The death of Saudi Arabia's King Fahd sent crude oil prices to another new high on Monday, offsetting favorable economic and corporate profit news on Wall Street.
The stock market ended mixed, with the Dow Jones industrial average closing in the red while the Standard & Poor's 500 and the Nasdaq composite index edged slightly higher — both closing just shy of four-year highs.
Smaller stocks also continued to outperform the rest of the market, as they have done for the past three months.
Crude oil, which was already moving higher, surged almost 2 percent on Monday to close at a new high of $61.57 per barrel on the New York Mercantile Exchange. Oil traded as high as $62.30 during the day.
Uncertainty in the wake of King Fahd's death early Monday was blamed for pushing up the price of oil, although market watchers generally agreed there was no imminent danger of a disruption in Saudi oil production. King Fahd's successor, former Crown Prince Abdullah, had been the de facto ruler of the world's largest oil producer for a decade, following the king's stroke.
Analysts acknowledged that the change was reason for concern related to terrorism as well as production. But they say any uncertainty related to the government will be short-lived. If anything, the new king is expected to be more assertive in making internal reforms in Saudi Arabia, according to GlobalSecurity.org.
Except for the rise in oil, the market would probably have ended even higher thanks to a report by purchasing managers that U.S. manufacturing activity improved in July.
The index compiled by the Institute of Supply Management rose to 56.6 from 53.8 in June and 51.4 in May — beating the consensus forecast of 54.5. The index showed inprovement in key components such as production, new orders and employment.
"The real economy continues to move ahead even though the news headlines scream higher interest rates and energy prices," said Wachovia Securities chief economist John Silvia of the ISM report.
He said the rise in manufacturing employment was likely to show up in the U.S. Labor Department's July employment report on Friday.
"For the year ahead we see moderate employment growth of 180,000 jobs [per month] on average with the majority of the gains in the private sector," he said.
The bond market was not happy with the ISM report, however. Bond traders saw it as a potential inflation threat that is likely to prevent the Federal Reserve from altering its policy of raising short-term interest rates. Heavy selling sent the 10-year Treasury yield to 4.32 percent, its highest level in three months.
The Georgia index of manufacturing activity also improved in July to 63.1 from 60.1 in June and 58.4 in May, the Georgia Purchasing Managers Association reported Monday.
"Georgia's July PMI continues to operate at a level that suggests renewed growth and strength for the manufacturing sector that started back in April," said Donald Sabbarese, co-director of the Kennesaw State University Econometric Center, which compiles the state report.
The Georgia PMI index showed a 10 percent rise in manufacturing production, and 5 percent gains in both employment and new orders, with commodity costs unchanged.
The only economic negative on Monday was the government's report that construction spending declined in June by 0.3 percent, following a revised decline of 1.7 percent in May, a trend that began in March. But the residential sector remained strong.
Corporate earnings news also was favorable on Monday as the second-quarter earnings season moves toward its final stage with better-than-expected results.
Thomson Financial, which monitors earnings forecasts, said profits for the quarter are up 11.1 percent year-over-year, with two-thirds of Standard & Poor's 500 companies having reported. Analysts last week were forecasting a 9.4 percent increase, and 8.8 percent two weeks ago.
An additional 60 companies are on this week's earnings report calendar.
In Monday's trading, Atlanta-based home improvement retailer Home Depot was the biggest loser among Dow stocks, falling 65 cents, or 1.5 percent, to $42.86. Analysts blamed the company's report last Friday that it had received a grand jury subpoena from the U.S. attorney in Los Angeles related to the company's hazardous waste disposal.
The big gainer on the Dow was ExxonMobil, whose shares rose 48 cents, or 0.8 percent, to $59.23, along with the oil sector generally.
RadioShack shares rose $3.31, or 14 percent, to $26.78 after the consumer electronics company announced a long-term partnership with Sprint and Cingular Wireless — which is a joint venture between BellSouth and SBC Communications.
