Rate Fears Extend Cold Tentacles and Snatch Stocks Downward

The market couldn't shake its nagging concerns about the course of inflation and interest rates, and no one wanted to buy blue-chips.
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There's a scene in

Trading Places

where

Don Ameche's

recently impoverished character, ignoring his brother Randolph's heart attack, bellows at the closing bell: "Get those traders back in here! Turn those machines back on!"

But on the day the

Nasdaq-Amex Stock Market

approved plans to proceed with extended trading hours, it's doubtful many players were clamoring for more (with a rebel yell or otherwise).

Yesterday's upturn proved to be the mirage many feared it was, specifically among blue-chip stocks.

The

Dow Jones Industrial Average

closed down 235.23, or 2.2%, to 10,466.93 and is now off 5.8% from its May 13 all-time best of 11,107.19. The

S&P 500

lost 23.35, or 1.8%, to 1281.41 and is down 6.3% from its record of 1367.56. Additionally, the

Russell 2000

fell 2.49, or 0.6% to 432.92 while the

Dow Jones Utility Average

slid 4.85, or 1.5%, to 325.78, snapping its string of record-setting closes.

"May is closing out the way it began -- with not a lot of people wanting to make commitments after a strong April," said Brian Belski, chief investment strategist at

George K. Baum

in Kansas City, Mo. "Why stick your neck out when there's not a whole lot going on?"

Meanwhile, the

Nasdaq Composite Index

fell just 8.04, or 0.3%, to 2419.14 after trading as low as 2400.94 and then rebounding as high as 2440.08.

TheStreet.com Internet Sector

index closed off 12.64, or 2.2%, to 559.38 vs. an intraday low of 557.88 and a high of 577.88.

Intel

(INTC) - Get Report

and chip-equipment makers such as

Novellus

(NVLS)

prevented the Comp from suffering another outsized fall. The

Nasdaq 100

dipped 0.1% but the

Philadelphia Stock Exchange Semiconductor Index

jumped 2.1%.

Bellwether Net names stumbled again, but secondaries such as

VeriSign

(VRSN) - Get Report

and

Custom Tracks

(CUST)

enjoyed solid gains. Also,

DLJdirect

(DIR)

and

StarMedia

(STRM) - Get Report

each produced robust second-day performances.

Market internals were again unpalatable to bulls, although trading volumes did recede from yesterday's pace.

In

New York Stock Exchange

trading, 829.7 million shares were traded while declining stocks bested advancers 1,898 to 1,042. In

Nasdaq Stock Market

activity, 839.1 million shares were exchanged while losers led 2,214 to 1,615. New 52-week lows led new highs 42 to 27 in Big Board activity and by 46 to 42 in over-the-counter trading.

Inflation Paranoia = Big Faith Destroya

Potential catalysts for the decline include the euro's continued struggles vs. the dollar, which will hamper the Continental efforts of U.S. multinationals. At home, the supply of new stock continues unabated while traders said there's just no compelling reason to buy ahead of the coming holiday weekend.

Rate fears were also cited, despite the

Commerce Department's

downward revision of first-quarter

GDP

figures to 4.1% from a previously reported 4.5% and continued struggles of overseas economies, particularly in Europe.

Market News'

influential economic reporter Steven Beckner reported some

Federal Reserve

officials favor a quick move from a tightening bias to the real deal. Meanwhile,

Medley Advisors

published a report saying the Fed will be pre-emptive against inflation, a source familiar with the report said.

More than inflation or even a rate hike, the issue is the "direction of inflation," according to Christine Callies, U.S. investment strategist at

Credit Suisse First Boston

. "We don't think inflation levels are particularly scary, but the market is prepared for no revival, and clearly

there is some. In a higher-interest-rate environment, richly valued markets need to come down."

Yesterday, Callies recommended investors lower equity exposure to 55%, up cash holdings to 15% and leave bonds unchanged at 30%. The recent upturn in

CPI

, which the strategist said was "not a one trick pony," was the main impetus for the allocation change. Notably, the change was her first in two years.

