Bonds Bring Some Weakness to Tech Sector

Also, Microsoft announced an investment in AT&T, and an analyst lowers his estimate for E*Trade.
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SAN FRANCISCO -- Tech stocks followed bonds lower before staging a mild recovery at midmorning.

Shares of

E*Trade

(EGRP)

have been on the defensive following a cautionary report from

Deutsche Bank Securities

, one of the more outspoken firms regarding the high valuations of online brokerage stocks.

In the note, analyst James Marks said that he expects E*Trade to increase advertising spending significantly in its fiscal third and fourth quarters. While maintaining that the advertising spending "has produced positive returns," Marks wrote that it also presents risks. First, if the market push produces strong account growth, E*Trade's "systems that have experienced problems in the past would no doubt be strained" by the increased business. Second, the company risks spending a significant amount of money upgrading its systems to meet increased demand, only to have a downturn in the market, which would decrease volumes and increase costs per transaction.

The bottom line is that Marks cut his 1999 estimates to a loss of 62 cents a share from a loss of 33 cents. This compares to the

First Call

estimate of a 46-cent loss. Deutsche Bank maintains a hold rating on the stock. E*Trade was off 2 1/4, or 2%, at 109 3/4 in active trading.

Shares of

CDnow

(CDNW)

were lower even though the company beat earnings expectations by 7 cents a share late Wednesday when it reported a loss of 96 cents. It was trading down 1, or 5%, at 17 3/8. The company has been mentioned as a possible takeover target, which has contributed to its volatility in recent weeks.

Microsoft

(MSFT) - Get Report

said it would invest $5 billion in

AT&T

(T) - Get Report

in return for putting Microsoft's software into AT&T's new digital set-top boxes. The agreement is another twist in AT&T's battle with

Comcast

(CMCSK)

for

MediaOne

(UMG)

. In early trading, Microsoft was up 1 1/4, or 1.5%, at 80 3/8.

On the IPO front,

Portal Software

(PRSF:Nasdaq), a provider of billing and management software for ISPs, will begin trading today. It was priced at 14.