who noted unusual activity in Dell stock ahead of the expiration of options, said he expects the markets to gain by the end of the day, led by a rebound in Microsoft, which reports earnings on Thursday.

Tech watch

Intel (INTC: news, chart, profile) gained 0.7 percent ahead of the release of its fourth-quarter earnings Tuesday. Microsoft (MSFT: news, chart, profile), another key tech stock reporting later this week, edged up 0.9 percent. Microsoft and lawyers for the lead plaintiffs in 27 antitrust suits against the software maker in California said late Friday they had reached a $1.1 billion settlement. Read tech earnings outlook and hardware report.

Intel's release will be watched for forecasts of a chip sector rebound; there's speculation things improved in the second half of 2003. The chip giant is expected to report earnings of 14 cents per share.

Wall Street forecasters are bullish about the outlook for corporate earnings in the fourth quarter, but their views get less rosy the further out they gaze into their crystal balls. Read earnings preview and Earnings Watch.

Motorola (MOT: news, chart, profile) tumbled 5.7 percent after the company said it plans to make a tender offer to acquire all the outstanding stock of Next Level Communications (NXTV: news, chart, profile) it doesn't already own. Next Level soared 30 percent.

Cisco Systems (CSCO: news, chart, profile) edged up 0.5 percent to a seven-month high, and was the Nasdaq exchange's most-active issue.

Shares of Nortel Networks (NT: news, chart, profile) ran up 7.7 percent to $2.53 on NYSE leading volume of 50 million shares. The stock, which is now up 57 percent since the end of 2002, reached an eight-month high of $2.70 earlier in the session.

Meanwhile, oil prices eased after the Organization of Petroleum Exporting Countries agreed Sunday to increase crude production by 1.5 million barrels a day, or 6.5 percent, to 24.5 million in a bid to lower prices and offset shortages resulting from a strike in Venezuela. February crude traded at $31.42 a barrel on the New York Mercantile Exchange, down 26 cents. Read full story.

Oil service and utility stocks were the biggest losers, with Transocean (RIG: news, chart, profile) losing 1.6 percent and Haliburton (HAL: news, chart, profile) easing 1.7 percent.

Shares of Duke Energy (DUK: news, chart, profile) plunged 12.9 percent after analyst Steven Fleishman at Merrill Lynch downgraded the company to "sell" from "neutral" following its warning that 2002 and 2003 earnings would fall short of expectations.

In other corporate news, Georgia-Pacific Corp. (GP: news, chart, profile) warned that its fourth-quarter profit would come in well below Wall Street's consensus forecast, sending shares down as much as 13 percent. Shares of Georgia-Pacific traded at last check down 8.0 percent. Read full story.

Analyst Girish Tyagi at Thomas Weisel Monday cut his rating on Johnson & Johnson's (JNJ: news, chart, profile) stock from "buy" to "attractive," citing concern about its pharmaceutical business. Tyagi said J&J's key anti-anemia treatment, Procrit, faces a strong challenge from a competing therapy from Amgen (AMGN: news, chart, profile). Johnson & Johnson stock fell 1.2 percent, while Amgen rose 1.4 percent.

Raytheon (RTN: news, chart, profile) plunged 5.2 percent after the defense company acknowledged in a statement that the Securities and Exchange Commission was looking into revenue recognition practices from 1997 to 2001 at its Raytheon aircraft unit. Read full story.

In other key exchanges, the Nasdaq 100 ($NDX: news, chart, profile) fell 0.1 percent to 1,086, while the Russell 2000 ($RUT: news, chart, profile) of small-cap stocks was flat at 396.

Volume hit 714 million on the NYSE and 948 million on the Nasdaq. Decliners beat advancers by a ratio of 16 to 14 on the Big Board and 15 to 13 on the Nasdaq.

Funds investing primarily in U.S. stock witnessed outflows of $1.7 billion in the first trading week of the year, Trim Tabs said. U.S. equity funds received $2.4 billion of new cash between Jan. 3-9, Dbut that was more than offset by $4.1 billion in outflows on Jan. 2, the first trading day of the year.

Treasurys were slightly on the defensive as stock averages got a boost from the shake-up at AOL Time Warner. Checking the latest prices, a benchmark 10-year Treasury note fell 7/32 at 98 23/32 to yield 4.16 percent, up from 4.13 percent in the previous session. A 30-year bond was off 5/32 at 104 24/32 to yield 5.06 percent, up from 5.05 percent. Read bond report.

The dollar gained 0.2 percent versus the euro to $1.0556, after seeing a low of about $1.0590 -- matching the multi-year low it hit on Friday -- earlier in the session. Dollar strength was by no means widespread, however, as the buck shed 0.2 percent against the yen to 118.92.

North Korea

Sam Stovall, senior investment strategist at Standard and Poor's, said investors were growing more optimistic about resolution to Iraq and North Korea, and recommended stocks that could benefit most from an economic recovery.  Listen to Stovall.

A U.S. envoy said that the United States is willing to consider energy aid for North Korea if Pyongyang ends nuclear weapons development.

Hopeful signs of a breakthrough in North Korea sent the Seoul stock market up 3 percent on Monday. In Europe, London's FTSE ended slightly lower, while Germany's DAX index rose after a key retailer assured on 2003 growth. Check out global markets page.

Earnings ahead

Apple (AAPL: news, chart, profile), Yahoo (YHOO: news, chart, profile), Continental Airlines (CAL: news, chart, profile), Bank of America (BAC: news, chart, profile), Fannie Mae (FNM: news, chart, profile), GM Hughes (GMH: news, chart, profile) and Genentech (DNA: news, chart, profile) are expected to report on Wednesday.

The earnings flood hits tidal wave proportions on Thursday, with updates expected from BankOne (ONE: news, chart, profile), Delta (DAL: news, chart, profile), EBay (EBAY: news, chart, profile), General Motors (GM: news, chart, profile), FleetBoston (FBF: news, chart, profile), Sears (S: news, chart, profile), Sun Microsystems (SUNW: news, chart, profile), United Technologies (UTX: news, chart, profile) and Wachovia (WB: news, chart, profile), among others.

A full plate of economic data awaits investors, starting with retail sales and import/export prices on Tuesday. Estimates for next week's key retail sales report are scattered.

Some economists think only late-year car incentives propped up a December reading otherwise dogged by a lackluster holiday. Others believe satisfactory -- if short of stellar -- December results will make for an encouraging final quarter. Read economic preview.

The Fed's Beige Book comes out on Wednesday, along with the producer price index and business inventories.

Jobless claims and the consumer price index await on Thursday. The week wraps up with international trade, industrial production and, importantly, consumer sentiment. Also, the key real estate market sector will look toward the NAHB housing index.

"There probably won't be anything to lead to an up, up and away kind of market, but once we get past Iraq, stocks may see a lift," Prudential's Piskorowski said. "Earnings pre-announcements were relatively benign. Companies are getting better at guiding down expectations." Allen Wan is a news editor for CBS.MarketWatch.com in New York.