The Average Stock Stumbles but Big Stock Averages Set New Highs

In a mirror image of yesterday, stocks start slowly, then gain momentum toward the close.
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SAN FRANCISCO --

The good

: In an inside-out (and smaller) version of

yesterday's action, stocks overcame early weakness to end higher, with the big three market averages each setting a record.

The bad

(for those long): The bond market improved from session lows (clearing the way for a final-hour surge by stocks), but the price of the 30-year Treasury bond still fell 4/32 to 89 2/32, its yield rising to 6.05%. Meanwhile, souring market internals belied gains registered by blue-chip gauges. Moreover, some market players note transportation and utility averages faltered again and still have failed to "confirm" the records set by better-known proxies. (A postclose profit warning by

Airborne Freight

(ABF)

isn't likely to help the former, either.)

The ugly

: After posting a profit warning,

Waste Management

(WMI)

slid 36.6%. Also,

New Era of Networks

(NEON) - Get Report

tumbled 52.6% following an earnings shortfall and red flag about future quarters.

The profit warnings sparked worries about the quality of second-quarter earnings arriving in the coming days and weeks. Much of today's earnings focus centered on

Yahoo!

(YHOO)

, which fell 4.5% ahead of its profit report. After the bell, the Internet bellwether posted second-quarter earnings of 11 cents per share, up from a penny a share a year ago and vs. the consensus estimate of 8 cents.

Weakness in Yahoo! and other components such as

MindSpring Enterprises

(MSPG)

spearheaded

TheStreet.com Internet Sector

index's loss of 11.45, or 1.7%, to 653.85.

Weakness in Net stalwarts weighed on the

Nasdaq Composite Index

, which traded as low as 2724.37. But afternoon strength in traditional bellwethers such as

Microsoft

(MSFT) - Get Report

and

Sun Microsystems

(SUNW) - Get Report

helped the tech-bundled index closed up 6.31, or 0.2%, to an all-time high of 2743.09. The

Nasdaq 100

rose 0.4%.

Elsewhere in earnings news,

Alcoa

(AA) - Get Report

shed 3.7%, despite posting second-quarter profits of 64 cents a share, a penny ahead of consensus.

Alcoa and

American Express

(AXP) - Get Report

were the biggest drags on the Dow, but the blue-chip index closed up 52.24, or 0.5%, to a record 11,187.36 after trading as low as 11,080.35. Similarly, the

S&P 500

rose 7.74, or 0.6%, to a record 1395.86, overcoming an early decline to as low as 1384.99.

Dow gainers were led by

General Electric

(GE) - Get Report

, which rose 3.5% to an all-time best of 117 15/16.

"I think it's encouraging that GE is acting the way it's acting," said John Roque, senior analyst at

Arnhold & S. Bleichroeder

, a New York-based firm that caters to international institutional investors. "GE moving substantially higher says the market has another of its best players on the field" after the stock lagged the averages' run to new highs last week.

The majority of Dow stocks closed with gains -- only nine of 30 finished in arrears, Roque noted, which "tells me the market is more than firm. It's going to take more than rates at these levels to push it lower. It's hard to say things aren't attractive when the markets are at all-time highs."

Blue-chip averages were also aided by

Caterpillar

(CAT) - Get Report

, which jumped 4.7% after

Merrill Lynch

-- once purveyors of the global deflation scenario -- named the industrial giant as potential beneficiary of what it sees as an improving global economic picture.

"A combination of better economic performance in both Asia and Europe suggests increasing portfolio exposure to so-called multinational companies," Charles Clough, chief equity strategist at the firm, wrote in a note today.

Clough recommended a handful of other multinationals in addition to Caterpillar, which posted a mixed performance.

International Paper

(IP) - Get Report

rose 2.4% and

McDonald's

(MCD) - Get Report

gained 0.9%. But

DaimlerChrysler

(DCX)

dipped 0.1% and

Coca-Cola

(KO) - Get Report

slid 0.5%.

