Market Wraps Up Week at Records, but With Disturbing Complacency

SAN FRANCISCO -- Forget all this talk about small-caps. Microsoft (MSFT), the monster truck, the big rig, the Godzilla of the great Northwest, rose 5.4% today in an otherwise soporific session. Meanwhile, General Electric (GE), No. 2 in the market-cap pantheon, joined Microsoft on the road to all-time highs, taking major stock proxies along for the ride. That's really all you need to know.

Major Indices INDEX CHANGE % VALUE YR TO DATE Dow 24.43 +0.2% 11,209.84 +22.1% S&P 500 9.16 +0.7 1418.78 +15.4% Nasdaq 25.11 +0.9% 2864.48 30.6% Russell 2000 0.54 -0.1% 465.26 +10.3% TSC Internet 10.98 -1.7% 638.73 +57.2% TREASURY BOND CHANGE VALUE YIELD 30-Year 14/32 91 4/32 5.887%

Bill Gates' wealth-creation machine enjoyed a double-Dutch treat of good news. The Wall Street Journal reported the firm may create a tracking stock for its Internet assets, giving the stock a boost at the open. Then, around 1:45 p.m. EDT, wire services ran headlines providing the secondary thrust: A jury in Connecticut federal court found the company not guilty of violating federal antitrust laws.

Microsoft's heavy lifting hoisted the Nasdaq Composite Index and S&P 500 to new highs while the Dow Jones Industrial Average piggy-backed on the positive tidings to a record of its own.

However, the averages waffled as Microsoft failed to crack through the 100 level in the immediate wake of the jury decision. A furious level of activity (especially relative to everything else) had the stock bid as high as 99 7/8 but never higher. The software colossus closed up 5.4% to 99 7/16.

The Nasdaq Comp closed up 25.11, or 0.9%, to 2864.48 vs. a session high of 2871.90. Still, the Microsoft-, er, tech-primed index established its third consecutive record and ninth in the past 12 trading sessions.

The index was also aided by strength in Sun Microsystems (SUNW), as well as PMC-Sierra (PMCS), which leapt 17.6% after posting better-than-expected earnings and receiving an upgrade from Prudential Securities. The Nasdaq 100 rose 1.2%, to a record 2459.48.

The S&P 500, meanwhile, rose 9.16, or 0.7%, to a record 1418.78.

The Dow Jones Industrial Average -- which does not count Mister Softee as a component -- rose as high as 11,213.33 before closing up 23.43, or 0.2%, to a record 11,209.84. Naysayers noted the index never threatened its intraday high of 11,236.76, set Tuesday.

In addition to GE, the Dow was led by American Express (AXP), United Technologies (UTX) and International Paper (IP). Chevron (CHV) and Merck (MRK) were big restraints.

Meanwhile, recent struggles for industry bellwethers continued. TheStreet.com Internet Sector index fell 10.98, or 1.7%, to 638.73. Also, the Russell 2000 slid 0.54, or 0.1%, to 465.26.

However, Internet IPOs had stellar sessions, led by Paradyne Networks (PDYN), up 231% from its offering price of $17.

"I think the market acts spectacular," said Ned Collins, executive VP of U.S. stocks at Daiwa Securities America. "There's been a whole lot of things and this market has taken it. Yes, it's dull and there are things people don't like but it's doing a great job and I think we have a chance to break out on the upside."

The Federal Reserve chairman's Humphrey-Hawkins testimony next week, tensions between Taiwan and China, recent problems in Latin America and the simple fact that stock averages -- and valuations -- are at all-time highs top most people's worry list.

Collins noted them all, and more. But "I really think it acts well. When you can't take 'em down any more than they've been able to, that's major underlying strength," he said. "Money flows have continued. You talk to specialists they say there's been some good buying" when there is stock being offered.

In New York Stock Exchange trading, 714.2 million shares were exchanged while advancers edged out declining stocks 1,453 to 1,448. In Nasdaq Stock Market action 1.06 billion shares traded while losers led 2,026 to 1,926. New 52-week highs bested new lows 111 to 29 on the Big Board and by 233 to 31 in over-the-counter trading.

