Rate Fears Ratchet Up the Pressure on Net Stocks

Y'all can bet one of your new homes that the Fed's gonna raise rates at the end of the month.

But then again, most folks already knew that. Last month, a strong reading on the Consumer Price Index and the Federal Open Market Committee's move to a tightening bias told investors a hike in short-term interest rates was in store. Yesterday, the NAPM followed suit. Friday's tell probably will be the May employment report.

Major Indices INDEX CHANGE % VALUE Dow 118.42 -1.12% 10,477.84 S&P 500 12.52 -0.97% 1281.74 Nasdaq 43.31 -1.8% 2368.72 Russell 2000 6.27 -1.43% 431.19 TSC Internet 27.31 -4.9% 529.53 TREASURY BOND CHANGE VALUE YIELD 30-Year 4/32 90 15/32 5.936%

And the reason du jour to expect Greenspan & Co. to take a stand against inflation at the Federal Reserve's meeting June 29 and 30? Word that new home sales vaulted 9.2% during April. The Commerce Department said the seasonally adjusted annual rate of sales leapt to 978,000 in April from 896,000 in March.

Those numbers were cause enough to keep bonds and inflation-fearful financial and technology equities on yesterday's path southward. And, as yesterday's afternoon turnaround among several big-cap names showed, some cyclical stocks are standing ready to pick up the falling coins.

But mostly, the air during this shortened Wall Street week remained stagnant, with people doing more scratching of the head than anything else. Alan Greenspan was set to speak at a trade and technology conference at 1 p.m. EDT in Boston, but his comments will likely have little influence on today's trading.

Thomas Madden, chief investment officer for U.S. equities at Federated Investors in Pittsburgh, sees the stock market stuck in a correction, with the Dow possibly falling to 9500 -- "although that would be the extreme," he said -- until the Fed meets. He says there's a "3-in-4" chance of a 25- to 50-basis-point boost in rates. In which case, he expects a relief rally on the day of the rate hike to mark the beginning of another leg skyward.

In the meanwhile, the strategist expects insurance, technology and "most high P/E stocks" to trade down, with a little "backing and filling." He said the cyclical rally isn't over yet and that "we will continue to see that shift into value stocks. We had a little profit-taking -- I think the institutions were making a lot of trades here -- after five years of earnings growth being discounted in an afternoon. But now it's back to the races."

Madden also sees small-cap names benefiting from current market conditions, "but I've been saying that for six quarters -- and that's six flights of stairs I've been thrown down."

As for the long bond, Madden said he wouldn't be surprised if the yield on the 30-year rose as high as 6.5%. If it goes above that, he said, his whole forecast can be thrown out the window.

The 30-year Treasury lately was down 4/32 to 90 15/32, sending its yield up to 5.94%. (For more on the fixed-income market, see today's early Bond Focus.)

Madden emphasized that Federated doesn't see any signs of substantial inflationary pressure. "While we may have some uptick in inflation in this pistol-hot economy," he said, "it's still very hard for me to see how this means a major increase in broad inflation. As everyone has pointed out, wage costs are under control and we continue to have excess capacity around the world, which holds down domestic costs."

He also cited yesterday's news that Merrill Lynch (MER) plans to offer online trading as a deflationary influence. "This outbuilding of the Net will cost consumers less money two years from now. The Net has forced retailers to get on the train. Networks always save time and money. That Merrill is meeting [Charles] Schwab's (SCH) price -- this is big."

After rising as high as 10,627.60, the Dow Jones Industrial Average lately was down 118.42, or 1.1%, to 10,477.84. Allied Signal (ALD), Chevron (CHV) and Exxon (XON) were among the seven Dow components in positive territory. Indeed, oil was one of the session's few bright spots, with the American Stock Exchange Oil & Gas Index rising 1.1%.

The broader S&P 500 was falling 12.52, or 1%, to 1281.74, and the smallish-cap Russell 2000 was dropping 6.27, or 1.4%, to 431.19.

The lately beaten Nasdaq Composite Index continued to acquire more bruises, and was down 43.31, or 1.8%, to 2368.72. Separate New York analyst meetings could move Hewlett-Packard (HWP) and MCI WorldCom (WCOM) later in the day.

Internet bellwethers saw no end to the suffering, as America Online (AOL) fell 4.9%, Yahoo! (YHOO) sank 4% and Amazon.com (AMZN) tumbled 5.7%. TheStreet.com Internet Sector index was losing 27.31, or 4.9%, to 529.53.

Breadth was negative and volume was fair. On the New York Stock Exchange, decliners lead advancers 1,796 to 990 on 393.6 million shares traded. And the downs had the ups 2,374 to 1,165 on 465.5 million shares in Nasdaq Stock Market activity.

