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Market Update: Nasdaq, Dow Deep in Red Woods at Midday

<LI>Gateway, Altera warnings slaughtering tech.</LI><LI>J.P. Morgan, big tech drag Dow down.</LI><LI>Chicago PMI shows contraction in factory sector.</LI>

Already battered and broken by a dismal outlook for tech earnings and anxiety over the


unresolved presidential elections, the

Nasdaq was thrown into a state of emergency this morning following profit warnings from PC-maker




and specialty chipmaker


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after the market closed yesterday.

The Comp was subsequently slammed by an oh-so-timely tsunami of downgrades and lowered estimates on PC-makers and semiconductor stocks this morning. Already at a 52-week low, the tech-heavy index shed over 129 points just 15 minutes after the bell. The Nasdaq later recovered some of those losses, but was recently back deep in the woods.


Dow also tried to struggle back, but couldn't resist tech's drag and was lately stumbling lower.

Gateway's warning was

severe; it cut estimates for fourth quarter and the coming year sharply. Altera, meanwhile, cut its revenue estimates for the fourth quarter. Altera and competitor

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earnings estimates were cut just last week by

Lehman Brothers

, saying it didn't expect the companies' would be able to make their revenue targets.

Gateway was lately off 40%, and knocking the wind out of the box makers. The

Philadelphia Stock Exchange Computer Box Maker Index

was falling 10.8%. The proxy, which tracks the performance of PC-making stocks, has lost 43% of its value since Sep. 1, when earnings warnings began to roll. The

Philadelphia Stock Exchange Semiconductor Index

, which has been halved since that same date, was lately losing 8.5%.

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Breadth on the Nasdaq wasn't pretty, with 3 decliners for every advancer on the exchange. And some 431 Nasdaq stocks were hitting new 52-week lows, including Altera and Xilinx, PC-makers


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and optical-component maker

JDS Uniphase


, among others.


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was one of the day's lone stars, lately up 5.5%.

Investors were hacking away at the blue-chip tech bellwethers, which were responsible for most of the Dow's pain. Software behemoth


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, down 8.9%, semiconductor king


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, down 10.2%, and PC-makers


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, down 6.4% and 9.4%, were putting about 114 points of downside pressure on the index.

J.P. Morgan

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was also falling cutting into the Dow, despite overall strength in financials. The financial titan was off 3.2%.

In typical fashion, investors were putting cash into defensive stocks such as drugs, tobacco, utilities and gold.

The big fuss over Gateway is partly that company was one of the last earnings

survivors in the personal-computer sector. In the most disappointing quarter of earnings this year, computer leaders and several of the major chipmakers have dropped bomb after bomb on tech investors -- warning that earnings and revenues will not meet targets as the economy slows. As the last standouts fall like toy soldiers, some market pundits are hoping this may be the bitter end -- that the bad news is all out; the selling can't get any worse; a bottom is finally near; and that the market will have to turn around soon.

Still, it may take a real whopper of a catalyst to turn this thing around. The Nasdaq has made several attempts to rally back since last Friday.

The wave of nasty earnings surprises and analyst downgrades have severely shaken investors' faith in corporations' earnings targets -- and in the market's ability to climb out of this deep, dark hole. Even many of the brave hearts haven't been up to buying on the dips anymore. And without any buyers to prop tech stocks up, attempt after attempt at a rally folds in on itself like a house of cards.

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Sector Watch

There was no holiday cheer for retail stocks today as disappointment with today's same-store sales reports drove investors to sell. Most U.S. retailers reported only modest gains in November same-store sales, indicating that consumers continue to be cautious about their spending as the signs that the economy is slowing grows.

Gateway's earnings warning didn't help the retailers either. Investors are beginning to see PC-makers as consumer cyclicals rather than "tech" or growth stocks, which means their performance has important implications for the retail sector. Thus, Gateway's assessment of the holiday season wasn't too warming. Gateway partly blamed its fourth quarter and next year on anticipation of weaker holiday spending.


S&P Retail Index

was off 1.9%. A few retailers did report strong same-store-sales, including


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however, and were benefiting from it. Kohl's was up 1.7%.

Financials had lately turned down after a morning continuation of a winning streak that began last Friday. Financial giant

J.P. Morgan

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was leading the way down, off by 3.2%.

The drugs, meanwhile, continued a heady rally begun in early September, when the Nasdaq began to falter. The

American Stock Exchange Pharmaceutical Index

was up 0.9%. Merck

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, which hit an all-time high yesterday, was up another 0.5% to $95.31.

Howard Barlow, vice president of WHB/Wolverine Asset Management said yesterday that he didn't expect the rally in the drugs to be sustainable in the short term, since many of these names have ratcheted up so far in the past few months.


American Stock Exchange Tobacco Index

was up 0.6%.

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Treasuries, which have been rallying for months on the expectation that economic growth would slow -- possibly prompting the

Fed to lower interest rates -- are narrowly mixed in response to new evidence that the slowdown is in progress.

'This is what we've been discounting since May when we began to rally," said Tony Crescenzi, bond market strategist at

Miller Tabak

and CEO of

, said. "We get the action we've been looking for, and it starts to go the other way."

The benchmark 10-year

Treasury note lately was up 8/32 at 101 27/32, yielding 5.501%.

Meanwhile, people more sure than ever that the Fed will lower the

fed funds rate in the next few months. For the first time,

fed funds futures contracts are discounting more than 100% odds that the fed funds rate will be 6.25% by April, down from the current 6.5%.

The latest evidence that the economy is slowing includes a surprisingly weak showing by the

Chicago Purchasing Managers' Index


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chart ), and a rise in

initial jobless claims


definition |

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The Chicago PMI, which gauges the health of Midwest-based manufacturing companies, plunged to 41.7 in November -- its lowest reading since April 1991 -- from 48.7 in October. Economists polled by


had forecast a slight rise to 48.9, on average. Readings below 50 indicate that the Midwest manufacturing sector is contracting, rather than growing.

Initial jobless claims rose to 358,000, the highest since July 1998, from 339,000 the previous week. The four-week average rose to 343,000 -- also the highest since July 1998 -- from 331,000. The rise in claims for unemployment insurance indicates that demand for workers is easing as the economy slows.

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