Investors Play Defense

Money moved into blue chips -- and out of the Nasdaq -- after Greenspan kept mum on rate cuts and Corning issued a revenue warning

Divergence persisted throughout the session as money rotated into defensive Dow issues and out of the high tech of the Nasdaq.

The tech troubles started at the opening bell as fiber-optics maker Corning (GLW ) was downgraded by Merrill Lynch and Salomon Smith Barney after reporting better than expected fourth quarter results -- but also warning of expected slower sales growth for the first half. This in turn led to weakness in several throughout its industry.

There was no relief from the Fed front as investors tuned into Chairman Alan Greenspan's testimony to the Senate Banking Committee found no light shed into FOMC's monetary policy. This left a cloud of uncertainty over techs and other growth stocks, which flourish in an aggressively easing interest rate environment. Profits were taken and cash looked for safety in sectors such as healthcare and pharmaceuticals.

The Dow gained 82.55 points to 10729.52 as investors sought shelter in defensive names. The Nasdaq was the big loser of the day, losing 104.82 points to close at 2754.33 on weakness in techs and telecommunications. The S&P 500 slid 6.79 points to end the day at 1357.51

Many investors are looking for a catalyst before returning to the tech sector, according to Charles Roden, Senior managing director at Josephthal "The high tech stocks had a good rally and the market is now settling in and waiting for news." He also says money is shifting into defensive names like Philip Morris and Johnson & Johnson. He also says that when Fed Chairman Alan Greenspan acknowledged that the economy was weak, it was no surprise. "The thing that struck me is that he more or less encouraged tax cuts. That's another reason why some of the old line stocks are doing better."

Barry Hyman, market strategist for Ehrenkrantz says lack of any hints at an aggressive rate ease has left a black cloud over tech issues. "I come out not feeling any worse [about the speech]," Hyman says. "I think it's pretty understandable, though a little vague. The only concern is that [Greenspan] is not giving any clear indication as to what the Fed will do at its next meeting and that's causing concern among growth stocks participants."

Of the weakness in the Nasdaq, Hyman notes that growth stocks are experiencing a continued deteriorating fundamental picture. "The rally we had in the Nasdaq was wonderful, it got close to 3000," he says "But the market is only going to go only so far on a big 'if' -- and [that is] if and when the economy will turn around."

On the economic data front, the employment cost index for December rose a lower than expected 0.8% in Q4, up 4.1% year over year. Wages and salaries were up 0.7% while benefit costs were up 0.8%. The Q4 headline number indicates that the pace of growth in wage costs is cooling.

And with tech names such as BroadVision (BVSN ) JDS Uniphase (JDSU ) and Qualcomm (QCOM ) due to report earnings before the bell rings, earnings could determine whether the hemorrhaging continues or is stanched for the techs.

Treasury Market

Fed Chairman Greenspan's Senate Budget testimony has been the focus in the market through the morning. Though he did not comment specifically on the economy's current situation or on monetary policy in his prepared testimony, his comments on tax policy and the government surpluses were nevertheless very interesting and cogent.

Bond prices have gyrated on various assessments of his comments. Prices were higher heading into the testimony thanks to a friendly ECI report (+0.8% in Q4), but they sunk on Greenspan newswire headlines, only to rebound again on a reassessment of his testimony. News headlines highlighted that tax cuts "appear required" in coming years to help address the growing budget surpluses, and that tax relief was favored "sooner rather than later."

The markets assumed that meant a less aggressive rate cut might be in the offing next week. But the body of the text and his Q&A suggested the economy might need more stimulative measures by the Fed, and that tax cuts and rate cuts weren't incompatible, and bonds rebounded. He did dodge a direct question on what the Fed would do next week, however, indicating he wanted to hear what his fellow FOMC members had to say. Greenspan also suggested debt reduction might eventually put a squeeze on bonds if a premium was required to wrestle paper away from foreign accounts. This also gave bonds support. He also added that the California energy crisis is a significant issue.

Durable goods orders are scheduled to be reported tommorrow.

Stocks in the News

Electronics for Imaging (EFII ) posted better than expected $0.17 vs. $1.38 Q4 EPS (pro forma) on 11% revenue decline.

VeriSign Inc. (VRSN ) posted $0.21 vs. $0.04 4Q EPS (pro forma) on a sharp revenue rise. The company sees $0.13-40.14 Q1 EPS.

Dow Chemical (DOW ) posted $0.36 vs. $0.50 4Q EPS from operations as higher hydrocarbon, energy costs, flat selling prices offset 2.8% sales rise.

Pharmaceuticals giant Eli Lilly (LLY) posted $0.70 vs. $0.61 Q1 EPS from operations on a 5.6% sales rise, in line with Wall Street estimates. The company also forecast $0.71-$0.73 Q1 EPS and 2.75-$2.85 2001 EPS.

World Markets

The Financial Times-Stock Exchange 100 index, which rose 50 points yesterday, finished Thursday's session with a loss of 8.80 points to close at 6255.60. The biggest contributor to the decline in the FTSE was British Telecom. U.S. Fed chairman Greenspan's testimony did not unsettle bond traders who expect lower U.S. short-term rates on Jan. 31. The British 10-year bond yield fell 1.2 basis points to 4.948%. There is a growing opinion that the BoE will cut rates at its February meeting.

The Nikkei 225 lost yet another round, a technical knockout no less, after slugging it out against the bears. The index shed 90.20 points to end another torrid day at 13,803.38. Profit-taking was blamed, as was uncertainty over when the government would introduce much-needed stock-boosting measures. There will be more bad news to come if Sony's Q3 earnings fall lower than expected. The Hong Kong market will be closed Jan. 24 through Jan. 26 for the Lunar New Year Holidays.

By Alan Hughes

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