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Stocks Pare Losses; Retailers Up, Merck Falls

Stocks trimmed earlier losses Thursday as investors weighed strong signs of an economy on the mend against increasing worries over Egypt and signs pointing to an end to the recent rally.

The Dow Jones Industrial Average traded flat after squeezing out a gainin the previous session.

Merck , Alcoa and Microsoft led blue-chipslower, while Bank of America and Home Depot gained.

The S&P 500 fell, while the Nasdaq also declined. The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose above 17.

Among key S&P sectors, energy, healthcare and materials fell, while consumerdiscretionary advanced.

Chaos continued in Egypt as thousands of supporters and opponents of President Mubarak battled in Cairo's main square, raining stones, bottles and firebombs on each other in scenes of uncontrolled violence as soldiers stood by without intervening.

The dollar gained against a basket of currencies, triggering a drop in oil prices. Brent crude fell to less than $102 a barrel, after topping $103, and U.S. light sweet crude dropped to under $91, even as the clashes in Egyptraised the prospect of further unrest in the Middle East.

Prices are soaring across a range of commodities, with copper hitting another fresh high and wheat futures rising to a 2-1/2 year high on Wednesday.

Middle East Turmoil
Middle East Turmoil

The weakness in trading Thursday in the face of good economic numbers has more to do with worries that the Federal Reserve will have to put a stop to its stimulative policies soon or risk further inflation than with concerns over the unrest in Egypt, said Joe Saluzzi, co-manager of trading at Themis Trading.

"I think good news is becoming bad news, because of those inflation concerns," Saluzzi said.

The real test will come tomorrow if the government reports a significant drop in unemployment and the market falls, he added.

In a day of heavy economic news, new claims for unemployment benefits dropped more than expected last week, according to the Labor Department, pointing to continued gradual improvement in the jobs market. Initial claims for state unemployment benefits tumbled 42,000 to a seasonally adjusted 415,000. Economists had forecast claims dropping to 420,000, according to a Reuters poll.

Meanwhile, productivity rose 3.6 percent in 2010 after a 3.5 percent gain in 2009, with both years the best showing since 2002, according to the Labor Department. Labor costs dropped 1.5 percent last year after a 1.6 percent decline in 2009.

The services sector grew in January at its fastest pace since August 2005. The ISM said its index of national non-manufacturing activity rose to 59.4 in January from 57.1 in December. Economists had expected a reading of 57.0, according to a Reuters survey. A reading below 50 indicates contraction in the sector, while a number above 50 means expansion.

And factory orders edged up in December and shipments of finished products were stronger, signaling a continuing pickup in activity in the manufacturing sector. Total factory orders rose 0.2 percent to a seasonally adjusted $426.8 billion, according to the Commerce Department—contrary to forecasts for a 0.5 percent decline made by Wall Street economists surveyed by Reuters and following an upwardly revised 1.3 percent boost in November orders.

Meanwhile, a handful of retailers reported surprisingly strong revenue gains in Januarydespite snowstorms that analysts feared would hurt spending. Costco , Limited Brands and Gap all traded higher.

On the earnings front, Merck reported results that topped forecasts, but its profit outlook for the current year was below what analysts were expecting, sending the pharma-giant's shares down. Rival GlaxoSmithKline posted a loss after taking a massive charge to provide for U.S. litigation over its diabetes drug, Avandia.

Royal Dutch Shell disappointed investors with below-forecast quarterly profit, with concerns over its refining business overshadowing a sharp rise driven by higher oil prices.

Dow Chemical rose slightly after posting a better-than-expected profit, helped by brisk agricultural, plastic and electronic sales, with earnings from joint ventures in the glass and energy sectors particularly strong.

MasterCard rose after the credit-card provider's profit soared 41 percent to $415 million, as consumers around the world spent more money. Meanwhile, rival Visa said quarterly profit rose 16 percent, slightly beating expectations, as consumer spending ramped up and the company processed more transactions abroad.

Unilever reported forecast-beating quarterly profitand said it was confident about dealing with soaring commodity costs and competition.

Green Mountain Coffee Roasters shares soared almost 20 percent, touching a life-time high, a day after the firm pacified investor concerns on high coffee prices with a rosy outlook and better-than-expected quarterly results.

Verizon started taking orders online for its Apple iPhone, a week before it is due to hit its store shelves. However, some Verizon customers complained they were unable to buy the phone online.

Ford Motor shares slipped after the automaker said it is recalling nearly 363,000 F-150 pickup trucks in North America because of a potential problem with the door handles not working properly.

Billionaire investor Jim Rogers told CNBC on Thursdayhe expected to see more political and social unrest in the future, driving commodity prices up even further, adding he invested in more in commodities than in stocks.

Overseas, the European Central Bank kept interest rates on hold at a record low of 1 percentas expected on Thursday, despite rising inflation fears. The current median expectation among economists is for no change until the fourth quarter of 2011 although financial market investors have started to bet on a rise in the third quarter.

While Bernanke, who speaks at a 12:30 pm ET at the National Press Club, sees no inflation threat, Trichet has warned that inflation numbers merit “very close monitoring”as they may rise further in the coming months due to higher energy costs.

Trichet's comments about inflation last month helped send the euro higher against the dollar on expectations the ECB would be first to move rates higher.

On Tap This Week:

THURSDAY: Bernanke at National Press Club, Minneapolis Fed President speaks, Verizon begins iPhone pre-orders; Earnings from Sunoco
FRIDAY: Nonfarm payrolls; earnings from Aetna.

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