Seattle Times - 2007 Markets, First Quarter

3/31/2007

Saturday, March 31, 2007

2007 markets, the first quarter | A turbulent time, but stocks recover

By Drew DeSilver

Seattle Times business reporter

Was it worries over the nation's housing recession and the unraveling of the subprime mortgage industry? A stray comment by former Federal Reserve Chairman Alan Greenspan that resonated around the world? Rising oil prices that stoked inflation fears? Or just a bull market that had grown long in the tooth and was due for a pullback?

Market watchers gave all of those reasons for the sharp drop in stock prices in late February and early this month, ending a climb that began last summer. Though stocks gained back much of that ground, the major market indices ended the first quarter more or less where they started, with either small gains or small losses.

"It's kind of a Rip Van Winkle effect," said Andrew Loechl, a principal at Seattle's Eagle Harbor Asset Management. "If you fell asleep in January and woke up today, you wouldn't think much had happened."

Friday's market activity encapsulated much of the turmoil of the entire quarter, as stocks rose, dropped and then recovered.

The Dow Jones industrials rose 5.60 points, or 0.05 percent, to 12,354.35, after rising 67 points and falling 106 earlier in the session. The Dow ended the quarter down 108 points, or 0.87 percent; that was the index's feeblest performance since the second quarter of 2005.

Broader stock indicators were mixed. The Standard & Poor's 500 index lost 1.67, or 0.12 percent, to 1,420.86, and the technology-dominated Nasdaq composite index rose 3.76, or 0.16 percent, to 2,421.64.

But the markets' small net change masked considerable volatility, and a closer look reveals how different sectors fared.

If, as many economists say, the United States is approaching the end of the current expansion, you'd normally expect the best performers to be large-capitalization stocks and "defensive" issues — those that are less sensitive to the ups and downs of the business cycle.

But the large-cap Standard & Poor's 500 index was up just a smidge in the quarter, while S&P's mid-cap index gained 5.5 percent. And while defensive sectors such as energy, health care and consumer staples did gain, the top-performing sector was basic materials, driven by double-digit gains in construction materials and metals stocks.

Though the big deals grab most of the headlines, much of the recent spate of merger and buyout activity has been among midsized companies, said Jeff Atkin, a principal at Kunath Karren Rinne & Atkin, a Seattle-based investment management firm.

Suppliers of building materials have benefited from nonresidential construction on everything from office towers to highways, he added. And despite the deflating housing market, new-home construction rose more than expected last month (though declines in building permits portend slower times ahead).

But stocks also rose and fell for reasons that had little to do with the broad economy. The premier local example was Dendreon, a Seattle biotech whose stock had traded in the $4-to-$5 range for more than a year, until Friday.

Nearly all of Dendreon's 210 percent gain for the quarter came on its last day, after the company's drug for prostate cancer moved a big step toward gaining regulatory approval.

Less spectacular was Weyerhaeuser, whose stock at one point was up nearly 22 percent since the start of the year. But much of that rise was due not to investor optimism about the fundamentals of the wood-products business, but speculation that the Federal Way-based company was about to convert itself into a REIT. That hasn't happened — yet — and after a couple of brokerage downgrades, the stock began moving back down. Still, it closed the quarter up 5.8 percent.

Despite hand-wringing by some that overregulation was hurting the competitiveness of U.S. securities markets, interest in initial public offerings continued to be strong. Seventy-four companies announced IPOs in the quarter, up from 66 in the same period last year. And 66 companies completed IPOs on U.S. markets, versus 55 a year earlier.

Only one Northwest company was among those selling stock for the first time, but it was a doozy: Kirkland-based Clearwire raised $600 million in its March 7 offering, making it the largest IPO of a Washington-based company since AT&T Wireless in 2000. Since then, however, Clearwire has lost 18 percent, closing out the quarter at $20.47.

Despite the choppier waters, the fundamentals are still in place for continued stock-market gains, said Peter Glidden, regional president for Harris Private Bank in Seattle.

Interest rates continue to be relatively low, Glidden said, making stocks look like better investments. Corporate profits are still rising, though many expect the growth rate to slow when first-quarter results start coming in a few weeks. And billions of dollars of liquid cash are still flowing around the world, looking for a home.

"2007 could turn out to be a lot like 2006," he said, noting that despite several steep dips last year, the S&P500 still finished with a double-digit gain.

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com