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Market Update: Cisco Pushes Nasdaq into the Dumps

<LI>Cisco news strikes components makers, other networkers.</LI><LI>Insurance, retail get lift.</LI><LI>Q4 productivity, unit labor costs above forecasts.</LI>

Near midday, the

Dow was barely above the flatline and the

Nasdaq Composite Index was descending deeper into the red.

The

Cisco

(CSCO) - Get Report

-motivated tech selloff was sparing few areas of tech.

After all, networking giant Cisco comprises a big chunk of the Nasdaq's market capitalization. Last night Cisco

announced that it missed earnings targets for the first time in three years.

Cisco was off 12.2% to $31.38, just shy of its 52-week low. The Nasdaq is off more than 2%.

CEO John Chambers said that "this capital spending trend could get worse before it improves" and that the company's visibility on capital spending was poor. A slew of companies have lately said they lack visibility, casting into doubt expectations that the economy will start to pick up in the second half of this year.

Electronics components makers, for whom Cisco is a big customer, were falling on the Cisco news.

Flextronics

(FLEX) - Get Report

was off 8%,

Medtronic

(MDT) - Get Report

was down 2.3% and

Jabil

(JBL) - Get Report

was slipping 7.9%. These firms do outsourcing work for a host of companies that need manufacturing services.

Networkers were obviously feeling the heat of Cisco's earnings news, with

Network Appliance

(NTAP) - Get Report

,

Cabletron Systems

(CS) - Get Report

and

Juniper Networks

(JNPR) - Get Report

hit hard. PC makers were also generally weak as were semiconductors and Internet stocks.

Another big mover is

Sun Microsystems

(SUNW) - Get Report

, falling 4.7%. Sun CFO Michael Lehman gave a rather gloomy

outlook yesterday afternoon, speaking at the Unix-systems company's two-day analyst meeting in San Francisco.

The blue-chip

TheStreet Recommends

Dow was getting a lift from financial stocks

J.P. Morgan

(JPM) - Get Report

and

American Express

(AXP) - Get Report

were higher.

The Data, The Fed, The Rates

A mixed but somewhat disappointing preliminary fourth-quarter

productivity report wasn't helping matters. But it didn't do much damage either.

Productivity rose 2.4% in the fourth quarter, preliminary results out this morning show, compared to economist forecasts of 2%. That's still lower than third-quarter productivity, which was revised down to 3% from 3.3%.

Unit labor costs grew 4.1% in the quarter. Economists were expecting 3.3%. Third-quarter unit labor costs were revised upwards to a 3.2% rise from a 2.9% increase. The fourth-quarter rise in unit labor costs is its biggest gain since second quarter of 1999 when it rose 4.3%. Productivity measures changes in output per hour for all members of the nation's workforce, while unit labor costs measures the labor costs per unit of output.

The big question now is whether the Fed can help stave off a deep recession in corporate earnings and throughout the economy.

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Sector Watch

Fiber optic stocks were under fire after Cisco said that its business was showing marked weakness.

SDL

(SDLI)

and

JDS Uniphase

(JDSU)

were off 6.8% and 7.1%. Both rose yesterday on news that their merger had been approved by the government. Other optical names,

PMC Sierra

(PMCS)

and

Corning

(GLW) - Get Report

were falling.

Insurance and retail stocks were rising along with defensive utility and tobacco stocks. The

S&P Insurance Index

was up 1.2%, the

S&P Retail Index

was climbing 1.6% and the

American Stock Exchange Tobacco Index

jumped 2.6%.

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Bonds/Economy

Treasuries were rallying early this morning ahead of the productivity report. The benchmark 10-year

Treasury note was lately unchanged at 104 6/32, yielding 5.187%.

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