Stocks Finish at Session Lows

An S&P 500 index rebalancing should add extra volatility Friday. Investors will also have another pile of tech earnings to ponder

Stocks Thursday relented to selling pressure, and the major indexes finished at session lows.

The Dow Jones industrial average, which was on postive ground for much of the session, tumbled 132.99 points, or 1.56%, to 8,409.49. Earlier, stocks like International Paper (IP ) and Honeywell (HON ) boosted the average. But those gains could not offset weakness in drug stocks, financial and industrial companies.

The tech-heavy Nasdaq composite index, meanwhile, added to the loss column, with a decline of 40.29 points, or 2.88%, to 1,356.96, led by losses in brand-name biotech, telecom and software stocks. The broader Standard & Poor's 500-stock index was down 24.48 points, or 2.70%, to 881.56.

In the latest earnings news, Sun Microsystems (SUNW ) after the closing bell Thursday reported fiscal fourth-quarter revenues of $3.4 billion, up 10% from third-quarter levels. Net income for the fourth quarter was $28 million.

Wall Street will look at more big earnings from tech concerns due later in the evening Thursday. Among those scheduled to report are Microsoft (MSFT ), the world's No. 1 software concern, eBay (EBAY ), Xilinx (XLNX ), QLogic (QLGC ) and Nortel Networks (NT ).

Investors will also have to contend with the rebalancing of the broadly followed Standard & Poor's 500 index of stocks. The rebalance will take effect at the close of business Friday. Non-U.S. stocks will be deleted for 7 domestic ones. While the majority of index funds are expected to wait until Friday to rebalance, arbitrage and hedge funds have likely acted sooner. The last time the S&P index was rebalanced was 1983, when seven Baby Bells were added. The rebalancing is likely to cause extra volatility in Friday's session.

In economic data Friday, both the overall consumer price index and the core index, which strips out more volatile components, are expected to rise 0.2%. The data, which gauges inflation at the consumer level, are expected to suggest that inflationary trends remain subdued. Inflationary pressures are not considered to be a primary concern for the Fed following the economic downturn, so these data will have very little impact on the market.

Standard & Poor's economic research unit MMS expects the goods and services trade deficit to widen further to around $36 billion in May from $35.4 billion reported for April, as trade in goods accelerates due to the threat of a Longshoremen's strike on the West Coast. These data have no direct impact on Treasuries, but traders will keep a close eye on the dollar, says MMS.

Earnings news from tech companies added pressure to the Nasdaq on Thursday. Data storage concern EMC (EMC ) said it broke even in the second quarter, amid lower storage spending and cutthroat pricing by its rivals. It earned $808,000, compared with year-earlier earnings of $109 million. EMC shares lost 2%.

Software maker Siebel Systems (SEBL ) posted lower-than-expected earnings per share of $0.06, compared with $0.15, on a 28% revenue decline. S&P downgraded the stock. Siebel stock lost 17%.

Meanwhile, drugmaker Eli Lilly (LLY ) helped lead tech stocks down. Lilly posted earnings per share of $0.61 versus $0.76 a year ago. The maker of Prozac blamed lower sales of that drug on generic competition. It sees $0.67 to $0.69 for their quarter operating earnings per share. The company cut its 2002 forecast to $2.60 to $2.62 earnings per share as its manufacturing woes may not be resolved until next year.

Media giant AOL Time Warner's AOL part of the business boosted its revenue through unconventional deals between 2000 and 2002, before and after the acquisition of Time Warner, according to an article in the Washington Post. Further, corporate infighting has stymied an aggressive advertising plan at AOL Time Warner, and the boardroom confrontation has led to the departure of co-CEO Robert Pittman.

Dow member Philip Morris (MO ), parent of the world's largest tobacco company, said quarterly profit climbed 8% despite a decline in U.S. shipments caused by higher cigarette prices. However, it said full-year earnings per share growth will be toward the lower end of its earlier view of 9% to 11% guidance due to plans to invest about $350 million to increase sales of its top brands.

Treasury Market

Treasuries finished higher in price on the heels of the latest update of the U.S. Philly Fed index, a measure of regional manufacturing health. The index plunged to 6.6 in July from 22.2 in June. This is much lower than expected and will support Treasuries at the expense of stocks, says MMS. This is the lowest reading since December last year. New orders shrunk to 6.6 from 20.1 and employment weakened further.

In other economic news, initial jobless claims for the week ended July 13 declined 28,000 to 379,000 (the previous week was revised up to 407,000 from 403,000). Continuing claims rose a mere 1,000 while the insured unemployment rate remained steady at 2.8%. While the drop in claims might weigh on Treasuries, the data is affected by the auto retooling season, according to MMS.

Also, the index of leading indicators for June, a gauge of economic conditions issued by the Conference Board, held steady in June. Industrial production had its biggest gain on the month since October 1998. Stock prices and consumer expectations were the primary components that prevented the leading index from continuing its positive trend in June. The recent wave of questionable corporate practices and the lack of measures aimed at addressing them have largely contributed to the weakness in these two components, says the Conference Board.

World Markets

European stock markets finished higher. In London, the Financial Times-Stock Exchange 100 index gained 106.70 points, or 2.55%, to 4,297.30. France's CAC 40 added 72.83 points, or 2.12%, to 3,513.71. Germany's DAX index inched up 7.93 points, or 0.19%, to 4,100.75.

Asian markets ended higher. In Japan, the Nikkei 225 index added 202.24 points or 1.96%, to 10,498.26, amid a lull in gains of the Japanese yen. Market players felt temporarily relieved that the U.S. dollar was supported by a recovery in the country's stock markets overnight, and that Japanese officials stepped up warnings they're planning to sell yen. In Hong Kong, the benchmark Hang Seng index jumped 117.43 points, or 1.14%, to close at 10,452.55.

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