A New Week Brings the Same Old Light-Volume Selloff

Wall Street won't get past its rate worries until after tomorrow's FOMC meeting, so the equity slide continues.
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With tomorrow's

Federal Open Market Committee

meeting looming ahead, memories of

Friday's selloff still bakery fresh, market watchers speaking of an imminent (if not ongoing) correction, and various financial outlets dredging up visions of 1929, 1987 and Japan 1989, it's little wonder stocks are down today. But as was the case on Friday, trading volume was scarce, suggesting few investors are tearing their hair out and praying for salvation while streaming for the exits in a cliche-packed panic.

Amid a delightfully sunny New York spring day (probably also subtracting from trading activity), major stock proxies were down in unison as lunchtime beckoned on Wall Street.

The

Dow Jones Industrial Average

was down 145 to 10,768 after trading as low as 10,762.12.

Dow laggards were led by

IBM

(IBM) - Get Report

, which was returning some of last week's Net-begotten gains. Further hampering the index were

United Technologies

(UTX) - Get Report

,

Goodyear

(GT) - Get Report

and the index's financial components.

Also,

General Motors

(GM) - Get Report

was down 5.2% after

Morgan Stanley Dean Witter

cut its recommendation on the auto giant to neutral from outperform. Outside the Dow,

Ford

(F) - Get Report

was off 4.9% after sustaining a similar knock from the brokerage.

Amid broad weakness in nearly all major industry groups, the

S&P 500

was off 14 to 1324 and the

Nasdaq Composite Index

was down 23 to 2505. Additionally,

TheStreet.com Internet Sector

index was down 13 to 616 and the

Russell 2000

was down 6 to 437.

In

New York Stock Exchange

trading, declining stocks were leading advancers 2,096 to 784 on a pale 349 million shares. In

Nasdaq Stock Market

activity, losers were leading 2,302 to 1,359 on 404 million shares. New 52-week lows were outpacing new highs 46 to 15 on the NYSE, but new highs were leading 43 to 29 on the Nasdaq.

While unable to impact broader markets, merger activity was putting the moves on individual issues. Most notably,

Global Crossing

(GBLX)

was down 4.1% and

U S West

(USW)

off 7.5% after the two telecom firms confirmed plans to merge.

Elsewhere,

Case

(CSE)

was up 8.5% after agreeing to a $55-a-share buyout offer from

New Holland NV

(NH) - Get Report

, which was off 10.3%.

Finally,

Gulfstream Aerospace

(GAC)

was up 9.7% after agreeing to be acquired by

General Dynamics

(GD) - Get Report

for $5.3 billion in stock, or $71.44 per share. General Dynamics was down 10.6%.

The Pundits Among Us

Adding to the jitters today, Thomas Galvin, chief investment officer at

Donaldson Lufkin & Jenrette

, said major averages are "susceptible" to a 5% to 15% correction due to worries about the

Fed

switching to a tightening bias. In a comment titled "Shot Across the Bow?" Galvin compared the current environment to March 1997, when "despite high real fed funds rates, the Fed raised rates 25 basis points to cool the economy."

Falling shy of predicting such an event, the strategist acknowledged the potential for a similar "shock" tomorrow. If so, Galvin predicts an at least 10% decline in the S&P 500, but a subsequent reversal within six weeks hence, as was the case in 1997. Moreover, despite near-term concerns, he is bullish on the intermediate-term outlook, predicting the S&P 500 will end the year at 1500, with financials -- now a "contrarian bet" -- leading the way.

"From a sector standpoint, the only key difference to 1997 might be limits to a technology and health-care share price recovery," due to Y2K and reform issues, respectively, he said.

Part of Galvin's optimism stems from a belief investors are now ignoring "good news" on inflation, such as the recent

Employment Cost Index

, productivity figures and the average hourly earnings component of the April employment report.

"In an economy which has successfully evolved from a high-fixed-cost industrial base to a high-variable-cost service-knowledge base, it is the direction of labor costs and productivity which will ultimately dictate inflation pressure rather than a temporary spike in commodity prices," Galvin wrote.

Moreover, the market watcher predicted the nascent recovery in emerging markets will result in deflationary pressures, not inflationary, because "access to capital will result in overproduction of goods again while overleveraged balance sheets in public and private sectors will limit significant consumption."

The Next Few Days Will Tell

Meanwhile, Don Hays, director of investment strategy at

Wheat First Union

, says the next few days will be key as to whether the major unrest he's been predicting since February unfolds.

