Stocks Edge Higher Despite Rising Yields

Stock prices closed mostly higher Friday even though interest rates continued to creep up.

The Dow Jones industrials added 2.59 points to 3,735.04, leaving the blue chip index down 18.77 points for the week.

In a surprise, Mexican stock prices rallied sharply Friday, following a strong earnings report from phone giant Telmex.

Second-quarter corporate earnings also generated some big individual stock swings in the U.S. market, but winners outnumbered losers on the New York Stock Exchange by just 11 to 10.

Still, that was impressive given another rise in bond yields. The yield on six-month Treasury bills, for example, closed at 4.95%, up from 4.91% on Thursday and 4.82% at the start of the week.

Markets were focused for much of the day on Federal Reserve Board Chairman Alan Greenspan’s testimony before a House Banking subcommittee. Greenspan largely repeated the two-part message he gave the Senate on Wednesday: The Fed wants to see a stronger dollar, and will do whatever is necessary to fight inflation.

At one point, Greenspan said, “What we don’t wish to see happening is a loss of confidence in the productiveness of dollar-denominated assets.”

Many economists believe the Fed is setting the stage for another hike in short-term interest rates in mid-August, which in part would help support the dollar. Fear of another rate boost pushed bond yields up for much of the week, though the biggest rise was in shorter-term securities.

Among long-term securities, the yield on the 30-year Treasury bond closed at 7.56% on Friday, up from 7.54% on Thursday. A week ago, the yield was also 7.54%.

Even though Greenspan sought to bolster the dollar, its rally of recent days faded. In New York, the greenback closed at 1.596 German marks, up from 1.589 on Thursday. But it eased to 98.90 Japanese yen, from 99.20.

As for the stock market, some analysts called it a positive sign that investors were responding to earnings reports, suggesting that the mood of paralysis over future interest rates is dissipating.

Among the market highlights:

* Technology stocks were again in the spotlight. Apple Computer surged 3 to 31 after reporting quarterly operating earnings of 50 cents a share, well above analysts’ mean estimate of 35 cents.

Another big winner was Microsoft, up rose 2 13/16 to 50 9/16 after the firm met with analysts.

But IBM, which rocketed 6 1/2 on Thursday on a strong earnings report, dipped 1 to 61 3/8.

* Steel stocks were higher after USX-U.S. Steel reported healthy earnings. Its shares jumped 1 3/4 to 37, while Inland Steel added 1 1/8 to 38 7/8 and LTV rose 7/8 to 18 1/4.

* On the downside, McDonald’s reported 13% higher quarterly earnings, but some analysts warned that the firm’s results will face tougher comparisons over the next few quarters. Also, overseas sales growth was said to be slower.

McDonald’s shares fell 2 to 26 1/4. Other growth issues losing ground included Kellogg, down 1 1/2 to 52 1/2; Home Depot, down 1 3/8 to 40 3/4, and Pfizer, off 1/2 to 60.

* One of the day’s big casualties was Paragon Trade, a maker of private-label diapers. It warned that pricing pressures and delays in customers switching to its new thin diaper may depress sales near-term. The stock lost 5 3/4 to 24 1/8.

* Among Mexican stocks, NYSE-traded Telmex surged 1 5/8 to 57 1/8 after saying inflation-adjusted operating income grew 12.6% in the first half. The results helped re-energize the depressed Mexican market, sending the Bolsa index up 67.85 points to 2,300.66.

* In other foreign markets, Frankfurt’s DAX index gained 36.96 points to 2,150.26 and London’s FTSE-100 index added 19.6 points to 3,114.7. In Tokyo, the Nikkei average eased 160.03 points to 20,462.89.

* In the U.S. municipal bond market, yields slid on California’s 21-month revenue anticipation warrants, or RAWs, which the state sold Wednesday. The RAWs were quoted at an annualized yield of 4.88%, down from nearly 5% on Thursday.

Investors responded favorably to the state’s decision Friday to make two interest payments on the RAWs, one a year from now and the other at maturity. Originally, the state had planned to pay all interest at maturity, but that could have resulted in tax problems for some buyers.

Market Roundup, D3