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Market Update: New Year Opens Unhappily as Nasdaq Plunges 5%; Dow Also Plummets

<LI>Manufacturing sector slows to lowest levels since 1991.</LI><LI>EMC, Veritas and Inktomi hammered after Robby Stephens downgrades.</LI><LI>Brokerages also losing ground.</LI>

Not exactly getting off to a good start, the major stock indices are all mired in the red this morning, and internals are poor. The new year has brought little cheer to the

Nasdaq, which ended 2000 with its

worst year ever, or the

Dow, down nearly 100 points.

The stock market fell sharply after the double whammy of this morning's

Purchasing Managers' Index

release and

Robertson Stephens'

downgrades of Internet security and software storage companies. The broader

S&P 500 lost extra ground after the PMI was released. The bond market is rallying, however, with 10-year note yields below 5% for the first time since February.

Robertson Stephens has taken the shine off of market darling

EMC

(EMC)

, downgrading the company due to expectations for slower technology spending, and by extension, competition for a diminished number of dollars. EMC was lately getting crushed, down 14.9% to $56.63.

The brokerage also downgraded

Veritas

(VRTS) - Get Virtus Investment Partners, Inc. Report

,

Network Appliances

(NTAP) - Get NetApp, Inc. (NTAP) Report

, and

Inktomi

(INKT)

.

Also getting hit with downgrades were shares of internet security companies, such as

Verisign

(VRSN) - Get VeriSign, Inc. Report

,

Internet Security Systems

(ISSX)

and

Netegrity

(NETE) - Get Net Element, Inc. Report

. All of those shares had lost at least 18%.

NAPM Doesn't Help

The PMI displayed a sharp drop in manufacturing activity in December. It fell to 43.7 in December, much cooler than the forecasted 47, and down from 47.7 in November. This is the lowest reading for the index since April 1991, and supports the market's contention that the

Federal Reserve should move to cut the fed funds rate from its current 6.5%.

The PMI figure signals expansion in the manufacturing sector when it's above 50 and contraction when below. The index is based on a survey of purchasing executives at roughly 300 industrial companies.

Some of last year's defensive stock champions held on to earlier strength this morning -- particularly tobacco and energy stocks. The interest-rate sensitive financials remained under pressure.

Diversified industrial giants

General Electric

(GE) - Get General Electric Company (GE) Report

,

United Technologies

undefined

and

TheStreet Recommends

Honeywell International

(HON) - Get Honeywell International Inc. (HON) Report

were weighing most heavily on the Dow, slashing a combined 60 points from the index. PC behemoth

IBM

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

was saving the blue-chip index from further pain after

Sanford Bernstein

said the stock looked attractive at current levels.

With recession worries clouding the market's future, Wall Street is anxious to know what the

Fed plans to do to interest rates when it meets at the end of this month.

Morgan Stanley Dean Witter

lowered its rating on semiconductor maker

Analog Devices

(ADI) - Get Analog Devices, Inc. Report

to neutral from outperform. Analog Devices was off 9% to $46.56.

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Sector Watch

Opticals, biotech and Internet stocks were all tumbling this morning.

Retail was rising despite a downgrade to buy from strong buy from

Deutsche Banc Alex. Brown

on several home goods retailers. Energy stocks were higher after

Credit Suisse First Boston

said it raised its 12-month price targets for natural gas companies.

The banks and brokerages were struggling today. The

Amex Broker/Dealer Index

was lately down 2.7% and the

Philadelphia Stock Exchange/KBW Bank Index

was down 1.5%.

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Bonds/Economy

Treasury notes and bonds are selling sharply higher as traders, back in full numbers on the floor, react to the latest confirmation of economic weakness. The national manufacturing data released today registered a plunge in factory output, to levels not seen for 10 years. All three major equity indices are declining as a result. Bond yields, which have been steadily declining for the past two weeks, are dipping to levels last seen in the first quarter of 1999.

The benchmark 10-year

Treasury note lately was up 1 3/32 to 105 29/32, lowering its yield to 4.969%.

In economic news, the December

Purchasing Managers' Index

(

definition |

chart |

source

) provided stark signs of an economic slowdown. Its reading came in much lower than expected, in contrast with that of the

Chicago Purchasing Managers' Index

(

definition |

chart ) -- released Friday -- which actually rose. The PMI fell to 43.7 in December, from 47.7 in November, its fifth consecutive monthly decrease and the lowest reading since April 1991. Economists polled by

Reuters

had forecast a December reading of 47. A reading below 50 indicates that the sector is slowing rather than growing.

The national report thus presents broad-based evidence of manufacturing sector weakness and a complete lack of inflationary prospects. Foreign demand for American-made goods also remains low and producers continue to reduce inventories.