Net Stocks Stuff Dow Stocking

U.S. stocks skyrocketed Wednesday, ending at session highs, propelled by the usual suspect - the high-flying Internet group.

The general ebullience of the technology complex, led by the roaring networking and Internet sectors, powered the Nasdaq to another record.

The Dow Jones Industrial Average closed up 157.57 points, or 1.7 percent, to 9,202.03. The tech-heavy Nasdaq Composite vaulted 51.56 points, a staggering 2.4 percent, to 2,172.54.

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Larry Wachtel, market analyst at Prudential Securities, said the inclusion of AOL in the S&P gave an endorsement to the Internet segment.

Players said AOL's addition to the S&P would certainly bloat the Index's P/E ratio but said they didn't see it adding significant volatility.

Gains among the chip-makers were sparked by news that Merrill Lynch analyst Thomas Kurlak had upgraded Intel (INTC) to accumulate from neutral, citing rising demand for PCs. Kurlak raised earnings estimates for 1999 to $4.25 per share from $3.60 and estimates higher unit growth of 22 percent next year. The company vaulted 5 15/16 to 125. See related story.

The buying spree in the tech sector is being spawned in part by portfolio re-balancing from fund managers before they shut down for the year. Funds, in fact, are looking to embellish their books by holding the best performers of the year, according to Arun Kumar, senior U.S. equity strategist at Lehman Brothers.

In addition, market makers are positioning themselves for next year, loading up on the big-caps, which they expect to outperform in 1999, strategists said.

"It's a strong technical market and you have favorable seasonals," Wachtel said. "The bulls are in control."

The market backed off briefly in the afternoon on newthat the Federal Reserve may not be moving to slash rates anytime soon.

The minutes of the Nov. 17 Federal Open Market Committee meeting -- during which the central bank cut rates by 25 basis points -- unveiled the Fed shifted to a symmetrical directive from its bias to ease. One member of the Committee, Cleveland Fed President Jerry Jordan, voted against the November ease arguing that an additional rate reduction risked fueling an unsustainable strong growth rate of domestic demand. See related story.

David Jones, chief economist at Aubrey G. Lanston & Co., said the shift to a neutral stance was a surprise for the Street, as it happened earlier than most had expected.

The minutes suggest the Fed is now in a wait-and-see mode, and will stand back to observe the U.S.economy's behavior. Thus, easing expectations are now shifting further out, to the second quarter of 1999, Jones said. He expects Fed officials to reiterate this view in upcoming speeches.

"It was a negative document for the financial markets. It struck a note of caution," Jones said. "It will squeeze the euphoria out of stocks."

Jones said the Fed was certainly worried that some element -- like weaker profit margins -- would puncture the stock bubble in a way that would be devastating to the economy and is suggesting that the markets be more cautious.

But others observe that the Fed's intention to stand aside is good news for stocks, as it indicates the central bank believes the U.S. economy is sturdy enough to stand on its own.

Terence Gabriel, technical analyst at I.D.E.A., said that's probably why the negative reaction in the stock market was so short-lived.

"This is a quarter during which we've had so many earnings warnings from Dow components," Gabriel said. He added that people are worried but are discounting the bad news because they believe things are getting better. And the FOMC minutes supported that notion.

Within the market, other Internet bellwethers soared on AOL's coattails. Amazon (AMZN) was up 2 5/8 to 325 while Yahoo (YHOO) piled on 5 to 250. The Goldman Sachs Internet Index leapt 7.1 percent.

Online brokerages roared higher for the second consecutive session as ABN AMRO raised E*TRADE's (EGRP) projected fourth quarter earnings to 28 cents per share from 26 cents on an expected rise in revenues from increased online trading. This came on the heels of a Piper Jaffray upgrade Tuesday to "strong buy" from "buy." The stock gained 6 5/16 to 44 3/4.

Despite the general ebullience, players noted the upward move Wednesday lacked a broad participation from mid- and small-cap stocks.

"It's been a Microsoft, Lucent, MCI WorldCom and Cisco kind of market," Wachtel said, noting that rallies have been confined to big cap names, with IBM the driving force in the Dow Industrials and the large tech stocks behind the Nasdaq's climb.

Kumar noted that performance has been narrowing and that it would ontinue to do so going forward.

"The big caps are outperforming because they are better positioned to grow as the U.S. economy slows," he said, while the smaller names will less global exposure will suffer.

Players pointed out, however, that typical year-end plays may be accentuating the disparities between large- and small-cap issues.

"I do think the breadth issue is a problem but tax loss selling may be distorting that right now. If the situation doesn't right itself in January, people will take notice of the glaring disparity but you can't get a true enough read now," Gabriel said.

