For Stocks, Another Case of Earnings Jitters

Disappointing profit reports -- and worries about higher interest rates -- sent the market lower Friday. Next week brings a new round of economic data to ponder

Stocks finished lower Friday amid some disappointing earnings and sales outlooks. Investors have also been on edge about higher interest rates in the coming months after the Federal Reserve shifted its assessment of the economy to neutral from cautious earlier in the week.

The Dow Jones industrial average declined 52.20 points, or 0.50%, to 10,427.67, hurt by IBM (IBM ), Boeing (BA ) and 3M (MMM ).

The Nasdaq composite index fell 17.44 points, or 0.93%, to 1,851.39, led lower by names such as Intel (INTC ), Microsoft (MSFT ), and Biomet (BMET ).

The broader Standard & Poor's 500 Index lost 4.89 points, or 0.42%, to 1,148.70 was hobbled by weakness in semiconductor, telecom services, and software stocks. Footwear and oil services stocks were also down.

However, some defensive groups showed strength Friday, including soft drinks and metal stocks. Homebuilders also gained ground, despite the possibility of higher interest rates, as data continues to show strength in the housing market.

And housing will be among the areas of the economy spotlighted in next week's calendar. Existing home sales will be released on Monday. Fed Chairman Alan Greenspan will speak Tuesday on corporate governance before NYU's Stern School of Business after the market close (5:00 pm EST). Durable good orders and consumer confidence reports are also due Tuesday.

On Wednesday, new home sales will be reported. Thursday is highlighted by Chicago PMI along with claims, Michigan sentiment, and fourth quarter final gross domestic product. Friday rounds out the week with personal income.

Earlier this week, the Fed left interest rates unchanged, but shifted its assessment to neutral from easing. The change in its assessment does not imply the Fed will move quickly to raise interest rates, says David Wyss, chief economist at Standard & Poor's. The next likely step would be to send a warning against excessive growth and inflation, which is not likely before June, he says. He continues to expect the Fed to raise rates at its August meeting. "The current move is simply taking the foot off the accelerator, not putting on the brakes," Wyss says.

Besides the Fed meeting, criticism about General Electric (GE ) took center stage. In response to investor inquiries about its debt load and how it achieves steady long-term earnings growth, the Dow component says that the company and its finance unit, GE Capital, will continue to fund a portion of their operations with commercial paper. GE says it remains committed to its $1.65-$1.67 EPS target before accounting charges for 2002. GE shares rebounded slightly after posting declines the last two days.

The IPO of Travelers Property Casualty (TAPA ), the biggest offering so far this year, got off to a good start. Citigroup (C ) spun off 21% of the insurance unit in an estimated $3.9 billion IPO. The shares priced at $18.50 each late Thursday, near the top of the proposed $16 to $19 range.

In earnings news Friday, McDonald's (MCD ), also a member of the Dow, warned that it sees operating EPS toward the lower end of its previously-announced range of $1.47-$1.54 in 2002, and that it will take a $0.03 per share charge in the first quarter. The fast-food chain held a conference call Friday morning. The shares were lower Friday.

Another Dow stock, Hewlett-Packard (HWP ), fell on reports that earnings and revenue at its services group are coming in below targets so far this quarter.

Nike (NKE ) shares fell after it reported earnings and says future orders rose 4% from a year earlier, below the 7% to 9% range some analysts expected.

Oil services provider Baker Hughes (BHI ) lowered its 1%-3% oilfield revenue growth forecast for the first quarter forecast to flat (plus or minus 1%) and trimmed its earnings outlook. Oil services stocks were also down after Salomon Smith Barney downgraded a number of top industry names based on valuation.

In the tech sector, memory chipmaker Micron Technology (MU ) reported a $0.05 loss per share in the second quarter on a 39% sales decline. Micron says chip prices increased and it sees demand picking up from corporate technology buyers.

3Com (COMS ) reported a narrower than expected $0.12 loss per share in the third quarter (pro forma) on a 43% revenue decline. The company says it hopes to achieve its goal of fourth quarter profitability from cost controls.

Palm (PALM ) shares jumped after it posted a narrower-than-expected third quarter loss per share of $0.02 in the third quarter on 38% lower revenue. CIBC World raised its estimates, while JP Morgan reportedly upgraded the shares to long term buy.

Treasury Market

U.S. Treasuries ended the week lower in price, sending yields higher. There were no economic reports due out Friday.

The federal funds futures market continues to price in an increasing risk for a Federal Reserve rate hike sooner rather than later. The June futures contract is fully priced for a 25 basis-point hike, S&P MMS says.

World Markets

European stock markets were mixed. In London, the Financial Times-Stock Exchange 100 index finished with a loss of 2.80 points, or 0.05%, to 5,250.50 in position-squaring before the weekend, along with speculation about higher interest rates. In France, the CAC 40 added 21.67 points, or 0.47%, to 4,601.57. In Germany, the DAX Index rose 22.48 points, or 0.42%, to 5,371.16. A report showing German construction orders fell 3.1% in January had little impact.

In Asia, the markets ended mixed. In Japan, the Nikkei fell 181.70 points, or 1.58%, to close at 11,345 as bank shares extended losses in the afternoon following a report that Japan's 12 biggest banks are all expected to post net losses in fiscal year 2001 (ending March) due to increased disposal of bad loans. In Hong Kong, the Hang Seng gained 33.34 points, or 0.31%, to close at 10,863.07

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