Investors Cash in Gains on Weak Income Report

An unsettling report on consumer incomes set off a spate of profit taking on Wall Street on Monday as investors worried that a tepid economy would erode companies’ third-quarter earnings. Another drop in oil prices failed to shake the gloom from the market.

While investors were cheered by the Commerce Department’s report of a strong rise in consumer spending for July, nearly flat growth in personal incomes and a handful of profit warnings for the third quarter made investors nervous. The news prompted them to cash in their gains after two weeks of advances.

“There’s not a lot of resistance here, and you’re seeing a little bit of profit taking,” said Todd Leone, managing director of equity trading at SG Cowen Securities. “Trading lower is the path of least resistance.”

Trading volume was again extremely light as many on Wall Street refused to make large moves during the Republican National Convention. Many investors also awaited the government’s August employment report due Friday, hoping for signs that the economy was emerging from a sluggish summer.

The Dow Jones industrial average fell 72.49 points, or 0.7%, to 10,122.52.

Broader stock indicators were moderately lower. The Standard & Poor’s 500 was down 8.62 points, or 0.8%, at 1,099.15, and the Nasdaq composite dropped 25.60 points, or 1.4%, to 1,836.49.

Declining issues outnumbered advancers by nearly 2 to 1 on the New York Stock Exchange.

The Commerce Department said consumer spending rose 0.8% in July, better than the 0.7% growth economists had expected and more than making up for the 0.2% drop in June. But despite the increase in spending, Americans’ incomes rose by only 0.1% in July, far less than the 0.5% forecast by economists and down from a 0.2% rise in June.

While consumer spending bodes well for short-term economic growth, the anemic rise in incomes cast a pall over longer term prospects, since rising income is key in overcoming inflation in consumer costs. Moreover, Americans are less likely to spend freely if they’re concerned about their paychecks.

Some analysts were surprised that the continuing decline in oil prices couldn’t motivate buyers on Wall Street. Near-term crude oil futures in New York fell 90 cents Monday to $42.28 a barrel, even as Iraqi officials said the country’s oil output would be halted for a week because of insurgent attacks on the country’s pipelines.

“Oil has certainly come down a lot, but it’s still not low by any means,” said Jeff Kleintop, chief investment strategist for PNC Financial Services Group.

Among Monday’s markets highlights:

* Bond yields moved lower on the news of nearly flat growth in personal income. The yield on the benchmark 10-year Treasury note dropped to 4.18%, down from 4.23% on Friday.

* Tyson Foods dropped $1.47, to $16.26, after the meat producer reduced its 2004 earnings outlook, citing slow demand and problems with the company’s grain hedging activities. Earnings before one-time charges will be between $1.26 and $1.33 a share.

* Accredo Health, a specialty pharmacy management company, met its fourth-quarter earnings targets, but said its 2005 growth would be less than Wall Street expected. Accredo was down $5.75 at $22.05.

* Microsoft, whose software runs almost 95% of personal computers, lost 16 cents to $27.30. The company said Friday that it delayed the next version of its Windows operating system until late 2006, two years after it first promised the program.

* Intel shed 42 cents, to $21.60. The world’s No. 1 maker of semiconductors will update investors on its third-quarter performance after Thursday’s close. It will predict a range for revenue with the same midpoint as its previous forecast of $8.6 billion to $9.2 billion, said Smith Barney analyst Glen Yeung. Still, the risk is that Intel will lower its forecast, he said.

* Oracle slipped 18 cents to $10.11 after Wells Fargo cut its 2005 earnings forecasts for the business software maker. The brokerage nonetheless reiterated a “buy” on Oracle.