Wednesday's Market: Stocks Drop on Economic Concerns

Kraft IPO unwraps modest gains. Weakness in chips and networkers help drag Nasdaq 2.2% lower.
By Eric Gillin ,

Despite the second-largest initial public offering in stock market history hitting the Street today, B.B. King's blues classic "The Thrill is Gone" seems like an apt coda for today's trading session. It was marked by light trading, a weak report on

retail sales and a reminder from the

Federal Reserve the economy is dragging.

The Fed's

Beige Book told investors what they largely know -- that most parts of the country had flat or slowing growth in April. Manufacturing was weak, new construction leveled off and the labor market got worse. The news put a drag on stocks when the report was released in the afternoon.

The

Kraft

(KFT)

IPO was one of the notable high points of the day, opening its first trading session at $31.50, half-a-buck higher than where it priced last night at $31. That was the high-end of its suggested range. But some analysts expected the stock to soar the way

UPS

(UPS) - Get Report

did

in November 1999, when it gained 35% on its first day of trading.

Kraft closed up 0.8% to $31.25, bringing in a one-day take of more than $8.7 billion on the 280 million shares offered.

Philip Morris

(MO) - Get Report

, the parent company of Kraft, sold about 16% of its interest to the public and will retain the remaining 84%. Philip Morris lost 1.6% to $47.81.

Ringing Up Concerns

Like the Beige Book, the latest data on retail sales helped cut away at investor confidence. Retail sales rose 0.1% in May, the government reported this morning, slightly lower than the 0.2% increase economists expected. But revised figures for April showed that retail sales advanced 1.4% that month, compared to a preliminary reading they rose 1.1%.

"This type of report has people sitting on their hands to try and figure out where the market will go," said John Peluso, head of listed trading at

Lehman Brothers

. "Is it time to get back into stocks with gusto? Or, are there still some more surprises down the pike?"

Investors were definitely sitting tight for much of the day. Volume was light early on and only picked up at the end of the trading day.

The

Dow Jones Industrial Average pecked the 11K support level on the cheek this morning, only to discover it was a goodbye kiss. The Dow ended the day off 77 to 10,872.

Intel

(INTC) - Get Report

,

Honeywell

(HON) - Get Report

and

Eastman Kodak

(EK)

were notable losers.

The

Nasdaq Composite Index finished 48 points lower, or 2.2%, to 2122, hurt by selling in semiconductors, networkers and telecommunications companies. The

Philadelphia Stock Exchange Semiconductor Index

lost 2.3%,for example, while the

American Stock Exchange Networking Index

fell 4.9%.

The broader-market

S&P 500 dropped 14 points to 1242. The

Russell 2000, which tracks small-cap stocks, outperformed the Dow, Nasdaq and S&P, but that's not saying much. It too had losses, ending off 2 points to 505.

Trying to Gauge a Recovery

Over the past week, the market has contended with profit warnings from a wide swath of corporate America. Investors, who sent stocks up significantly from late March through early May based on hopes of an economic recovery, are now worried a second-half turnaround is increasingly unlikely. Now some tech companies have begun to say woes in Europe are hurting business.

Fed fund futures, a good proxy for monetary policy, are fully priced for another 25 basis-point interest-rate cut. Since the beginning of the year, the central bank has cut short-term rates five times, by 250 basis points. Today, the benchmark 10-year

Treasury Note was off 1/32 to 97 1/32, pushing its yield up to 5.266%.

Forest and paper stocks were among the biggest winners today, with the

Philadelphia Stock Exchange Forest & Paper Products Index

gaining 0.5%. HMOs, airlines and biotech also moved up.

Losers were easy to spot: Financials, natural gas, utilities and retailers were all lower.

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