What Cost Employment, Traders Muse as Stocks Take Another Bath

A weak GDP report does nothing to ease the marketwide pain.
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"When I say, 'Jump,' you're gonna say, 'How high?' Got it, you market maggots?"

"Yes, Drill Sergeant Greenspan. When you say, 'Employment costs matter more than actual economic growth,' and the former comes in stronger than expected, we're going to say, 'How low can we go'..."

So let it be spoken, so let it be done.

In his recent

testimony and subsequent Q&A (most notably before the

House Banking Committee

last week), Alan Greenspan made clear that labor costs presently supersede almost all other economic factors in importance. Thus, when the second-quarter

Employment Cost Index

showed a gain of 1.1% (vs. expectations for a 0.8% increase) market players deduced a greatly increased possibility that the

Federal Reserve Open Market Committee

will hike rates when it meets Aug. 24.

Stocks and bonds tumbled today as the ECI overwhelmed whatever positive tidings could be gleaned from a weaker-than-expected report on second-quarter

gross domestic product

, which rose 2.3% vs. expectations of a 3.3% increase. Still, major averages closed off session lows, encouraging less concern among some market players.

The

Dow Jones Industrial Average

fell as low as 10,714.03 before closing off 181.10, or 1.7%, to 10,790.97. The close is the Dow's lowest level since June 28, but the venerable index is just 3.7% off its all-time best of 11,209.84

Financial names such as

American Express

(AXP) - Get Report

and

J.P. Morgan

(JPM) - Get Report

, along with growth stocks such as

Hewlett-Packard

(HWP)

,

IBM

(IBM) - Get Report

and

Johnson & Johnson

(JNJ) - Get Report

, exerted the greatest negative influence on the Dow, as was the case in the broader market. Evincing the extent of the selloff, all but four of the Dow's 30 components finished in negative territory.

The

S&P 500

fell 24.37, or 1.8%, to 1341.03 and is now 5.5% off its record close of 1418.78. The

Nasdaq Composite Index

lost 65.83, or 2.4%, to 2640.01, but closed off its session low of 2627.80. The riddle-me-tech (Batman) index is now 7.8% off its 2864.48 all-time best.

Elsewhere,

TheStreet.com Internet Sector

index fell 21.88, or 3.7%, to 562.44. The

Russell 2000

dipped 5.03, or 1.1%, to 441.58 as small-cap stocks held up relatively better than market favorites but couldn't avoid the downdraft.

Among the few market sectors posting solid gains were those not associated with bullish trends or stability: The

Philadelphia Stock Exchange Gold & Silver Index

rose 4.6%, while the

CBOE Market Volatility Index

gained 8.1%.

The bond market fared no better. The price of the 30-year Treasury bond fell 26/32 to 88 24/32 (but off its low of down 1 12/32 to 88 6/32), its yield climbing to 6.07%.

As is often the case on Wall Street, the action left market players largely in distinct camps: Optimists said it was the culmination (or near end) of the reversal under way since major averages hit all-time highs

July 16. In fact, some market participants were so sanguine they seemed more interested in reports of a power outage in Taiwan than in the action on Wall Street. Meanwhile, skeptics countered this was merely a continuation of that trend and augurs more to come. Additionally, the session emboldened those who have compared this year's action to last year's trend.

The Bulls

"We got beat up today, but our feeling is inflation is still not out there," said Scott Marcouiller, market analyst at

A.G. Edwards

in St. Louis. "Our take is that we've had this negative psychology in the bond market since Greenspan's testimony last week, and today's GDP report showed we had slower growth, which is very positive. But that was ignored and the focus was on ECI

and that it's going to give Greenspan more ammunition to raise rates again."

As strong as the ECI was today, it is still showing only an "average" increase on a year-over-year basis, the analyst noted, as did several other market players.

Marcouiller, who works with longtime bull (and A.G. Edwards' chief market strategist) Alan Goldman, said today was "close, but no cigar" in terms of being a classic "capitulation" day that would signal the end of the selloff.

"Today has all the earmarks -- we haven't seen this negative breadth in quite a while -- but you'd like to see volume a little higher," he said. There was an "overreaction today, but it's going to take improvement in the bond market to get stocks going or several more days of churning or modest selling."

In

New York Stock Exchange

trading, 766.7 million shares were exchanged, while declining stocks swamped advancers 2,227 to 805. In

Nasdaq Stock Market

action, 912.1 million shares traded, while losers led 2,591 to 1,349. New 52-week lows bested new highs 150 to 30 on the Big Board and by 97 to 62 in over-the-counter trading.