Wednesday's Midday Movers

By Thomas Lepri
Staff Reporter

Headlining today's movers are the brokers, which are looking pretty funky, though not in a good, Bootsy Collins sort of way. PaineWebber (PWJ) and Morgan Stanley Dean Witter (MWD) were taking hits after CIBC World Markets analyst Steven Eisman cut them both to buy from strong buy and reduced his 2000 earnings estimates for the companies to $3.45 from $4 a share and to $6.40 from $7 a share, respectively. PaineWebber was off 3 13/16, or 8.5%, to 40 15/16, while Morgan Stanley was down 5 3/4, or 6.3%, to 86. Eisman also lowered his 2000 earnings estimate on Merrill Lynch to $5 from $5.70 a share, sending that stock down 4 5/8, or 6.2%, to 70 5/8.

The poster child du jour for the continuing Net stock slump is Spanish language Web portal StarMedia Networks (STRM), which was giving back some of its recent big gains, falling 17 3/16, or 28%, to 44 1/8.

In other news:

Volpe Brown started coverage of AdForce (ADFC) with a buy rating, but that wasn't enough to ward off a drubbing shared with the rest of the Net sector: AdForce was off 8 1/2, or 29.6%, to 28 1/4.

Polish cable TV network @Entertainment (ATEN) was surging 5 5/8, or 45.2%, to 18 1/16 on news that Europe's second-largest cable company, United Pan-Europe Communications (UPCOY), agreed to buy it for $1.15 billion. Microsoft (MSFT) has an 8% stake in UPC, which was lately off 1/4 to 41 1/4.

There seems to be only so much capital to go around in the online bookselling business, and that limited supply has been shrinking lately. barnesandnoble.com (BNBN) was lately trading below its IPO price of 18, off 2 7/8, or 14.4%, to 17 1/8.

British Steel (BST) was jumping 3 9/16, or 16%, to 25 3/4 after the mellifluously named Dutch steel and aluminum firm Hoogovens said it was in merger talks with the company.

DLJdirect (DIR) was letting off some steam gathered during its market debut last week, down 6 1/4, or 16.1%, to 32 1/2.

eToys (ETYS) was tumbling 7 1/2, or 13.9%, to 46 3/4. Competition between toy retailers in the capital markets will heat up later this week when Zany Brainy's -- say it again, Zany Brainy's -- IPO is expected to be priced.

This isn't the way M&A arbitrage is supposed to work. But investors are bullish on chemicals firm Geon's (GON) plan to acquire O'Sullivan (OSL), a maker of polymer films for the auto and industrial markets. Geon was lately up 2 7/16, or 7.7%, to 34 1/8, while O'Sullivan was advancing 2 11/16, or 28.7%, to 12 1/16.

Software company Marimba (MRBA) was sliding 10 5/8, or 18.7%, to 46 3/8 after Morgan Stanley Dean Witter started it with a neutral rating.

Bear Stearns started coverage of information technology services firm Metro Information Services (MISI) with a rating of attractive. But the stock was getting beaten down a rather unattractive 5 3/4, or 24.3%, to 17 15/16.

Earnings/revenue movers

Preannouncement season is upon us, folks, and the fun is just beginning.

American Home Products (AHP) seems to have stabilized after last night's warning that second-quarter earnings would likely come in about 7 cents below the 25-analyst First Call outlook of 41 cents a share, and that full-year 1999 earnings would fall about 11 cents shy of the 27-analyst forecast of $1.89 a share. The stock dropped sharply in after-hours composite trading, but was bouncing back today, lately up 1 3/16 to 53 3/16. AHP earned 39 cents in the year-ago second quarter and $1.78 for 1998. The company blamed a global slump in grain and livestock prices and said it was considering strategic alternatives for its agricultural product and livestock units.

Adobe Systems (ADBE) was little changed -- up 5/8 to 73 1/8 -- after it said it expects to report second-quarter earnings slightly above its previously estimated range of 62 cents to 66 cents a share. The 11-analyst view for Adobe's quarter was 64 cents a share. Adobe also said it would take a $15 million restructuring charge to cut about 9% of its worldwide staff.

Fast-food franchiser CKE Restaurants (CKR) was getting rocked after cutting its first-quarter earnings forecast to between 35 cents and 37 cents a share, well below the 45-cents-a-share 12-analyst estimate. CKE, which blamed the slackness on poor results from its Carl's Jr. and Hardee's chains, was lately down 4 7/8, or 27%, to 13 3/16.

Weighing in with an actual earnings report was Web communities firm iTurf (TURF), which was off 13/16 to 18 3/4 after the company reported a first-quarter loss of 1 cent a share, a dime narrower than the four-analyst call and a penny wider than last year's break-even quarter.

>To order reprints of this article, click here: Reprints