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Growth Takes an Extended Holiday as Rate Worries Mount

Blue-chips and cyclicals improved, but tech stocks and others that need low rates to keep growing were slammed.

SAN FRANCISCO -- After a long and glorious (weatherwise, at least) weekend, traders were back in the saddle today, only to get harpooned by a couple of arrows early in the ride. A stronger-than-expected

National Association of Purchasing Management

index proved the most poisonous (yet not deadly), while summary comments from

Federal Reserve

governors left both bond and equity markets saddled with weakness.

However, while a host of negative developments ambushed several high-tech warriors, blue-chips closed well off their intraday lows and the

Dow Jones Industrial Average

ended with a modest gain. Once as low as 10,409.14, the Dow closed up 36.52, or 0.4%, to 10,596.26.

In reaction to the steaming-hot NAPM report, the price of the 30-year Treasury bond fell 1 6/32 to 90 17/32, its yield rising to 5.93%. The data, plus comments from Fed governors such as

New York Fed

President

William McDonough

, left traders convinced the central bank will raise interest rates later this month.

The Dow began its comeback roughly in the wake of comments from Fed Vice Chairwoman

Alice Rivlin

, who said in a midday speech in Montreal there is "no clear indication" inflation has revived.

Still, Doug Myers, vice president of equity trading at

Wachovia Securities

in Atlanta, questioned the impact of Rivlin's comments. "I can't say Americans heard the news and ran to call their brokers," Myers said. "I think the ones that were paying attention went out and nibbled in what they perceive are the safest equities they could get into."

Beyond the Dow, however, "it was an ugly day for equities," he said.

Not surprisingly, unrest in the bond market proved most damaging to so-called growth stocks, whose outsized price-to-earnings ratios are far less justifiable by even new-era pontificators when interest rates are rising.

Therefore, the

Nasdaq Composite Index

fell 58.49, or 2.4%, to 2412.03 while

TheStreet.com Internet Sector

index lost 23.77, or 4.1%, to 556.87.

But it wasn't just bonds that beleaguered tech stocks today. A negative cover story in

Barron's

this weekend helped scuttle

Amazon.com

(AMZN) - Get Amazon.com, Inc. Report

, which fell 11%. Also,

America Online

(AOL)

fell 5.1% after spending $400 million to acquire privately held

Spinner Networks

and

Nullsoft

.

Meanwhile,

E*Trade Group

(EGRP)

had an inauspicious debut as a DOT component. On its first day in the index after replacing

Excite

, whose acquisition by

@Home

(ATHM) - Get Autohome, Inc. Sponsored ADR Class A Report

was completed late Friday, E*Trade fell 11.5%. The online broker and many of its ilk were walloped by revelations

Merrill Lynch

(MER)

is planning a major push into online trading.

Heeding the potential onrushing giant,

Charles Schwab

(SCH)

fell 5.7% and

Ameritrade

(AMTD) - Get TD Ameritrade Holding Corporation Report

lost 11.1%. Merrill, meanwhile, lost 10.4%, helping drag the

American Stock Exchange Broker/Dealer Index

down 5.4%.

Financials in general got spanked by the prospect of higher interest rates; the

Philadelphia Stock Exchange/KBW Bank Index

slid 1.6%.

Among traditional tech bellwethers,

Intel

(INTC) - Get Intel Corporation (INTC) Report

fell 6.7% after agreeing to acquire

Dialogic

(DLGC)

for $780 million. Additionally,

BancBoston Robertson Stephens

chip analyst Dan Niles made some negative comments about the chip giant's ability to meet earning estimates.

Elsewhere,

Sun Microsystems

(SUNW) - Get Sunworks, Inc. Report

fell 6.2% and

Hewlett-Packard

(HWP)

lost 4.4% after

Banc of America Securities

downgraded each.

The bulk of tech bellwethers tumbled in sympathy, leaving the

Nasdaq 100

down 3.1%, the

Morgan Stanley High-Tech 35

off 2.5% and the

Philadelphia Stock Exchange Semiconductor Index

off 3.2%.

The

S&P 500

slid 7.58, or 0.6%, to 1294.26 but closed off its session low of 1281.44. The

Russell 2000

lost 1.22, or 0.3%, to 437.46.

H-P,

IBM

(IBM) - Get International Business Machines (IBM) Report

and

J.P. Morgan

(JPM) - Get JPMorgan Chase & Co. (JPM) Report

led Dow decliners but cyclical issues, led by

Alcoa

(AA) - Get Alcoa Corp. Report

and

Caterpillar

(CAT) - Get Caterpillar Inc. Report

, helped reverse the downturn. The

Morgan Stanley Cyclical Index

rose 2.6%.