The Bears

"This is a watershed event," said Ronny Kraft, CEO of

Gotham Capital Management

. "The move today has broken the very important trend that was started at the bottom of last year's pullback."

Kraft, who has been predicting a big market drop and heralding inflation's return since early spring, said the Dow and S&P 500 suffered "major breaks" in their technical patterns today by breaching 10,857 and 1336, respectively.

The absence of big volume supporting such a view is attributable to "the fact that many people are caught in a trap," the hedge fund manager said. "If you bought tech a month ago in size, then how the hell can you be blowing this out now? Remember

Fidelity

is

heavily invested in tech. This market won't rip to the downside until Fido recants."

Fidelity's

(FMAGX) - Get Report

Magellan fund was 20% in technology at the end of June vs. 25.8% at year-end 1998, according to the firm's Web site.

Withholding Judgment

"It's certainly not the greatest action in the world, but there are too many stocks acting well, which tells me there's not a disaster," said Gary Kaltbaum, chief technical analyst at

J.W. Genesis Securities

in Boca Raton, Fla., who cited

Intel

(INTC) - Get Report

and

Apple

(AAPL) - Get Report

as examples. "But certainly the Dow broke below 10,830, which gives a wake-up call. We may go to 10,500, but I'm hopeful we can stay within a range of 10,800 to 11,000. I think the top has been put in near term."

Kaltbaum said he'll have to see how the markets respond in the coming days to determine the significance, if any, of the session.

Among other indices, the

Dow Jones Transportation Average

fell 69.44, or 2%, to 3348.95; the

Dow Jones Utility Average

dipped 3.95, or 1.3%, to 313.23; and the

American Stock Exchange Composite Index

shed 5.01, or 0.6%, to 784.59.

Market data above are preliminary. Updated numbers and Thursday's Company Report will follow this story

.

Elsewhere in North American equities, the

Toronto Stock Exchange 300

slid 60.90 to 7050.29 and the

Mexican Stock Exchange IPC Index

fell 216.07, or 3.9%, to 5267.68.

Thursday's Company Report

By Eileen Kinsella
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.

)

Despite reporting strong earnings,

AT&T

(T) - Get Report

slipped down, as concerns about inflation overshadowed the market and pulled major indices lower.

3M

(MMM) - Get Report

moved up despite the worries.

AT&T shaved off 1 1/2 to 53 7/16 after it reported second-quarter profits from continuing operations of 49 cents a share, a penny ahead of the 21-analyst estimate, but down from the year-ago 54 cents. Ma Bell's profits from continuing operations rose to $1.59 billion from $1.47 billion.

3M rose 1 11/16 to 90 13/16 after it reported second-quarter operating earnings of $1.03 a share, ahead of the nine-analyst estimate of $1 and above the year-ago 94 cents.

Mergers, acquisitions and joint ventures

AMR

(AMR)

, parent of

American Airlines

, slipped 1 1/4 to 66 3/16 and

British Airways

(BAB) - Get Report

fell 1 to 64 1/2 after the

Financial Times

reported that the airlines abandoned their three-year struggle to set up a global aviation alliance. The decision comes after the airlines were informed that the

Transportation Department

was set to dismiss their application for immunity from antitrust proceedings, the newspaper reported. The two airlines, meanwhile, said they would continue to pursue ties within regulatory limits.

Kirby

(KEX) - Get Report

climbed 1 13/16 to 20 3/8 after agreeing to buy closely held

Hollywood Marine

for $325 million, including $100 million in debt.

Earnings/revenue reports and previews

First Union

(FTU)

jumped 1 1/8 to 48 after announcing after the close that G. Kennedy Thompson, head of global capital markets, will replace John Georgius as president of the bank at the end of this year.

First Union stock started climbing just before noon when

The Charlotte Observer

reported on its Web site that First Union was holding an emergency board meeting to make senior management changes, but the newspaper did not give details on what those changes might be.

First Union's senior management, and particularly Chairman and CEO Edward Crutchfield, have been criticized over the past year for making acquisitions that ended up harming earnings. In May, First Union said it was revising down earnings projections, due chiefly to slower-than-expected revenue growth in the units that once constituted

CoreStates

bank, acquired last year.

First Union stock could fall Friday, since the appointment of Thompson as president may not be regarded in the market as a big enough change to boost confidence in the bank, says Peter Kuper, analyst at

Keefe Bruyette & Woods

, which has no underwriting relationship with First Union. "First Union still has problems," he says. "But this is a shot across Crutchfield's bow by the board."