"We try to pick our spots

and think the change in the direction of rates is a major distinction that did not apply in 1997 or 1998," she said. This "is a routine correction in the sense it's probably not going to be a bear market. The problem again is centered on the interaction between higher rates and high valuation. That can typically and very easily turn a simple correction into a correction that has trouble recovering."

The "official view" at CSFB is that rates will remain unchanged this year, Callies noted. However, "the fixed-income markets and futures are anticipating at least one increase

and I think the Fed will be under some pressure to reverse probably the last rate cut. That's what the market is saying."

Growth Trumps Value

The price of the 30-year Treasury bond fell 19/32 to 91 19/23, its yield rising to 5.85%. But as recently as yesterday, stocks were trading inversely to fixed-income because of alleged "asset allocation" trades.

Moreover, cyclical stocks -- which would benefit from an accelerating economy -- were among the worst performers today, while growth stocks -- whose high P/Es make them most susceptible to rising rates -- were more resistant to the downturn. The

Morgan Stanley Cyclical Index

slid 2.5% and the

S&P Barra Value Index

lost 2.3%, while the

S&P Barra Growth Index

dipped 1.3%.

Cyclicals such as

Exxon

(XON) - Get Report

,

Caterpillar

(CAT) - Get Report

,

3M

(MMM) - Get Report

and

AlliedSignal

(ALD)

were among the Dow's biggest laggards.

Admittedly,

General Electric

(GE) - Get Report

and financials

J.P. Morgan

(JPM) - Get Report

and

American Express

(AXP) - Get Report

were also heavy negative influences.

Despite their outperformance today, George K. Baum's Belski observed many growth stocks have "already corrected a fair amount while others are on the cusp of further breakdowns."

Specifically, GE and

Wal-Mart

(WMT) - Get Report

have an additional 10% downside risk, he said, while

Microsoft

(MSFT) - Get Report

seems only now to be stabilizing after an about 15% correction.

"As a consequence of the strong stock market, people are used to instant gratification," Belski said. "Now that the pendulum has swung away from growth stocks, a lot of growth managers are struggling in terms of where to go for performance and what to do with their growth holdings."

Among other indices, the

Dow Jones Transportation Average

fell 75.11, or 2.2%, to 3378.77; and the

American Stock Exchange Composite Index

lost 8.27, or 1.1%, to 774.39.

Elsewhere in North American equities, the

Toronto Stock Exchange 300

fell 57.12, or 0.8%, to 6727.80 and the

Mexican Stock Exchange IPC Index

slid 119.50, or 2.1%, to 5498.85.

Thursday'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.

)

Inet Technologies

(INTI:Nasdaq) grew 2, or 12.5%, to 18 after

Goldman Sachs

priced its 5.75 million-share IPO top-range at $16 a share last night. The company is a telecommunications equipment maker based in Plano, Texas.

Elsewhere in new issues,

SalesLogix

(SLGX:Nasdaq) grew 2 7/16, or 27.1%, to 11 7/16 after

Hambrecht & Quist

priced its 3.33 million-share IPO bottom-range at $9 a share. The company is a Scottsdale, Ariz.-based software provider.

Meanwhile, DLJdirect,

Donaldson Lufkin & Jenrette's

(DLJ)

online brokerage unit, flew 8, or 26.7%, to 38 in its second day of trading. And StarMedia shot up 19 3/8, or 74.5%, to 45 1/2 after its IPO yesterday.

Mergers, acquisitions and joint ventures

Capital Re

(KRE) - Get Report

declined 2 15/16, or 15.3%, to 16 5/16 after

ACE

(ACL)

agreed to buy the company in a stock swap valued at $606 million. ACE lost 7/8 to 30 5/8.

Empi

(EMPI)

rose 3 3/4, or 18.1%, to 24 1/2 after agreeing to be bought by an affiliate of

Carlyle

for $26.50 a share, or about $168 million, in cash.