"Friday certainly gave us some relief in our correction mentality, but it is much too early to claim victory," Hays wrote this morning. "So far, no major uptrends have been violated. Since the new 'baby-boomer' investors have been conditioned over these last eight years that every two-day pullback clears up any problem and presents a buying opportunity, it will be telling what happens in the next few days."

Hays believes the bond market is "calling the stock market's bluff" and wonders if investors are "going to be willing to continue to plunge into the S&P 500 with an earnings yield of 2.8%, while the long-term government bond yield is now up to 5.91%?"

Lately, the price of the 30-year Treasury bond was up 3/32 to 90 25/32, its yield at 5.91%. (For more on the fixed-income market, see today's early

Bond Focus.)

However, while the veteran strategist frets about rising interest rates, he is paradoxically (it seems) skeptical about the perceived acceleration in the global economy.

"It is true that there are many signs that some of those troubled economies are bottoming out, but we continue to believe that their troubles are not over with," he wrote. "The test will come in the Japanese economy in our opinion. If this second-largest economy of the world can dig itself out of the ditch, there might be some credibility to the world growth (salvation of the world) thesis. But the signs we are looking at don't confirm that outlook."

Hays notes Japanese government bonds have fallen back to 1.24% after rising above 2% a few months back while short-term rates are "virtually zero." Also, the yen has weakened vs. the dollar of late and could "retest" the 147 level of last August, he said.

"Our

bearish scenario has been built on the backbone of an impending currency war, based upon trade disparities," Hays wrote. "If the Japanese yen continues to weaken, that will increase these possible trade disputes dramatically."

Monday's Midday Movers

By Heather Moore
Staff Reporter

In this kind of a down market, for many stocks the Monday morning question changes from "How much are companies with merger and joint-venture news up?" to "How well are they clinging to that flatline?"

  • Case was up 3 3/4, or 8.5%, to 48 5/8 after New Holland agreed to acquire the company for $55 a share, or a total of $4.2 billion plus an undisclosed amount of debt. New Holland was down 1 13/16, or 10.3%, to 15 3/4. Deere (DE) - Get Report, for which the merged Case-New Holland is expected to create competition, was up 1 1/2 to 41 15/16.
  • Dow Jones (DJ) was down 1/8 to 53 1/2 and Reuters (RTRSY) was down 1/4 to 85 7/8 on word they're combining interactive business services to create an Internet-based database product for corporate clients.
  • EarthLink Network (ELNK) was up 1/4 to 60 1/4 and Sprint (FON) was up 1 to 107 after announcing they will offer co-branded high-speed Internet access using Sprint's DSL network.
  • Gulfstream Aerospace was up 5 3/8, or 9.7%, to 61 after General Dynamics agreed to buy the jet manufacturer in a $5.3 billion stock swap. General Dynamics was down 7 9/16, or 10.6%, to 63 7/8.
  • Medical Manager (MMGR) was up 11 1/4, or 33.3%, to 45 after Synetic (SNTC) said it will acquire the medical practice management software firm in a $1.4 billion stock deal. Synetic was down 7 1/4, or 7.6%, to 88 3/8.
  • TicketMaster Online-Citysearch (TMCS) was down 1 3/8 to 31 3/8 after saying it will acquire Match.com from Cendant (CD) . Cendant was up 9/16 to 18 5/16.
  • U S West was down 4 11/16, or 7.5%, to 57 9/16 after confirming last week's reports that it will merge with Global Crossing in a stock swap valued at $37 billion. Global Crossing, which was down 2 1/2 to 58 5/8, said it will fold its planned acquisition of Frontier (FRO) - Get Report into the merged entity.
  • Wyman-Gordon (WYG) was up 5 7/16, or 41%, to 18 11/16 after Precision Castparts (PCP) said it will buy the company for $825 million, including the assumption of $104 million in debt. Precision Castparts was down 3/4 to 40 1/4.

In other news:

Morgan Stanley Dean Witter cut its ratings on Ford, down 3 to 57 3/4, and General Motors, down 4 5/16, or 5.2%, to 78 13/16, to neutral from outperform.

Fusion Medical Tech

(FSON)

was up 9/16, or 8.8%, to 7 1/16 after a bullish piece in

Barron's

quoted Tony Pace of

Pace Partners

hedge fund saying he expects the company's

FloSeal

to receive approval from the

Food and Drug Administration

. FloSeal is a treatment to stop active bleeding during surgery.

Immune Response

(IMNR)

was down 4 3/16, or 35.6%, to 7 5/8 while

Agouron Pharmaceuticals

(AGPH)

was up 3/4 to 59 13/16 after saying an independent data safety monitoring board recommended that a Phase III clinical trial of the companies'

Remune

immune-based therapy for HIV patients be terminated.