In

New York Stock Exchange

trading, 698.6 million shares were traded while declining issues bested advancers 1,560 to 1,403. In

Nasdaq Stock Market

activity, 746.7 million shares were exchanged while losers led 2,212 to 1,674. New 52-week lows led new highs 36 to 30 in NYSE trading, while new highs led 67 to 39 in over-the-counter trading.

Higher Rates Aren't Death Knell

"The odds are increasing the Fed will tighten," Alan Skrainka, chief market strategist at

Edward Jones

in St. Louis, said today, echoing the thoughts of many on Wall Street. "Two key reports will be employment on Friday and

CPI

due on the 16th. Unless we see a significant change or new evidence the economy is slowing down" the Fed will likely tighten.

However, Skrainka argued a rate hike (or even two) wouldn't be so terrible to those long stocks. Since 1917, stocks were up an average 8.5% one year after a first tightening in a series and up 4.5% one year after the second, he said.

"It's only when the Fed gets caught off guard by inflation and has to play catch up with a series

of tightenings do you see the market deteriorate," the strategist said. "The notable exception being in 1987 when the Fed hiked rates in an overvalued market and stocks took a tumble."

Although some contend the current environment compares (un)favorably enough to 1987 to foster a repeat, Skrainka notes 30% of NYSE stocks are down 30% from their highs, as are more than 50% of Nasdaq stocks.

"From our point of view, you can't look at the P/E on the S&P 500 and say the market is wildly overvalued," he said. "There are a handful of stocks getting hit hard but individuals can still do well buying good stocks at a good price."

Specifically, he recommends

Franklin Resources

(BEN) - Get Franklin Resources, Inc. (BEN) Report

,

MCI WorldCom

(WCOM)

and

Leggett & Platt

(LEG) - Get Leggett & Platt, Incorporated Report

.

TheStreet Recommends

Edward Jones has not done any underwriting for the aforementioned.

Among other indices, the

Dow Jones Transportation Average

rose 50.90, or 1.5%, to 3466.60; the

Dow Jones Utility Average

declined 3.78, or 1.2%, to 325.42; and the

American Stock Exchange Composite Index

lost 2.63, or 0.3%, to 776.11.

Elsewhere in North American equities, the

Toronto Stock Exchange 300

rose 10.58 to 6852.38 and the

Mexican Stock Exchange IPC Index

fell 41.23, or 0.8%, to 5436.42.

Tuesday'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.

)

As noted above, Merrill Lynch dropped 8 3/4, or 10.4%, to 75 1/4 after

announcing plans to offer online trading in December with a basic charge of $29.95 a trade for U.S. equities.

Meanwhile, E*Trade slid 5 1/8, or 11.5%, to 39 5/16 after saying it will buy

Telebanc Financial

(TBFC)

in a stock deal valued at $1.8 billion. E*Trade will exchange 2.1 of its shares for each share of Telebanc. Telebanc jumped 8 3/16, or 12.4%, to 74 1/2.

Elsewhere in Net news, Amazon.com kerplunked down 13, or 11%, to 105 13/16 after a negative piece in

Barron's

detailed problems the company faces in making a profit and in dealing with competitors.

BancBoston Robertson Stephens

analyst Lauren Levitan reiterated her strong buy rating on Amazon.

TheStreet.com's

James Cramer

gave his take on the issue this morning.

Amazon.com rival

Barnes & Noble

(BKS) - Get Barnes & Noble, Inc. Report

slipped 13/16 to 27 3/8 on word the

Federal Trade Commission

will oppose the bookseller's plan to merge with

Ingram Book Group

, arguing the acquisition of the book wholesaler would violate antitrust laws.

barnesandnoble.com

(BNBN)

declined 3 1/4, or 14%, to a postoffering low of 20.

Mergers, acquisitions and joint ventures

America Online tumbled 6 1/8, or 5.1%, to 113 1/8 after agreeing to pay $400 million to acquire Spinner Networks and Nullsoft. Spinner's Internet music service,

Spinner.com

, attracts 1.5 million users monthly and strong daytime at-work usage, AOL said. Nullsoft is the developer of Winamp, a branded MP3 player for Windows, and SHOUTcast, an MP3 streaming audio system.

Crompton & Knowles

(CNK) - Get Cinemark Holdings, Inc. Report

picked up 1 1/4, or 6.8%, 19 5/8 and

Witco

(WIT) - Get Wipro Limited Sponsored ADR Report

picked up 15/16, or 5.4%, to 18 7/16 after the specialty chemical companies said they are planning a merger of equals "aimed as much at cutting costs as at boosting revenues." The merged C&K Witco would be formed by swapping each Crompton & Knowles share for one C&K Witco share and each Witco share for 0.92 of a share of the new company.

Dialogic grew 9 1/2, or 28%, to an annual high of 43 7/16 after Intel agreed to pay $780 million to acquire the company. Intel shed 3 5/8, or 6.7%, to 50 11/16.

