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The Honolulu Advertiser

Posted at 11:39 a.m., Tuesday, May 23, 2006

Stocks end lower on inflation jitters

Associated Press

NEW YORK — Wall Street closed moderately lower today after worries about the impact of high oil prices on the economy triggered a late-day drop, erasing an earlier moderate advance.

Upbeat earnings from homebuilder Toll Brothers Inc. and a rebound in oil and gold prices had lifted stocks through most of the session following their recent heavy losses. But an afternoon news report that quoted Energy Secretary Sam Bodman as saying soaring energy prices could damage economic growth ignited traders' inflation concerns and set off renewed selling.

Stocks had shown signs of stabilizing after suffering nearly two weeks of declines as the market fretted about interest rates and the economy's health. But investors clearly were still nervous about keeping money in the market while they remained uncertain about the Federal Reserve's plan for lending rates.

"The bargain hunters ran out of steam, and we still have the same concerns on the macro scene," said Art Hogan, chief market analysts for Jefferies & Co. "We're still concerned about inflation, the Fed tightening — all of that didn't go away because we're oversold."

There was no new economic data to give investors clues about the interest rate outlook after recent inflation signals supported the possibility of more rate hikes from the Fed. Although Fed Chairman Ben Bernanke spoke to a congressional panel today, his testimony on personal finance steered clear of the central bank's monetary policy.

At the close, the Dow lost 26.98, or 0.24 percent, to 11,098.35, after adding as much as 77 points earlier. The Dow is 4.7 percent off a six-year closing high of 11,642.65, reached May 10.

Broader stock indicators also shed earlier gains. The Standard & Poor's 500 index dropped 5.49, or 0.43 percent, to 1,256.58, and the Nasdaq composite index fell 14.10, or 0.65 percent, to 2,158.76.

Bonds pulled back slightly from their recent runup, with the yield on the 10-year Treasury note rising to 5.06 percent from 5.04 percent late yesterday. The U.S. dollar was flat against other major currencies, and gold prices gained ground to stand near $670 an ounce.

The recuperating bond market and stabilizing dollar have been bright spots for Wall Street during stocks' recent retreat, which pulled the Dow and the S&P 500 down about 5 percent. Investors have been fixated on whether the Fed will keep boosting interest rates, but one or two more increases at this point would have a marginal impact, according to George Schwartz, president and chief investment officer of Schwartz Investment Council Inc.

"The Fed game is near the end — there may be a 17th or 18th increase, but there's not going to be 27," Schwartz said. "I think the 5 percent correction that the Dow and S&P 500 made is over. I think we're going to head back up over the next several weeks."

Still, the market's late-day turnaround shows how vulnerable it is to investors' intense anxiety about inflation and rate hikes, a nervousness that has sent markets around the globe falling as well.

Japan's Nikkei stock average plunged 1.63 percent to sit at a three-month low. European markets rebounded sharply from recent dropoffs, with Britain's FTSE 100 gaining 2.64 percent, Germany's DAX index jumping 2.38 percent and France's CAC-40 rising 2.45 percent. The trading day in those countries ended before word of Bodman's comments reached investors.

A sharp upswing in oil prices reinforced fears that soaring oil and gasoline prices could hinder consumer spending and drive up prices in other parts of the economy, particularly with crude futures within reach of their all-time high ahead of the summer driving season. Bodman added that there was little the Organization of Petroleum Exporting Countries could do to cap oil prices.

Forecasts for an active hurricane season this summer ignited worries about another round of devastation of Gulf Coast refineries. A barrel of light crude gained $1.79 to settle at $71.75 on the New York Mercantile Exchange.

The bounce in commodities initially had aluminum producer Alcoa Inc. and oil company Exxon Mobil Corp. leading the Dow industrials higher, but the late-day decline eroded their gains. Alcoa fell 31 cents to $30.84, and Exxon sank 39 cents to $60.39.

NYSE Group Inc. fell $2.80 to $60.05 although shareholders of European stock exchange operator Euronext NV declined a proposal to commit to a takeover by Deutsche Boerse Group. Yesterday, NYSE's $10.2 billion bid for Euronext trails Deutsche Boerse's $11 billion deal.

Toll Brothers posted better-than-expected earnings for last quarter, but the homebuilder said higher material and labor costs would cause its 2006 profit to be less than previously estimated. Toll Brothers nonetheless rose 45 cents to $27.35.

Federal regulators are slapping Fannie Mae with a fine of between $300 million and $500 million for alleged accounting improprieties following a three-year investigation of the mortgage lender. Fannie Mae added 45 cents to $50.72.

Declining issues overtook advancers by about 9 to 7 on the New York Stock Exchange, where volume of 1.91 billion shares trailed the 2.06 billion shares that changed hands yesterday.

The Russell 2000 index of smaller companies advanced 3.96, or 0.55 percent, to 711.29.