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Three cheers (or jeers) for logical investing.

When Wednesday's positive earnings surprises and solid economic news prompted stocks to tilt slightly negative, the logical conclusion was that outright bad news after hours would do even more damage on Thursday.

And so it was.



less-than-expected first-quarter guidance and



lowered guidance hit technology stocks hard as eBay tumbled 19% and Qualcomm lost 8%.


Nasdaq Composite

dropped to a new low for the year, down 1.3% to 2045.88. Ominously, the index closed at its intraday low, and breadth was negative by more than 2 to 1. No sign of an end to 2005's ugliness yet.

Other lackluster reports from the likes of



and fund favorite

International Game Technology


pulled down the rest of the market. The

Dow Jones Industrial Average

lost almost 69 points, or 0.7%, to 10,471.47 after earlier setting a new 2005 low of 10,457.94. The

S&P 500

lost 0.8% to 1175.41 and -- no surprise -- earlier made a new 2005 low of 1173.39.

Numerous retail and housing stocks also got slammed. Homebuilder

D.R. Horton


reported a 30% increase in profits, but the gain in home closings slowed to 5%. Revenue guidance for 2005 was below some bullish forecasts. The stock lost 4.3%, and is now down 2.7% for the year. The Philadelphia Stock Exchange's housing index lost 2.1% and is now down 1.4% in 2005. It was up 28% last year.

Merrill Lynch's Retail HOLDRs fund lost 0.7%, as



fell 0.8%,



dropped 3.1% and



was down 1.6%.

May Department Stores


, the subject of a possible bid from Federated, was an exception, gaining 9.2%.

Bank stocks continued to show divergent returns, as companies with sharper managements and balance sheets prepared for higher rates prospered. As mentioned

here, some banks are suffering a lot more than others as rates creep up (and the yield curve flattens). Citigroup reported results a penny above the average analyst estimate for the fourth quarter but added some pretty bearish guidance.

"I'm more comfortable with the bottom end of analysts' estimates than the top end," Chief Financial Officer Sallie Krawcheck said on Citi's conference call, adding that the bank would cease giving short-term guidance on quarterly profits. She blamed rising rates, a higher tax rate and the unlikelihood that further reductions would be coming in reserves for bad loans. A 10% hike in the dividend limited the damage, and Citi's shares ended down 0.6%.

Wednesday's wrong-way bank,

J.P. Morgan Chase


, was down another 1.6%.

Bank of America


, up 0.8%, and



, which rose 0.3%, proved to be better positioned for higher rates and is doing a better job integrating respective acquisitions.

Tightening Profits

While some banks struggle with

Federal Reserve

policy, there is a much smaller set of companies that have a financial profile more suited to profit in a tightening environment. Payroll processors like






see billions of dollars temporarily dumped in their coffers as employers send them the cash to dole out to employees, and to pay state and federal taxes and withholding.

The float that they can earn rises as interest rates go up. Also, the companies obviously benefit when hiring picks up, as it did last year and as it is forecast to continue doing in 2005. Wednesday's big drop in weekly claims for unemployment insurance is another positive marker on the road to better job growth ahead.

ADP has flourished during prior tightening cycles in 1994-95 and 1999-2000. For the year starting Feb. 3, 1994, the day before the first rate hike of that cycle, ADP gained 19% while the S&P 500 lost 0.4%. For the year after June 29, 1999, when the Fed cycle that popped the Internet bubble began, ADP gained 18% and the S&P rose 7%.

Morgan Stanley analyst David Togut says that despite the Fed's five rate hikes last year, ADP remains on the cheap side of its historical value relative to the S&P 500. As of the close on Wednesday, the stock was trading at about 23 times its projected 2005 profits, or about 135% of the forward P/E of the S&P 500. Over the past 10 years, ADP has traded for between 96% and 191% of the S&P's forward P/E, with the all-time highpoint reached a few months after the Fed's 1999-2000 tightening campaign ended. Togut says ADP is also gaining market share, a bonus to the positive macroeconomic factors.

ADP, which fell 1% to $43.50 on Thursday, releases earnings on Friday with analysts expecting 42 cents a share.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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