In New York Stock Exchange trading, 781.6 million shares traded while declining stocks led advancers 1,686 to 1,275. In Nasdaq Stock Market activity, 1.03 billion shares were exchanged while losers led 2,126 to 1,849. Net 52-week highs led new lows 87 to 53 in NYSE trading and by 133 to 26 in over-the-counter action.

Reflecting the lackluster performance of the advance/decline, broader market averages stumbled. The

Russell 2000

fell 3.86, or 0.9%, to 452.69; the

American Stock Exchange Composite Index

fell 2.75, or 0.3%, to 802.14 from yesterday's record-setting close; and the

Value Line New Arithmetic Index

shed 4.32, or 0.4%, to 1052.94.

Yes Virginia, There Are Risks

Despite his short-term bullishness, Roque foresees risks for the stock market, and they are interest rate-based.

"Odds tell us interest rates should move higher. Clearly it's a risk you and I and everybody else are living with," he said. "Short-term, the

stock market is fine. I don't want to paint a picture that's not there.

But often it's not the first break in bonds, it's the break thereafter when stocks get hit. If bonds break down again, I think stocks will have trouble."

The analyst expects the long bond's yield to rise to 6.50% by the end of the third quarter, owing to the fact the prices of oil and other commodities continue to rise, recoveries in Asia and Japan continue and there's no sign of slowdown in the U.S. economy.

As to whether that suggests the

Fed

erred last week when it reverted to a neutral bias, Roque replied in a diplomatic (if not somewhat un-PC) fashion.

"It's hard enough to figure out what my wife is going to do, never mind central bankers," he said. "I just think if the belief in the 'New Era' was real, they wouldn't have moved at all. Why bother to tighten? Them tightening tells me they are concerned."

Among other U.S. indices, the

Dow Jones Transportation Average

shed 3.05, or 0.1%, to 3474.90 and the

Dow Jones Utility Average

dipped 0.24, or 0.1%, to 321.14.

Wednesday'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.

)

Aluminum manufacturer and Dow component Alcoa sliced off 2 3/8 to 61 3/8 after posting second-quarter earnings of 64 cents a share, a penny above the 16-analyst consensus and up from last year's 62 cents. The stock has been rising in recent sessions ahead of the news.

Yahoo! scratched off 7 15/16 to 167 1/16 ahead of its second-quarter earnings report, due after the close today. Yahoo! also inked a broad marketing deal with U.K. pay-TV broadcaster

British Sky Broadcasting

(BSY)

. The deal covers Yahoo!'s U.K. and Ireland properties. British Sky Broadcasting lost 1 1/4 to 56.

Mergers, acquisitions and joint ventures

Cox Communications

(COX)

picked up 1 7/8, or 5.1%, to 38 7/16 after it said it will exchange its $2.85 billion in

AT&T

(T) - Get Report

stock -- 50.3 million shares -- for AT&T cable TV networks with 495,000 customers. Cox said that it will also get $750 million in "other consideration, including cash" under the deal. Telephone added 1 5/8 to 58 1/4.

Oneida

(OCQ)

tumbled 3 15/16, or 12.8%, to 26 15/16 after its board yesterday unanimously rejected the

third

takeover offer from rival

Libbey

(LBY) - Get Report

-- this one worth about $637 million, or $37.50 a share. Oneida issued a rather spooky statement calling the bid "illusory," and said that Libbey's desire to negotiate amounts to "nothing more than efforts to obtain access to Oneida's confidential and proprietary business information."

U.S. fund-management firm

Pimco Advisors

(PA)

sizzled up 4 5/16, or 14.6%, to 33 7/8 on a

Wall Street Journal Europe

report that German insurance colossus

Allianz

is in talks to buy all or part of the company in a deal worth as much as $5 billion.

RCN

(RCNC)

grew 1 15/16 to 45 15/16 after setting an alliance with

Lycos

(LCOS)

to collaborate on a number of Internet-based initiatives, including the development of high-speed content to be deployed over RCN's fiber optic network. Lycos surged 3 7/16 to 107 1/4.