The Pragmatic Bear

Lackluster market internals are another factor of concern mentioned by traders and everybody seems worried about something. Maybe that's why the trend is up. (Either Collins is in the minority or more honest about being optimistic.)

However, if market players are concerned, they're not taking action. As CNBC's Bob Pisani noted (credit where credit is due), the S&P 100 Volatility Index closed down 7.9% to 18.13 today, levels not seen since around July 17, 1998 -- the summer peak last year, coincidentally or not.

Elsewhere, the widely watched Chicago Board Options Exchange put/call ratio totaled 0.37 at the close of trading and expiration today, compared with 0.60 yesterday. This kind of action suggests market players aren't worried after all.

Meanwhile, one died-in-the-fur bear admits being unable to take the pain.

"I'm a bear, but I'm pragmatic," said Aron Thompson, president of Infinity Investments, a small hedge fund outside Seattle. "I wish I could go short, but I don't have the stones to do it."

Comparing current valuations to historic patterns is "almost meaningless" because the "marketplace now is completely different" than in 1929, or 1987, or in Japan, Thompson said. "There's so much money going in you have to make radical adjustments to compare to historical P/Es."

Still, "any market with this kind of money momentum, the potential for that to happen in reverse is real strong," he said. "It's just illogical and impossible to pick the top. If you don't you're going to get crucified. Not for a reason anyone suspects, one day it'll just decided it's done and it'll hang itself. It's like a conversion -- like Saul on his horse getting zapped and becoming Paul. I just ain't good enough to pick that spot."

Back in January, Thompson put the roughly $10 million he runs almost entirely into cash.

"I'm a bear mostly in cash and taking a certain percentage of said cash and being speculative," he said.

Capitulating bears and complacency by everyone else. Isn't that supposed to be bad? Hard to make that argument looking at another week of records for major averages.

The price of the 30-year Treasury bond rose 14/32 to 91 4/32, its yield declining to 5.89%.

Among other indices, the Dow Jones Transportation Average rose 4.84, or 0.1%, to 3401.87; the Dow Jones Utility Average slid 0.33, or 0.1%, to 320.24; and the American Stock Exchange Composite Index dipped 3.63, or 0.4%, to 818.10.

For the week, the Dow industrials rose 16.14, or 0.1%; the S&P 500 advanced 15.50, or 1.1%; the Comp jumped 71.42, or 2.6%; the Russell 2000 grew 7.28, or 1.6%; while the DOT lost 26.11, or 3.9%. Additionally, the Dow transports shed 25.45, or 0.7%; the Dow utilities slid 1.47, or 0.5%; and the Amex Composite rose 5.37, or 0.7%.

Elsewhere in North American equities, the Toronto Stock Exchange 300 lost 7.09 to 7285.60 and the Mexican Stock Exchange IPC Index climbed 10.44 to 5886.41. For the week, the TSE rose 1.2% and the IPC lost 0.04%.

Friday's Company Report

By Heather Moore
Staff Reporter

(Earnings estimates from First Call; new highs and lows on a closing basis unless otherwise specified. Earnings reported on a diluted basis unless otherwise specified.)

Investors were tossed three buying biscuits today to bid up Microsoft. The usual Mister Softee earnings optimism was alive and well ahead of the company's report Monday. The 26-analyst view calls for 36 cents a share. As noted above, the software giant also got a boost from a Wall Street Journal story saying the company is closer to creating a tracking stock for its Microsoft Network properties. Microsoft may make an announcement as early as next week, the newspaper said. And then midafternoon came news that a federal jury in Connecticut ruled in favor of the company, saying Microsoft didn't violate antitrust laws in a case involving software firm Bristol Technology. The stock popped up 5 1/16, or 5.4%, to an all-time high of 99 7/16 on 57.7 million shares.