Gabriel believes the small caps will begin to participate more fully in the rally, adding that the Russell 2000 index looks for an upside breakout in 1999.

• The Standard & Poor's 500 Index rose 2.1 percent, another record. Advancers outpaced decliners on the New York Stock Exchange by 19 to 11. On the Nasdaq, winners beat losers by a mere 18 to 21.
• On the NYSE, a total of 696 million issues changed hands, about average, while 960 million shares traded on the Nasdaq.
• The Russell 2000 Index of small-capitalization stocks gained 1.1 percent.
• Turning to the Treasury market, prices tumbled with the bellwether 30-year losing 21/32 to yield 5.18 percent on extremely thin volume, hurt by the FOMC minutes and surging stocks.

James Kochan, first vice president of fixed-income research, said the market breached some fairly important support levels, which doesn't bode well for the next week.

The selloff is sobering indeed, Kochan said, as it comes at a time of the year when the bond market typically rallies. "It's usually the first quarter that tends to be the ugliest for bonds," he said.

Not surprisingly, little movement came so far from the morning's dose of economic news. The final revision to third quarter gross domestic product showed a downward revision in the figure to 3.7 percent from the previously reported 3.9 percent. The news didn't generate any waves. Meanwhile, the implicit price deflator was upwardly revised to 1.0 percent from 0.8 percent.

In other news, durable goods orders for November rose by a larger-than-expected 1.0 percent while the University of Michigan's consumer sentiment index for December declined to 100.5. The strong durables report is just another sign that the economy isn't falling off a cliff, Kochan remarked.

Looking ahead, November personal income and personal consumption expenditures will be out Thursday. Both are expected to rise 0.3 percent. Weekly jobless claims are seen coming in at 308,000. See daily calendar, weekly calendar, and earnings calendar.

In earnings warnings, defense contractor Lockheed Martin Corp. (LMT) said it expects fourth-quarter earnings to disappoint due to soggy sales and delayes space launches. The company said it expected earnings per share for 1998, excluding charges, to rise between 2 percent and 4 percent. In adition, fourth-quarter earnings, not including charges, are expected to decline 10 percent from the year-ago's $1.79 a share. .

Consumer credit report provider Equifax (EFX) said it expects fourth quarter earnings to come in at 31 cents per share, 10 cents lower than the 41 cent estimate in a survey of analysts by First Call. Shares collapsed 9 15/16, or 22.6 percent, to 34 1/16.

Financial services provider Franklin Resources (BEN) said it anticipates net earnings below analysts' expectations for the first fiscal quarter of 1999 due to increased expenses and a continuing shift in the asset mix towards lower-margin fixed-income products. The stock lost 3 3/8 to 39 9/16.

Computer tape storage devices maker Exabyte Corp.(EXBT) tanked 1 1/16, or 16.3 percent, to 5 7/16 when it warned that it predicts a fourth-quarter loss of 18 to 24 cents a share. Analysts surveyed by First Call expected the company to earn 4 cents.

Technology products distributor Ingram Micro (IM) said it expects fourth-quarter earnings of between 48 cents and 50 cents a share, well below the First Call consensus estimate of 56 cents, citing soggy PC sales. Shares fell 3 1/16 to 33 15/16.

Meanwhile, shares of inventory management software maker Manugistics (MANU) fell 15/16 to 12 1/8 after the company unveiled late Tuesday a larger-than-expected loss of 39 cents a share in the third quarter, compared to expectations for a loss of 6 cents.

In earnings surprises, networking company 3Com (COMS) slumped under the weight of AG Edwards' downgarde to "accumulate" from "buy." Tuesday, Gruntal analyst David Takata upgraded the stock to "strong buy" from "hold."

The company beat estimates when in unveiled its earnings report after the bell Tuesday. In fact, third quarter earnings came in at 36 cents per share compared to 1 cent in the year-ago period, 5 cents ahead of First Call estimates. Shares inched down 3/8 to 48 1/4.

Meanwhile, online retailer Cyberian Outpost (COOL) reported a smaller-than-expected third-quarter loss of 34 cents, beating First call estimates by 5 cents. The company also said revenue increased by 286 percent. Shares fell 3/8 to 36 7/8 after climbing at the open.

COMMODITIES

New York light sweet crude for February delivery gained 24 cents to $11.36.

February gold fell $2.2 to $286.80.

CURRENCIES

Dollar/yen was quoted at 115.94 from Tuesday's 116.62.

Dollar/mark was at 1.6726 from Tuesday's 1.6712.