Market Gets What It Wants -- and Stumbles Anyway

Analysts wonder if January effect gains will be followed by a February hangover

Tech stocks buckled while the Dow lost most of the session's gains after the Federal Reserve made its much anticipated 50-basis-point interest rate cut. The central bank indicated it is taking an easing stance on the economy and suggested it would consider an inter-meeting cut if necessary.

Market reaction to the Fed rate cut was not unexpected. "It got what it wanted, but it wasn't acting very well in the face of that," said Frank Gretz, market analyst at brokerage firm Shields and Co.

Gretz noted that January is typically a strong month for the market as new money comes into the market at the start of the year. The market may not hold up as well in February, he said. "It's important to see how the market acts in the next week or so. You get to February and typically you have more of a difficult time. We should have more of a struggle here going forward," Gretz said.

The Fed's policy setting Federal Open Market Committee said that fears of a sharply weakening economy prompted the bank to take a "rapid and forceful response on monetary policy." The Fed's key federal funds rate is now at 5.5%, down from 6.0%, to help spark the sluggish economy. The cut follows a surprise half-percentage point rate cut earlier this month and erases all the rate increases if last year. The Fed's next policy-setting meeting will be held on March 20.

"I think the Fed made it clear it is going to do whatever it takes to keep the economy from entering a situation where economic weakness feeds on itself," said Steven Leeb, President of Money Growth Institute, a money management firm. Leeb is not worried about fallout from the January effect, noting that "it would be unprecedented for the market to back off at this point."

Profit taking sent the Nasdaq lower, ending down 65.46 points, or 2.3%, at 2,772.89. "Tech stocks were very strong this month. I think people sold just to book some profits at the end of the month," Leeb said. Nasdaq heavy hitters Cisco (CSCO ), Oracle and Dell all ended down.

In corporate news, (AMZN ) said after Tuesday's close that it would cut 1,300 jobs, or 15% of its work force, in an effort to turn its first pro forma profit by year end. The company's shares slipped about 8.9%. Newly merged media behemoth AOL Time Warner Inc. (AOL ), said fourth-quarter adjusted cash flow rose 14% and its net loss widened to $1.09 billion on a pro forma basis. Its shares were up about 3%.

After the Fed's rate cut announcement, financial services stocks on the Dow stumbled while retailing stocks were the bright spots among the 30 blue chips.

The Dow ended up 6.16 points, or 0.06%, at 10,887.36, as investors hoped for a steep rate cut. The broader S&P 500 ended off 7.86 points, or 0.57%, at 1,365.87.

Treasury Market

U.S. treasuries ended higher after the Fed interest rate cut as focus on fourth quarter gross domestic product (GDP) boosted the case for bonds. A report this morning showed fourth quarter GDP was at 1.4%, which is down from 2.2% in the third quarter. The surprising weakness was due mostly to a sharp 4.3% drop in exports even though the monthly figures through November imply a decline of less than 1%, alongside an unexpected $5 billion drop in exports, and a slightly weaker than expected drop of 1.7% in fixed investment. The weak figures showed the U.S. economy is growing at its slowest clip since 1995.

Chicago PMI, a regional gauge of the manufacturing industry's health fell to 40.2 in January compared with a revised 45.2 in December. S&P's economic research unit was forecasting the reading to come in at 44.5%. Overall, signs continue to suggest that U.S. manufacturing remains depressed.

Sales of new homes jumped rose 13.4% in December. The buoyant housing market appears due to the decline in mortgage rates through the year.

Stocks in the News

Semiconductor industry supplier Applied Materials (AMAT ), said it sees first quarter revenue at 7% to 10% below early guidance and it expects earnings per share to fall short. Goldman Sachs cut its estimates on the company.

Cardiovascular device maker Guidant Corp. (GDT ) posted adjusted fourth quarter EPS of $0.41, compared with $0.31, on a 13% sales rise. The company said it expects double-digit sales growth in 2001 that slightly exceeds sales growth should be achievable.

CompuCredit Corp. (CCRT ), which markets bank-card and fee-based services, posted fourth-quarter earnings were far below Wall Street estimates and slashed its earnings outlook for 2001.

World Markets

European markets ended mixed. London's Financial Times-Stock Exchange 100 index ended down 37.00 points, or 0.58%, at 6,297.50. In Germany, the DAX Index was up 55.84 points, or 0.83%, to 6,795.14. Meanwhile, France's CAC 40 ended up 81.34 points, or 1.37%, at 5,998.49.

The Asian markets finished up. Japan's Nikkei ended up 16.90 points, or 0.12%, at 13,843.55. Hong Kong's Hang Seng Index finished with a gain of 209.28 points, or 1.32%, at 16,102.35.

Today's Headlines

Bush signaled flexibility on packaging his tax cuts, which some say will total $2 trillion. The Congressional Budget Office put the 10-year surplus at $5.6 trillion; excluding Social Security and Medicare leaves $2.8 trillion: WSJ.

A few thousand cattle may have been fed the ground-up remains of other cattle by mistake, but no people will be at risk of mad cow disease as a result, U.S. government regulators say: Reuters.

China stepped up its campaign to paint Falun Dafa as an evil cult, releasing details of members' recent burn protests in Tiananmen Square: WSJ.

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