Earnings/revenue reports and previews

American Homestar

(HSTR)

added 1/16 to 7 after reporting fourth-quarter earnings of 25 cents a share, 4 cents higher than the five-analyst view but below the year-ago 36 cents.

Brass Eagle

(XTRM)

collapsed 3 1/16, or 16.3%, to 15 3/4 after saying it sees second-quarter earnings of 37 cents a share, which would meet the two-analyst forecast and beat the year-earlier 33 cents. The company said its revenue has been hurt by a shift in the timing of product expansions at certain retailers.

Discount Auto Parts

(DAP)

sloughed off 9/16 to 22 5/8 after reporting fourth-quarter earnings of 47 cents a share, in line with the five-analyst forecast and a penny above the year-ago figure.

HCR Manor Care

(HCR) - Get Report

plunged 4 1/8, or 16.8%, to an annual low of 20 3/8 after last night saying it expects to earn only 30 cents to 35 cents a share in its second quarter, well below the 14-analyst call for 44 cents and close to last year's 32 cents. The company said the shortfall was partly due to delays in a January agreement to sell 28 assisted living residences to

Alterra Healthcare

(ALI)

for $200 million. The company said that it had yet to sell seven of those facilities.

Navistar

(NAV) - Get Report

slipped 1 1/8 to 43 1/4 after saying its third-quarter earnings will come in around $1.15 to $1.20 a share due to a shortage of transmissions and unexpected personnel costs. The six-analyst estimate called for earnings of $1.25 vs. the year-ago 72 cents.

NCI Building Systems

(NCS) - Get Report

dropped 3 3/4, or 16.4%, to 19 3/16 after it warned yesterday that its third-quarter earnings will be 68 cents to 70 cents a share, below the seven-analyst consensus of 82 cents but up from last year's 58 cents.

New Era of Networks split in half, losing 21 9/16, or 52.6%, to 19 7/16, after warning last night it will report a second-quarter loss of 12 cents to 22 cents share, significantly below the nine-analyst prediction for a repeat of the year-ago profit of 12 cents. Today,

Credit Suisse First Boston

downgraded the stock to buy from strong buy and decreased its price target to 26 from 70. Both

Prudential Securities

and

Warburg Dillon Read

slashed the stock to hold from strong buy, and

Goldman Sachs

deflated it to market performer from outperform.

Respironics

(RESP)

declined 3 3/8, or 23.1%, to 11 5/16 after last night saying it expects to report fourth-quarter earnings of 18 cents a share, which would be a dime below the 10-analyst estimate of 28 cents but above the year-ago 17 cents. The company also said it will cut its worldwide workforce by 10% as part of a restructuring to focus on research and development. Today,

Deutsche Banc Alex. Brown

downgraded the stock to market perform from buy and

ING Barings

cut it to hold from buy.

Sterling Commerce

(SE) - Get Report

plummeted 9, or 25.2%, to 26 3/4 after it warned that its third-quarter earnings will be 38 cents to 39 cents a share, below the 22-analyst view of 41 cents.

Donaldson Lufkin & Jenrette

dropped it to market perform from buy and

SG Cowen

dropped it to neutral from buy.

Waste Management dwindled 19 5/8, or 36.6%, to an annual low of 33 15/16 after last night warning its second-quarter earnings would be a malodorous 67 cents to 70 cents a share, missing the 14-analyst forecast of 78 cents but rising above the year-ago 41 cents. The company blamed lower-than-expected North American revenue, and said the revenue shortfall will hurt future quarters. Today, Merrill Lynch cut the stock to near-term neutral from buy, Deutsche Banc Alex. Brown cut it to market perform from strong buy, Credit Suisse First Boston cut it to hold from strong buy, Goldman Sachs cut it to market perform from the firm's recommended list.

