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Market Update: Stocks Sinking After Bad PMI Report, Tech Downgrades

<LI>Manufacturing slows down dramatically.</LI> <LI>Defensives holding ground.</LI><LI>Robby Stephens axes Internet infrastructure companies.</LI>

The new year brought little good cheer to this morning's market. The Nasdaq, which had its worst year ever in 2000, had been tickling the flatline, but lately was burning more than 100 points lower after the December National Purchasing Managers' Index numbers were released.

The PMI showed a severe slowdown in manufacturing in December; it was 43.7, much cooler than the forecasted 47.

The PMI hit 47.7 in November. The figure signals expansion in the manufacturing sector when it's above 50 and contraction when below. The PMI is based on a survey of purchasing executives at roughly 300 industrial companies.

The broader

S&P 500 also lost some extra ground. But the

Dow had already dropped precipitously earlier this morning.

Earlier strength in the semiconductor and PC-making stocks faded following the PMI report. Those two sectors have been the hardest hit of any in recent months as PC sales slowed. Semiconductor companies supply the chips used to make PCs and other technology hardware.

But advancers were practically matching decliners on both the Nasdaq and the Dow, indicating that the bulls are fighting hard.

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



Honeywell International

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

were weighing most heavily on the Dow, slashing a combined 35 points from the index. PC-goliath


(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

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Fed plans to do to interest rates when it meets at the end of this month. Some market pundits are speculating that the Fed could prompt an "intermeeting" cut in interest rates if Friday's unemployment report shows a greater-than-expected jump in the jobless rate. Such a cut could come as soon as next week.

While few economists are forecasting a recession for this year, most say recession is a greater risk now than it has been in a long time. A recession is defined as two quarters of negative economic growth.

But even if the economy doesn't slow to recession speed, the expected downshift should be felt pretty dramatically, economists say. According to the

Philadelphia Fed's Livingston Survey

, economists are projecting

gross domestic product

growth of 3.1% this year compared with 2.2% in the third quarter and 5.6% in the second quarter of last year. Figures for the fourth quarter have not yet been released.

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Sector Watch

Opticals, biotech and Internet stocks were all tumbling lower 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.

Gold, drugs and tobacco were also rising.

Data storage stocks were in the hole after

Robertson Stephens

lowered its ratings on data availability and protection companies due to slowing demand.

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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Treasury prices were soaring this morning. The benchmark 10-year

Treasury note spiked higher following the release of the PMI this morning. It was lately up 25/32 at 105 19/32, yielding 5.009%.

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