Italy's

Gucci

(GUC)

dropped 4 9/16, or 6.5%, to 65 15/16 after a Dutch court refused to investigate the company's sale of a 42% stake to France's

Pinault Printemps-Redoute

, making of a full takeover of Gucci by

LVMH Moet Hennessy Louis Vuitton

(LVMHY)

unlikely. LVMH sloughed off 1 1/2 to 54.

Infinity Broadcasting

(INF) - Get Report

closed flat at 26 after agreeing to buy

Outdoor Systems

(OSI)

for $6.5 billion in stock, plus the assumption of about $1.8 billion of debt. Outdoor Systems picked up 11/16 to 29 1/2.

Level 3

(LVLT)

tacked on 1 13/16 to 78 while

broadcast.com

(BCST)

gave up 6 7/16, or 6.1%, to 99 1/4 after the two set a five-year strategic alliance aimed at advancing broadband delivery of streaming media.

Marcam Solutions

(MRCM)

rocketed 3 13/32, or 90.8%, to 7 5/32 after

Invensys

agreed to buy it in a $60 million cash deal.

RMI.Net

(RMII)

, formerly

Rocky Mountain Internet

, expanded 1 1/4, or 11.4%, to 12 1/4 after saying it will offer e-commerce products and services as part of partnerships with Microsoft,

Compaq

(CPQ)

and Intel.

SFX Entertainment

(SFXE)

picked up 1/4 to 53 5/16 after

The New York Times

and

The Wall Street Journal

reported the company's close to acquiring troubled

Livent

, a Broadway production company, for around $100 million.

Williams Cos.

(WMB) - Get Report

excelled 2 3/4, or 5.6%, to an all-time high of 51 5/8 after

Telefonos de Mexico

(TMX)

said it will buy up to $100 million in shares of the company's

Williams Communications

unit. Williams Communications has filed for a $750 million IPO. Telmex's announcement came a day after Intel agreed to a $200 million investment in Williams Communications. Telmex shaved off 3/4 to 79 3/4.

Earnings/revenue reports and previews

American Skiing

(SKI)

lost 7/16, or 9.3%, to 4 1/4 after recording third-quarter earnings of 69 cents a share, a penny short of the four-analyst outlook and below the year-ago $1.03.

AutoZone

(AZO) - Get Report

lowered 1 3/8 to 29 3/4 after last night reporting third-quarter earnings of 39 cents a share, including charges for the closure of underperforming stores and the discontinuing of development of certain sites. The 14-analyst estimate called for 40 cents vs. the year-ago 35 cents.

Blyth Industries

(BTH)

added 1 to 27 15/16 after reporting first-quarter earnings of 38 cents a share, 1 cent higher than the five-analyst view and above the year-ago 30 cents.

Cooper Companies

(COO) - Get Report

sliced off 1 1/8 to 21 3/4 after reporting second-quarter earnings of 38 cents a share, beating the three-analyst estimate by 4 cents and moving ahead of the year-ago 27 cents.

Costco

(COST) - Get Report

gave up 2 1/2 to 71 1/8 after announcing third-quarter earnings of 46 cents a share, topping the 18-analyst estimate of 44 cents and the year-ago 37 cents.

Fatbrain.com

(FATB)

slid 2 3/4, or 13.8%, to 17 1/4 after last night reporting a first-quarter loss of 46 cents, narrower than the three-analyst forecast for a loss of 50 cents but wider than the year-ago loss of 25 cents.

Garden Ridge

(GRDG)

sank 31/32, or 13.2%, to 6 7/16 after reporting first-quarter earnings of 1 cent a share, a penny below the six-analyst view and behind the year-ago 6 cents.

Gerber Scientific

(GRB)

advanced 1 1/8, or 5.4%, to 22 1/8 after recording fourth-quarter earnings of 36 cents a share, a penny ahead of the four-analyst estimate and ahead of the year-ago 32 cents. The company also said it sees strong earnings growth this year and that it's in a position to reduce its debt and buy back shares.

Grow Biz

(GBIZ)

fell 1, or 11.1%, to 8 3/4 after last night saying it expects to record break-even second-quarter results due to continuing losses from its retail game store chain. The single-analyst view called for a quarter loss of a penny a share vs. the year-ago profit of 17 cents.