Mergers, acquisitions and joint ventures

No one got very excited about the news that Cyprus Amax Minerals (CYM) and Asarco (AR) are combining in a $764.2 million stock transaction. Cyprus Amax lowered 9/16 to 14 while Asarco lowered 11/16 to 18 9/16. Cyprus Amax shareholders will get 0.77 of a share of the new company, to be called Asarco Cyprus, for each share of Cyprus Amax held, giving them about a 64% stake in the new company. Asarco shareholders will exchange their stock for Asarco Cyprus shares at a 1-for-1 ratio. Not impressed, Warburg Dillon Read cut Cyprus Amax to hold from buy.

Rite Aid (RAD) rallied 1 1/2, or 6.9%, to 23 3/8 on market chatter the company will be taken out.

Gains from Net deals can disappear as quickly as they come. Audiohighway.com (AHWY) erased 3 1/4, or 13.1%, to 21 3/4 after racing up 19% yesterday after it said it will put together an audiobooks channel on the Microsoft Network site WindowsMedia.com.

U S West (USW) hopped up 2 7/16 to 60 1/4 after CNBC's David Faber said the company's board is expected to approve Qwest Communications' (QWST) $69-a-share takeover offer tonight.

Earnings/revenue reports and previews

Air Products & Chemicals (APD) sliced off 4 3/8, or 10.6%, to 36 15/16 after it warned that it expects to report third-quarter earnings of 48 cents a share, below the 12-analyst outlook of 56 cents and down from the year-ago 63 cents.

Gillette (G) picked up 2 1/2, or 5.6%, to 47 1/4 after last night posting second-quarter earnings in line with lowered analysts' estimates. The razor-blade maker earned 26 cents a share, matching the 13-analyst view but falling below the year-ago 33 cents.

Insurance firm Horace Mann Educators (HMN) dropped 2 7/16, or 8.4%, to 26 1/2 after warning that its second-quarter earnings will be about 34 cents a share, 16 cents below the six-analyst call and slightly up from last year's 31 cents.

Mercury Interactive (MERQ) swelled 7 3/8, or 20.2%, to an all-time high of 43 7/8 after yesterday reporting second-quarter earnings of 18 cents a share, 2 cents on top of the 11-analyst vision and up from last year's 10 cents. The company also yesterday named its CEO and co-founder, Amnon Landan, to the additional post of chairman.

PMC-Sierra climbed 12 5/16, or 17.6%, to an all-time high of 82 1/2 on the heel's of yesterday's hot earnings report. The company said it earned 23 cents in the second quarter, a nickel above the 18-analyst view and up from the year-before 15 cents. Prudential lifted the stock to strong buy from accumulate.

Charles Schwab (SCH) shaved off 2 15/16, or 5.3%, to 52 7/16 after it warned that its profit margins may shrink later this year. Schwab posted second-quarter earnings of 18 cents a share, a penny above the eight-analyst view and up from last year's 9 cents.

Seagate Technology (SEG) declined 3 7/16, or 11.5%, to 26 9/16 after yesterday reporting fourth-quarter earnings of 30 cents a share, 4 cents below the 11-analyst consensus and up from the previous year's 9 cents. Morgan Stanley Dean Witter started the disk drive maker with a cool neutral rating today.

Veritas (VRTS) flourished 7 15/16, or 14.9%, to an all-time high of 61 3/16 after it yesterday reported second-quarter earnings of 16 cents a share, 2 cents above the 17-analyst estimate and up from the previous year's 8 cents a share.

In other earnings news:

Upside Surprises
Company	Qtr	EPS	First Call View	Yr. Ago EPS	Number of Analysts	Price Change	Close
Archer Daniels Midland (ADM)	4Q	7c	6c	10c	5	--	14 1/2
Constellation Energy (CEG)	2Q	45c	38c	39c	9	+3/16	30 3/16
Diamond Offshore Drilling (DO)	2Q	37c	32c	76c	24	+3/16	31 3/8
First Financial (FFCH)	3Q	36c	34c	30c	4	+1/8	18 1/16
P.H. Glatfelter (GLT)	2Q	30c	26c	33c	3	--	15 7/8
Newport News Shipbuilding (NNS)	2Q	55c	52c	45c	2	+1/2	31 5/8
Potlatch (PCH)	2Q	33c	30c	35c	3	+5/8	42 1/4
Premark (PMI)	2Q	62c	58c	50c	4	-1/16	37 1/2
Tribune (TRB)	2Q	88c	87c	75c	14	+1/4	88 1/16