Many banking experts, when asked about the emergency board meeting Thursday, expected the bank to announce that Crutchfield was going to step down or be demoted.

Thompson, who was also elected to the First Union board, effective immediately, is well regarded. "He's done a great job in the area he's been in charge of," says Lisa Welch, banks analyst at

John Hancock Funds

, which holds First Union. But she, too, is not overwhelmed by the change. "I liked Georgius, too."

--

Peter Eavis

Alpharma

(ALO) - Get Report

skipped up 1 11/16 to 35 3/4 after last night topping second-quarter earnings estimates by a penny with a profit of 28 cents a share.

Callaway Golf

(ELY) - Get Report

fell 1 1/4 to 11 13/16 after last night saying it expects its sales to be down from the rest of 1999. The company also reported second-quarter earnings of 35 cents a share, 1 cent higher than expected.

DaimlerChrysler

(DCX)

sank 7 7/16, or 8.8%, to 77 9/16 after it said operating profit in the first half of the year rose 11% to $5.5 billion, below expectations.

Deutsche Telekom

(DT) - Get Report

edged down 1 3/8 to 39 5/8 after posting a decline in its first-quarter earnings, for which the company blamed domestic price competition. Also,

The Wall Street Journal

reported that Deutsche made a takeover bid for U.K. mobile group

One2One

and that it was in talks to acquire

France Telecom's

(FTE)

10% stake in

Sprint

(FON)

.

Equant

(ENT) - Get Report

tumbled 9 3/8, or 9.9%, to 85 1/4 after reporting a first-half operating loss of $15 million vs. the year-ago profit of $324,000.

Glaxo Wellcome

(GLX)

slid 4 1/8, or 7.5%, 51 3/16 after warning it won't meet its target for double-digit sales and earnings growth for 1999.

NPC International

(NPCI)

fell 3, or 19.7%, to 12 1/8 even after last night meeting predictions for first-quarter earnings of 27 cents a share.

Province Healthcare

(PRHC)

rose 1 1/8 to 15 9/16 after last night reporting second-quarter earnings of 21 cents a share, a penny better than estimates.

SS&C Technologies

(SSNC) - Get Report

fell 1 1/4, or 16.4%, to 6 7/16 after last night posting a second-quarter loss of 16 cents a share, wider than the estimate for a loss of 3 cents.

Storage Technology

(STK) - Get Report

lost 2 13/16, or 13.4%, to 19 15/16 after posting second-quarter earnings of 27 cents a share, on target with the seven-analyst view but below the year-ago 50 cents.

Waste Management

(WMI)

sank 5 1/2, or 17.5%, to 25 15/16 after it said its second-quarter operating results will be less than recently forecast. Waste Management expects second-quarter earnings of 58 cents to 60 cents a share. The 13-analyst estimate called for earnings of 67 cents. On July 6, the company said it expected second-quarter earnings would be in the range of 67 cents to 70 cents a share, exclusive of merger and other acquisition-related charges.

ZDNet

(ZDZ)

fell 1 1/8, or 6%, to 19 5/8 after last night posting second-quarter earnings of 1 cent a share, beating estimates for a break-even quarter.

In other earnings news:

Offerings and stock actions

Timberland

(TBL)

rose 1 1/8 to 84 5/8 after it late yesterday set a 2-for-1 stock split, effective Sept. 15 for shareholders of record Aug. 31.

Analyst actions

Adobe Systems

(ADBE) - Get Report

fell 1 13/16 after

Banc of America

started coverage with a buy rating.

Ask Jeeves

(ASKJ)

fell 2 1/16 to 42 after

Morgan Stanley Dean Witter

initiated coverage with a market outperform rating.

Smith International

(SII)

slipped 1/16 to 9 1/16 after Banc of America upped the stock to buy from hold.

Teleglobe

(TGO)

fell 5 1/16, or 18.9%, to 21 11/16 after

Deutsche Bank Alex. Brown

cut its rating to buy from strong buy citing continued price pressure in the North American market and losses on foreign currency conversions.

Miscellany

ChromaVision Medical Systems

(CVSN)

rose 3 13/16, or 34%, to 15 1/8 after the

Food and Drug Administration

gave the company the OK to market its computerized imaging system to detect cancer and infectious disease.

Intel

(INTC) - Get Report

slipped 13/16 to 69 1/2 despite a report in the

Journal's

"Heard on the Street" column, which said the company was benefiting from "free" PC promotions being offered by Internet service providers.