Harcourt General

(H) - Get Report

shed 1 1/4 to 49 3/4 after reporting a second-quarter loss of 33 cents a share, 7 cents narrower than the five-analyst estimate but wider then the year-ago loss of 25 cents.

Information Advantage

(IACO)

tumbled 9/16, or 11.7%, to 4 3/16 after announcing a first-quarter loss of 19 cents a share, in line with the five-analyst forecast and below the year-ago profit of 3 cents.

Nine West

(NIN)

deflated 11/6 to 27 7/16 after posting first-quarter earnings of 28 cents a share, a dime ahead of the three-analyst outlook and above the year-ago 20 cents.

Sunglass Hut

(RAYS)

slid 1/4 to 15 3/8 after reporting first-quarter earnings of 13 cents a share, above both the four-analyst estimate of 11 cents and the year-ago 7 cents.

Supreme

(SUPI)

jumped 1 5/8, or 18.1%, to 10 5/8 after reporting first-quarter earnings of 43 cents a share, 6 cents above the five-analyst outlook and ahead of the year-ago 39 cents.

Teltrend

(TLTN)

plunged 2 5/8, or 12%, to 19 3/8 after reporting third-quarter earnings of 32 cents a share, on target with the three-analyst prediction and higher than the year-ago 27 cents.

Westvaco

(W) - Get Report

skidded 1 11/16, or 5.6%, to 28 1/4 after posting second-quarter earnings of 27 cents a share, 4 cents ahead of the six-analyst forecast but behind the year-ago 34 cents.

Offerings and stock actions

Alpha Industries

(AHAA)

dwindled 2 1/4, or 6.2%, to 34 5/16 after announcing a 3 million-share offering at 35 apiece.

DII Group

(DIIG)

soured down 2 7/16, or 7.3%, to 31 after late yesterday filing with regulators for a 6 million-share offering.

Trimeris

(TRMS)

climbed 1 3/8, or 11.8%, to 13 3/8 after saying it will offer 2.5 million shares at about $11.75 a share.

Vignette

(VIGN)

tanked 7 7/8, or 13.3%, to 51 3/8 after the underwriters for its February IPO agreed to release about 500,000 shares from a lockup. The company said the shares include about 430,000 shares of the 16.5 million shares held by former preferred shareholders and 70,000 shares held by the company's two founders.

Analyst actions

CareMatrix

(CMDC)

lost 1 3/4, or 10.2%, to 15 3/8 after

J.P. Morgan

lowered it to market performer from long-term buy. The firm said it's concerned that the company isn't leasing facilities on schedule.

Micromuse

(MUSE)

flew 5 1/16, or 14.2%, to 41 1/2 after

SoundView

lifted it to strong buy from buy.

Network Appliance

(NTAP) - Get Report

tacked on 1 5/8 to 46 3/4 after Goldman Sachs initiated coverage by adding the stock to the firm's recommended list.

Falling prey to tremendous pressure earlier this week,

Providian

(PVN)

surged 6 11/16, or 8%, to 90 after

PaineWebber

raised it to buy from attractive and

Salomon Smith Barney

upped it to buy from outperform.

Tarrant Apparel

(TAGS) - Get Report

vaulted 3 3/8, or 13.8%, to 28 1/8 even after

Prudential Securities

lowered its price target on the stock to 35 from 55 a share. Late yesterday, Tarrant and

Burlington Industries

(BUR)

ended their joint-venture talks. Today, Tarrant said the termination of those talks won't changes the company's earnings estimates.

Trex

(TWP)

slipped 3 9/16, or 14.5%, to 20 15/16 after

J.C. Bradford

downgraded it to buy from strong buy.

Miscellany

Autobytel.com

(ABTL)

, an online car dealer, swelled 7 3/8, or 46.8%, to 23 1/8 after saying it was generating more than $1 million an hour in sales.

Iridium

(IRID)

expanded 1 3/16, or 15.7%, to 8 13/16 after saying it's working on restructuring rather than considering bankruptcy. The company said it remains in active talks with creditors and vendors.