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Dow Ekes Out Gain, Led by Bank of America

Monday, 27 Jul 2009 | 5:11 PM ET

Stocks eked out a gain Monday as banks got a boost from a jump in new-home sales.

The Dow Jones Industrial Averagerose 15.27, or 0.2 percent, to close at 9,108.51. The S&P 500added 0.3 percent, while theNasdaq gained just 0.1 percent.

Stocks had struggled for much of the day as investors worried about a a record $200 billion in Treasury auctions this week and lowered outlooks from Honeywell and Aetna cast a shadow over the market.

This comes after a strong run for stocks that brought the Dow its best two-week performance since 2000.

Adding a layer of anxiety to the market is a record $200 billion of government debt hitting the market this week. It kicked off with $6 billion of 20-year TIPS, or inflation-protected securities, which had a high yield of 2.387 percent. The bid-to-cover ratio was 2.27, the highest in history.

The Treasury also auctioned $32 billion of three-month bills and $31 billion of six-month bills to decent demand as part of its routine weekly auction.

The concern is that traders are seeing signs of economic recovery, yet the government is still hauling out record debt offerings, said Jim Paulsen, chief investment strategist at Wells Capital Management.

"They're worried that, if the economy starts to pick up and the government still has to come in with such offerings, will the credit markets start to tighten up?" Paulsen observed. "What happens if the economy starts to recover? It’s one thing to raise this type of money in a recession — another thing if it’s growing," he explained.

Plus, they're worried that the impact of all this debt could cause China and other big buyers to start dumping U.S. bonds, he said.

Bank stocks, which have lagged in recent weeks, were among the day's top gainers after a report showed new-home sales rose 11 percentto an annual rate of 384,000 in June. Economists had expected a pace of 360,000.

Bank of America was the biggest gainer on the Dow, up 4.6 percent. Regions Financial shot up 8.9 percent and Zions Bancorp jumped13 percent.

Of course, homebuilders also got a boost, with Beazer, Hovnanian and Pulte Homes among the biggest gainers.

Traders are a little trigger-happy to trade on the slightest bit of bad news these days, Paulsen said, but he still thinks it's a good time to buy stocks.

As for all the talk about earnings only being good because of cost-cutting efforts, and sales still being weak, Paulsen said people are reading too much into it.

He believes we are at the bottom of the recession and sales are exactly where they should be.

"Why would anyone expect there to be good sales growth at the bottom of a recession? There never is," Paulsen said, adding that earnings should grow from here, as they do after you hit bottom.

"I think we existed the recession last quarter," he said. "And we're going to have positive growth in the current quarter and beyond. I think we're in the recovery phase."

On the earnings front, Aetna shares skidded 2.7 percent after the health insurer reported its profit fell 28 percent amid higher medical expenses in its commercial business. Aetna also slashed its full-year outlookfor the second time in two months.

Honeywell hit its earnings target but the company, which makes everything from air purifiers to jet engines, lowered its full-year outlookto the low end of its previously-stated range. The stock was lower for much of the day, but recovered by the closing bell, ending up 0.7 percent.

So far this earnings season, companies beating expectations have outnumbered the misses by a ratio of 5 to 1, the highest since 2004, according to analysts at Birinyi Associates.

Among the biggest beats so far were Goldman Sachs, miner Freeport-McMoRan Copper & Gold and flash-memory maker SanDisk.

It's a bit less busy on the earnings front this week, though still a full schedule: About 30 percent of the S&P 500 will report this week. The highlight will likely be the oil companies.

Chevron and ExxonMobil report this week, as do ConocoPhillips and Royal Dutch Shell.

Crude oil ticked slightly higher, settling at $68.38 a barrel. Analysts expect the sharp drop in oil recently to have taken a toll on big oil profits.

The CBOE Volatility index, widely considered the best gauge of fear in the market, is now below 25 after soaring to near 80 in the fall. Goldman Sachs derivatives strategists said they expect volatility to continue to decline as much of earnings season is now behind us.

Dow component Verizon beat earnings expectations by a penny and announced plans to cut 8,000 jobs but revenue failed to keep pace with cost cutsand its shares declined. Its shares fell 1.6 percent.

Corning also topped earnings forecasts, citing strong demand for glass for flat-screen TVs, and said it expected that demand to continue for the rest of the year.

Corning "didn't give precise top- and bottom-line estimates for their business, but they raised their view of the overall LCD market, and I think that implies for Corning the second-half of the year should remains quite solid," Oppenheimer analyst Yair Reiner told Reuters.

Still, Corning shares fell 2.9 percent Monday after rising 10 percent in the past month.

Boeing shares dropped 0.3 percent after Barclays cut its rating on the aerospace giantto "equal weight" from "overweight," citing cost overruns on Boeing's 787 Dreamliner. Analyst Joseph Campbell said the aircraft has the potential to be Boeing's most profitable ever but delays in production of the aircraft are creating too much uncertainty. He also slashed his price target on the stock to $46 from $60.

AIG shares rose 4.3 percent after the company renamed its AIU property-casualty business under the name Chartis to distance the unit from the problems of its parent company. The troubled insurer is still planning to go ahead with an IPO of the unit, which was valued at about $38 billion and is intended to help AIG repay its $180 billion loan from the government.

More deal news: Swedish telecom Ericssonagreed to buy Nortel's wireless unitfor $1.13 billion.

And shares of Varian soared 29 percent after Agilent Technologies agreed to buy the scientific-instrument maker for $1.5 billion, or $52 a share in cash. Agilent shares rose 1.8 percent.

RadioShack beat analyst estimates, helped by cost cuts and a one-time charge in the year-earlier period, but revenue disappointed. Its shares fell 6.6 percent.

Shares of Mylan tumbled 13 percent following a report that suggested workers at the generic drug maker's primary manufacturing plant overrode quality controls intendedto ensure the safety of the drugs. This is just the latest in a string of deficiencies found at generic drug makers, which have come under increased scrutiny as the Obama administration looks to make them an integral part of health-care reform.

Shares of Amgen fell 0.3 percent ahead of its earnings. After the bell, the biotech giant beat expectations, helped by an arthritis drug and a tax benefit, and raised its full-year outlook. Its shares rose after-hours.

Volume was light, with about 1.04 billion shares changing hands on the New York Stock Exchange. Advancers outpaced decliners, 9 to 5.

This Week:

MONDAY: $200 billion round of Treasury auctions begins
TUESDAY: Case-Shiller home-price index; consumer confidence; Earnings from US Steel, Viacom, Dreamworks and STMicro
WEDNESDAY: Weekly mortgage applications; durable goods; weekly crude inventories; Fed's beige book; Earnings from ConocoPhillips, Sprint Nextel, Time Warner, WellPoint Health, Visa
THURSDAY: Weekly jobless claims; Earnings from AstraZeneca, ExxonMobil, Colgate-Palmolive, Eastman Kodak, Kellogg, MasterCard, Motorola, Disney, MetLife
FRIDAY: GDP; Chicago PMI; Earnings from Chevron

Send comments to cindy.perman@nbcuni.com.

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