- The Washington Times - Friday, July 20, 2007

The Dow Jones Industrial Average, boosted by strong profits, yesterday hit the 14,000 barrier barely two months after breaking through 13,000 for the first time.

Such a rapid ascent of the century-old blue-chip index has not been seen since the halcyon days of the early 2000 technology boom. Yesterday’s 82.19 point rise in the Dow lifted it past the 14,000 milestone by only a hair’s breadth — it ended at 14,000.41 for the day — but the Dow swept aside potential obstacles such as bad news on subprime mortgages and near-record oil prices to get there.

The Dow has made its impressive ascent into record territory despite threats of recession, higher inflation, record-high gasoline prices, a drop in earnings growth, a collapse in the housing market, a meltdown in the subprime market, a record-low dollar, and other troubles that might have posed unsurmountable stumbling blocks in previous years.

The index’s stellar gains have helped to lift consumer spirits and wealth even as other developments threatened them.

The market’s rise has been fueled by unexpectedly robust profits — particularly at multinational companies riding a wave of strong global economic growth — and an unprecedented boom in huge buyouts engineered by wealthy investors operating through private equity funds and employing an ocean of inexpensive credit.

Yesterday, the Dow gained strength from reports of strong profits at technology titan IBM and banking giants Bank of America and Citigroup. Mirroring a trend seen among other top banks, Bank of America said it had to set aside cash to cover increased credit losses, but that was more than offset by surging revenue from its private equity and capital market businesses.

Solid earnings growth at IBM and Microsoft also lifted the Standard & Poor’s 500 Index to a new record of 1,553, and sent the tech-driven Nasdaq Composite Index to a six-year high of 2,720. More than half of the 112 internationally operating companies in the S&P; index have reported better-than-expected earnings this quarter.

“The U.S. earnings cycle is in the global sweet spot,” said Joseph P. Quinlan, chief market strategist with Bank of America Corp. “The current global backdrop for U.S. exporters and multinationals has rarely been better.”

While economic growth has dragged in the U.S. this year and credit losses have deflated the domestic earnings of companies, that has been outweighed by ebullient growth in overseas economies from Brazil to China, where the economy posted near 12 percent growth in the last quarter. Growth through most of Asia, Europe and Latin America has been robust despite the U.S. struggles this year.

The overseas earnings of U.S. corporations in the first quarter soared 16.4 percent over the previous year while domestic earnings inched up by 2.7 percent, Mr. Quinlan said. That trend has continued in second-quarter earnings.

“2007 could go down as the year the rest of the world saved corporate America from a severe earnings squeeze,” he said. The dollar’s weakness — it is near historic lows against the euro and British pound — has helped U.S. corporations by boosting exports and magnifying the gains when their overseas earnings were brought home and translated into dollars, he noted.

Also driving the market higher this year has been a rash of companies using their profits to buy back stock and more than $700 billion of buyouts, mergers and acquisitions, with suitors bidding up the prices of stocks of companies like Dow Jones, TXU, Heinz and Alcoa.

While the merger mania has drawn scrutiny from Congress, which is debating imposing higher taxes on the wealthy partners in private equity funds, Federal Reserve Chairman Ben S. Bernanke yesterday endorsed the buyout craze, saying that most of the time it helps make corporations more efficient and profitable by replacing weak managements with strong ones.

Mr. Bernanke vowed before the Senate Banking Committee to maintain the central bank’s vigilance against inflation, but his testimony did not make a dent in the market’s bullish sentiment.

Jeffrey Kleintop, chief market strategist at LPL Financial Services, said the market has been pleasantly surprised this year by consistently better-than-expected earnings because companies, having learned lessons from the Enron era, have been providing conservative guidance that understates their ultimate performance on average by 3 percent.

Stock valuations in 2007 are also expanding for the first time this decade, he said, hastening the ascent of so-called “growth” stocks whose rise depends more on the momentum of the market than the fundamental financial soundness of the company.

The re-emergence of growth stocks is one of several signs the market has entered into the late phases of the economic and market cycle, which is marked by big ups and downs from day to day as the market swings between enthusiasm over earnings and worries about threats to the economy, he said.

“Volatility tends to rise in the second half of the business cycle,” he said, noting that during 1987 and 1997, when previous expansions were nearing their peaks, the market experienced such major declines and advances. Both years had major stock crashes in October.

“Is the fall of 2007 setting up to follow this decadal pattern? We doubt it,” Mr. Kleintop said, “but we are watching the subprime fallout closely for signs of contagion that could result in a crisis.”

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