Dow Jones

(DJ)

added 3/16 to 52 11/16 after announcing a pact with

Holtzbrinck

publishing group whereby the German concern will get 49% of Dow Jones'

The Wall Street Journal Europe

while Dow Jones will take a 22% share in

Handelsblatt

, Holtzbrinck's business daily.

First American

(FAM) - Get First Trust / Aberdeen Global Opportunity Income Fund Report

climbed 2 13/16, or 6.9%, to 43 5/8 after

AmSouth Bancorp

(ASO)

agreed to acquire the company in a stock swap valued around $6.3 billion. First American shareholders will receive 1.87 AmSouth shares for each share held. AmSouth lost 3 15/16, or 13.9%, to 24 7/16.

Liberty Media

(LMG.A)

skidded 3/16 to 66 1/4 after agreeing to acquire

Associated Group

(AGRPA)

for about $3 billion, including debt assumption. Associated Group lowered 2 9/16 to 62 1/4.

Teligent

(TGNT)

spiked up 5 3/4, or 11.8%, to 54 9/16 after Liberty agreed to own the 41% stake in the company currently held by Associated.

Earnings/revenue reports and previews

CVS

(CVS) - Get CVS Health Corporation Report

tacked on 1/4 to 46 14 after reporting its May same-store sales rose 10.2%.

Harnischfeger Industries

(HPH)

tanked 4 3/4, or 65%, to an all-time low of 2 9/16 after posting a second-quarter loss of 36 cents a share, excluding a charge to establish a reserve for undelivered paper machines, vs. the year-ago loss of 7 cents. The eight-analyst forecast called for a loss of 13 cents. Harnischfeger, which makes mining and papermaking equipment, blamed severe weak global original-equipment demand and said it doesn't expect significant financial improvement by year-end.

United Natural Foods

(UNFI) - Get United Natural Foods, Inc. Report

rose 1 1/8 to 28 9/16 after posting third-quarter earnings of 30 cents a share, a penny ahead of the six-analyst outlook for a repeat of the year-ago 29 cents.

Offerings and stock actions

CheckFree Holdings

(CKFR)

gave up 5 3/4, or 12.2%, to 41 1/4 after filing with regulators for a 3.5 million-share offering.

Analyst actions

Apple

(AAPL) - Get Apple Inc. (AAPL) Report

picked up 13/16 to 44 13/16 after

Salomon Smith Barney

lifted it to buy from neutral and increased its 12-month price target on the stock to 55 from 42 a share. Analyst Richard Gardner noted strong March-quarter

iMac

shipments "suggest that the product maintains good momentum" and that sales could get a boost now that iMacs are being sold at

Sears

(S) - Get SENTINELONE, INC. Report

.

Complete Business Solutions

(CBSI)

slid 7 7/8, or 32.6%, to 16 3/8 after

SG Cowen

downgraded the stock to buy from strong buy. The firm also lowered its 1999 earnings estimate for the company to $1 a share from $1.20 and cut its 2000 view to $1.45 from $1.60. Cowen cited delays in the company's offshore projects and a transition in the offshore staff's skill base which could influence utilization rates. This afternoon, the company said it expects 1999 earnings of $1.05 to $1.15.

General Dynamics

(GD) - Get General Dynamics Corporation (GD) Report

advanced 11/16 to 66 7/16 after

Merrill Lynch

upgraded it to near-term accumulate from neutral.

Georgia-Pacific

(GP)

swelled 8 7/16, or 9.8%, to 94 7/8 after

PaineWebber

raised it to buy from attractive.

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

dwindled 3 3/4, or 5.5%, to 64 3/16 after several firms began coverage of the investment bank -- PaineWebber with an attractive, and

Morgan Stanley Dean Witter

, Salomon Smith Barney and

Bear Stearns

with neutral ratings.

Latitude Communications

(LATD)

flew 1 1/2, or 12%, to 13 7/8 after

Credit Suisse First Boston

initiated coverage with a strong buy and a price target of 20 and

Dain Rauscher Wessels

began coverage with a strong buy and a price target of 18 1/2.

Northpoint Communications

(NPNT)

lowered 1 1/2 to 40 13/16, off an earlier high of 43 1/4, even after Credit Suisse First Boston started coverage with a buy and a price target of 55.

Silknet Software

(SILK) - Get Silk Road Medical, Inc. Report

added 5/16 to 37 7/8, off an earlier high of 44 1/2, after Credit Suisse First Boston started coverage with a buy and a price target of 44.

Sun Microsystems sank 3 11/16, or 6.2%, to 56 after Banc of America Securities slashed it to hold from buy, saying a recent survey of corporate and public buyers "leads us to no other conclusion than that we'll see a significant computer hardware spending falloff in fourth-quarter 1999 and, to a lesser extent, the first quarter of 2000." The firm also dropped Hewlett-Packard, which sank 4 3/16 to 90 1/8, to hold from buy.