ECI Data, Fed Chief Haunt Net Sector

Internet bellwethers were some of the biggest losers after data showed the economy could be overheating.
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SAN FRANCISCO -- Comments Federal Reserve Chairman Alan Greenspan made last week came back to haunt the stock market today, and Internet stocks were not spared.

In his

Humphrey-Hawkins

testimony before Congress last week, Greenspan said the economy may be growing too fast and it could lead to another hike in interest rates should there be signs of inflation. The Fed got that type of ammunition today, with a 1.1% increase in the second-quarter

Employment Cost Index

, igniting

fears of inflation and another rate hike.

Internet stocks are hurt by rising interest rates, partly because so many of them are losing money. Because their earnings are off in the future, the present value of that future earnings stream falls as rates rise. Furthermore, with the inflation that accompanies higher interest rates, more companies are able to raise prices; that means investors can shift their investments out of Internet stocks into sectors that offer high growth but at less risk.

TheStreet.com Internet Sector

index closed down 21.88, or 3.7%, at 562.44. While losses were extensive, traders said there did not appear to be panic selling. But they said the market could remain weak should it continue to price in the prospect of another rate hike. The market has seen periods of profit-taking during the current earnings season in what is traditionally a weak time of year.

Internet bellwethers, which carry some of the highest valuations in the sector, were among the largest point losers in the sector.

Yahoo!

(YHOO)

closed down 6, or 4%, at 137.

America Online

(AOL)

continued to flirt with the 100 level, closing down 3 7/8, or 3.8%, at 99 7/8.

Amazon.com

(AMZN) - Get Report

was doing some flirting of its own, closing down 4 3/16, or 4%, at 101 9/16, after reaching a low of 100.

Interest-rate sensitive stocks like online banks and brokerages also felt the squeeze.

Teleb@nc Financial

(TBFC)

closed down 1 11/16, or 5%, at 30 7/8, while

Net.B@nk

(NTBK)

finished off 1 3/8, or 5.6%, at 23 1/4.

E*Trade

(EGRP)

ended down 1 31/32, or 6%, at 32, while

Schwab

(SCH)

closed down 2 7/32, or 5%, at 45 27/32.

But even today's activity was not enough to dampen enthusiasm for Internet IPOs.

Net2Phone

(NTOP:Nasdaq), which provides services to allow users to make telephone calls over the Internet at low cost, closed up 11 9/16, or 77%, at 26 9/16.