Trash-sector buddy

Safety-Kleen

(SK)

joined Waste Management in the dumps, losing 4 3/16, or 22.3%, to 14 5/8, after yesterday posting third-quarter earnings of 30 cents a share, 2 cents under the 12-analyst view but up from last year's 20 cents.

Offerings and stock actions

Musicmaker.com

(HITS)

, an online music retailer, sung up 9 15/16, or 71%, to 23 15/16 after

Ferris Baker Watts

priced its 8.4 million-share IPO top-range at $14.

Analyst actions

Argosy Gaming

(AGY)

tacked on 9/16 to an annual high of 10 after DLJ pushed it up to buy from market perform.

Caterpillar inched up 2 13/16 to 62 1/8 after

Lehman Brothers

analyst David Raso reiterated his buy rating for the stock, praising the company's recent cost-cutting initiatives.

Concur Technologies

(CNQR)

swelled 7 13/16, or 23.5%, to 41 1/16 after

BancBoston Robertson Stephens

raised it to strong buy from buy. The firm also set a 12-month price target of 60.

Network Plus

(NPLS)

climbed 1 7/16, or 6.6%, to 23 3/8 after DLJ started coverage with a buy and Goldman Sachs placed the stock on its recommended list.

Shop at Home

(SATH)

jumped 2 3/16, or 27.3%, to 10 1/4 after Prudential started coverage with a strong buy.

Starbucks

(SBUX) - Get Report

skidded 1 1/2, or 5.7%, to 25 after

Morgan Stanley Dean Witter

lowered it to neutral from outperform. Uh, a little late, guys -- the warning was last week.

Stillwater Mining

(SWC)

chopped off 3 1/2, or 11.5%, to 26 7/8 after Merrill Lynch cut the stock to near-term neutral from accumulate. Yesterday, the company said it expected its production of platinum group metals to drop 8,000 ounces from the first quarter.

Unicom

(UCM)

picked up 1 1/4 to 42 3/16 after

PaineWebber

upped it to buy from neutral.

Miscellany

barnesandnoble.com

(BNBN)

tacked on 5/8 to 17 11/16 on news that it opened its online music store today, celebrating the launch with -- ooh! ooh! -- a free download of

Jewel's

"Deep Water."

Elan

(ELN)

slipped 1 1/4 to 28 1/2 on a

Wall Street Journal

report that the

Securities and Exchange Commission

sent the Irish drug firm a comment letter in January raising questions about its accounting procedures. Elan, lowered by SG Cowen to buy from strong buy, said it expected the SEC inquiry to be resolved in the next couple weeks.

TheStreet.com

last month

explored the accounting issues at Elan.

Ericsson

(ERICY)

shaved off 3 1/8, or 9.3%, to 30 7/16 on news that President and CEO Sven-Christer Nilsson resigned in the face of the board's criticism over the company's slow restructuring process.

J2 Communications

(JTWO)

, owner and licenser of the

National Lampoon

name, rocketed 7 15/16, or 107.6%, to an all-time high of 15 3/8 after announcing yesterday it will soon unveil "the official portal site for comedy on the Internet." Investor Daniel Laikin told

Dow Jones Business News

, "If you look at this company as an Internet play, it should be a $120 to $150 stock." Along with a partner, Laikin holds a 21.9% stake in the company, which has a float of less than a million shares.

Kaiser Aluminum

(KLU)

fell 1/2, or 5.7%, to 8 1/4 after its Kaiser Aluminum & Chemical unit declared force majeure at its Gramercy, La., alumina refinery following a explosion Monday that shut down the plant. Kaiser Aluminum said it is working with customers to help them find alumina from alternate sources.

Several defense stocks benefited from remarks by the

Defense Department

, saying Europe's efforts to produce new weapons at lower costs will spark a number of mergers among U.S. and European defense firms within months.

Northrop Grumman

(NOC) - Get Report

gained 5 1/2, or 8%, to 74 5/16 and

Raytheon

(RTN.B)

vaulted 3 15/16, or 5.6%, to an all-time high of 74 15/16, to name a couple.