Downside Surprises
Company	Qtr	EPS	First Call View	Yr. Ago EPS	Number of Analysts	Price Change	Close
Caterpillar (CAT)	2Q	78c	80c	$1.20	20	-3/16	58 15/16
Edison International (EIX)	2Q	37c	40c	40c	8	-1/16	26 3/16
Huffy (HUF)	2Q	50c	55c	-6c	3	-1/4	14 7/8

Offerings and stock actions

Efficient Networks (EFNT) wasn't done yet. The high-speed DSL firm expanded 7 7/16, or 14.6%, to 58 5/8 after it rocketed about 240% in its trading debut yesterday.

Paradyne Networks soared 39 3/16, or 230.5%, to 56 1/4 in its first day of trading. Lead underwriter Donaldson Lufkin & Jenrette priced Paradyne at $17 yesterday, above its $14-to-$16 pricing range.

Elsewhere in new issues, Audible (ADBL) flew 12, or 133.3%, to 21 after Credit Suisse First Boston priced its 4 million-share first offering midrange at $9. And Ravisent Technologies (RVST) vaulted 5 9/16, or 46.4%, to 17 5/8 after Bears Stearns priced its 5 million-share offering at $12.

Analyst actions

Alcoa added 5/16 to 61 1/16 after Morgan Stanley Dean Witter upgraded stock to strong buy from neutral and Merrill Lynch upped it to near-term buy from neutral.

Altera (ALTR) chopped off 4 1/8, or 9.1%, to 41 1/16 after Morgan Stanley Dean Witter cut the stock to outperform from strong buy. Credit Suisse First Boston started coverage of the stock with a buy and a price target of 53. PaineWebber lifted its price target to 52 while maintaining its buy rating. Last night, the company meet earnings estimates of 25 cents a share.

Finova (FNV) lost 3 3/4, or 7.2%, to 48 11/16 in the face of another downgrade, this time from J.P. Morgan, which cut the company to long-term buy from buy. Yesterday BancBoston Robertson Stephens cut Finova to long-term attractive from buy on concerns over the financial services firm's profit margins. Finova reported second-quarter earnings of 83 cents a share yesterday morning, in line with the 17-analyst view and up from the previous year's 68 cents.

KN Energy (KNE) grew 1 7/16, or 7%, to 21 7/8 after Banc of America Securities pushed up the stock to buy from hold.

Natural MicroSystems (NMSS) excelled 1 7/16, or 12.9%, to 12 5/8 after U.S. Bancorp Piper Jaffray lifted the stock to buy from neutral with a price target of 15, saying "backlog and visibility improved [in the second quarter] with strategic accounts leading the way."

Office Depot (ODP) fell 1 1/2, or 7.4%, to 18 13/16 after Merrill Lynch cut the stock to accumulate from buy. Yesterday, the company met second-quarter earnings expectations of 21 cents a share.

Profit Recovery (PRGX) tacked on 3, or 7.4%, to 43 5/8 after Merrill raised it to near-term buy from accumulate.

Quantum (QNTM) slipped 1 3/8, or 5.1%, to 25 13/16 after Hambrecht & Quist cut it to market perform from buy.

Sawtek (SAWS) swelled 6 7/8, or 11.7%, to an all-time high of 66 1/8 after U.S. Bancorp Piper Jaffray raised it to strong buy from buy with a price target of 70.

Security Dynamics (SDTI) deflated 3 3/16, or 13.4%, to 20 3/4 after Prudential slashed it to hold from accumulate. Yesterday, the company matched earnings estimates of 15 cents a share.

Miscellany

AdForce (ADFC:Nasdaq) jumped 4, or 16%, to 29. TSC's Adam Lashinsky wrote earlier about how AdForce replaced lost revenue when GeoCities ceased to be one of its clients.

GlobeSpan Semiconductor (GSPN) grew 3 5/16, or 5.7%, to 61 7/8 on no discernible news.

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