The Dow closed at 10,623.15 with a loss of 17.76 points, or 0.2 percent. The index had been up 31 points at the opening but fell most of the day.
On the upside, the S&P 500 rose 1.17 points, or 0.1 percent, to 1,235.35, and the Nasdaq composite index gained 10.55 points, or 0.5 percent, to 2,195.38.
The Russell 2000 index of smaller stocks rose 3.05 points, or 0.5 percent, to 682.80.
A major question about that plan also remains unresolved just weeks before the commission's September deadline to send its recommendations to President Bush, himself a stateside Vietnam-era pilot in the Texas Air National Guard: Does the law even allow the Pentagon to move Air Guard units without the consent of state governors, who through their adjutants general share authority over the units with the president?
"The Air Guard issue has become the long pole in the tent," said Christopher Hellman, a base-closing expert at the Center for Arms Control and Nonproliferation, a national security policy group.
In May, Rumsfeld proposed shutting or consolidating 62 major U.S. military bases and hundreds of smaller facilities, prompting lawmakers and communities to feverishly lobby the commission to spare their hometown facilities.
Only a fraction of the $49 billion Rumsfeld says his plan will save over 20 years would come from the Air Guard reorganization. But the impact on the Air Guard would be dramatic.
With roughly 106,000 members, the Air Guard currently has units stationed at about 95 Air Force bases and separate Air Guard installations and on leased land at about 78 civilian spots, including local airports.
Rumsfeld's proposal would shift people, equipment and aircraft at 54 sites where Air Guard units are stationed. Half would grow, with the rest slated for closure or downsizing, including many units that would continue to exist with no planes assigned to them.
The Pentagon says the Air Guard changes are part of an overall effort to reshape the Air Force "into more effective fighting units" by consolidating a force that is now "fragmented into small, inefficient units."
Lawmakers, states and commissioners worry about the potential impact of the Pentagon proposal on recruitment, retention and training, and question whether the Air Guard will be able to fulfill its homeland security mission.
Anthony Principi, the commission's chairman, has appealed to all involved groups "to work to a solution that best serves the interests of our national security and our country."
"The commission believes a solution is needed," Principi told defense officials last month. However, he said, throwing out all of Rumsfeld's Air Guard recommendations would be "irresponsible."
Principi has since scheduled an Aug. 11 hearing to address the Air Guard plan.
Lt. Gen. H. Steven Blum, the Army general in charge of the National Guard Bureau, told lawmakers he's committed to ensuring each state has at least one Air Guard flying unit.
"If I don't have a flying unit in a state or territory, very shortly thereafter I will have no Air National Guard in that state or territory," he said.
Comments like those don't ease the fears of states - and lawmakers - facing losses.
"This doesn't work," Rep. Joe Schwarz, R-Mich., told Air Force officers at a recent House Armed Services Committee hearing.
"This thing is amazing in its incompleteness and in the disruption that it's caused, the insecurity that it has caused. And, I'm just, frankly appalled," added Rep. John Kline, R-Minn.
Pennsylvania and Illinois have filed lawsuits to stop the Air Guard changes, arguing the federal government is out of bounds because it failed to consult the states. Other states may join those suits.
"Unless the commission wants to see the entire process held up by a legal recourse ... my guess is that in all likelihood the Air Guard bases are going to be removed from the list" of proposed closures, said P.J. Crowley, a Clinton administration military adviser who now is an analyst with the Center for American Progress, a liberal think tank.
The commission's legal counsel has said relocating, disbanding or moving Air Guard units from one state to another could be outside the commission's authority. The Pentagon wants the commission to wait for a Justice Department opinion before changing Rumsfeld's plan.
Maj. Gen. Roger Lempke, president of the Adjutants General Association of the United States, said the Air Guard plan is "beyond the scope" of the law authorizing the first round of base closings in a decade. He said the law "pertains to installations, not to units, unit equipment, people or positions."
But Lt. Gen. Stephen G. Wood, an Air Force deputy chief of staff, said, "We believe that we are within the full extent of the law."
