Dow falls, Nasdaq rises

May 8, 2001: 5:02 p.m. ET

In divergent session, Cisco Systems gains but financial stocks falter
By Staff Writer Jake Ulick

NEW YORK (CNNfn) - U.S. stocks ended mixed Tuesday as investors sifted through conflicting news about the health of the economy and the outlook for corporate profits.

The Dow Jones industrial average edged lower, falling for a second session, amid concerns that financial service companies could face slowing sales in the months ahead.

But the market showed pockets of strength. The Nasdaq composite index rose, lifted by Cisco Systems, which, after the market closed, said third-quarter earnings per share fell more than 78 percent, topping lowered forecasts.

Hurting the Dow, Morgan Stanley downgraded shares of American Express, the credit card issuer, one day after another brokerage advised clients to sell stock in J.P. Morgan Chase.

The mixed action comes as Wall Street attempts to sort through a confusing batch of information. Corporate earnings, which showed weakness during first three months of the year, are not expected to rebound soon.

But stocks rose strongly in April as investors looked ahead to a time of economic recovery. Major stock indexes have mostly drifted this week.

"I think we are looking for that next bit of information that's going to drive us," Michael Farr, president of Farr Miller and Washington, told CNNfn's Market Call.

Data have shown that the job market continues to weaken as companies lay off workers to cut costs. But the Federal Reserve next week is expected to cut interest rates for the fifth time this year. Those moves typically help stocks.

"I don't think (Fed Chairman Alan) Greenspan is ready to let the economy roll off the cliff," Art Cashin, director of floor trading for UBS PaineWebber, told CNNfn's The Money Gang.

Still, economic data released Tuesday showed an unexpected drop in worker productivity.

The Dow industrials lost 51.66 points, or 0.5 percent, to close at 10,883.51. The Nasdaq, heavy in technology stocks, rose 25.09 points, or 1.1 percent, to 2,198.66. A broader market index, the S&P 500, declined 2.39 to 1,261.12.

More stocks rose than fell. Advancing issues on the New York Stock Exchange topped declining ones 1,611 to 1,452 on trading volume of 992 million shares. Nasdaq winners beat losers 2,150 to 1,711 as 1.7 billion shares changed hands.

In other markets, the dollar rose against the yen and euro. Treasury securities were mostly lower.

Mixed action
On the Dow, financial stocks fell, deferring hopes for Dow industrials to close above 11,000 for the first time since September. American Express (AXP: down $1.93 to $41.30, Research, Estimates), J.P. Morgan Chase (JPM: down $1.45 to $47.75, Research, Estimates) and Citigroup (C: down $0.85 to $49.80, Research, Estimates) were among the losers.

In his downgrade of American Express, Kenneth Posner, who covers the company for Morgan Stanley, said he sees little upside potential, given financial risks in the credit card industry.

On Monday, Prudential Securities made the unusual move of downgrading J.P. Morgan Chase to "sell," saying the economy's slowdown could lead to problems in the bank's loan division, hurting the bottom line.

Stocks affected by slower consumer spending declined, including Wal-Mart (WMT: down $0.07 to $51.98, Research, Estimates), General Motors (GM: down $0.45 to $56.20, Research, Estimates) and 3M (MMM: down $1.54 to $116.36, Research, Estimates).

The latest news on the economy signaled that the big gains in productivity, a hallmark of the late 1990s, may be fading. Worker productivity, a measure of worker output per hour, fell in the first quarter at an annual rate of 0.1 percent, the Labor Department said. It was the first drop in six years.

For businesses, declining efficiency could increase costs. That, in turn, could mean lower profits or rising prices as companies pass costs on to consumers.

"Clearly, these are disappointing numbers and should put to rest the notion that there a tech-driven miracle in U.S. productivity in the last few years," said Ian Shepherdson, U.S. economist at High Frequency Economics. "There was a boom, and booms drive up productivity -- until they bust."

The session began with more optimism. Stock index futures pointed to a higher market open after Morgan Stanley upgraded Cisco (CSCO: up $1.13 to $20.38, Research, Estimates), the maker of computer networking equipment, and put a $25 price target on the stock.

Hours ahead of Cisco's quarterly profit report, Morgan Stanley said it expects the company's business to improve in the months ahead.

"We believe that by the time you see Cisco's fundamentals recover, the stock will ultimately have rebounded," Morgan analyst Christopher Stix said in his report.

But Cisco's report revealed problems. The company's profit of 3 cents a share for the fiscal third quarter topped forecasts. But the company, which twice lowered its forecasts for the latest quarter, showed a net loss of $2.69 billion and hinted that slowing growth is persisting.

"The first four months of 2001 were extremely challenging," said John Chambers, president and CEO. "This may be the fastest deceleration any company of our size has ever experienced."

Still, other tech stocks also moved higher Tuesday, including Nortel Networks (NT: up $0.51 to $16.54, Research, Estimates), Sun Microsystems (SUNW: up $0.32 to $19.86, Research, Estimates) and Juniper Networks (JNPR: up $1.82 to $58.90, Research, Estimates).

Dell Computer (DELL: down $1.08 to $24.83, Research, Estimates) lost value. The computer maker, in an effort to reduce costs, said it will cut as many as 4,000 jobs, or about 10 percent of its work force.

Dell also said it will meet Wall Street's profit and sales target for the latest quarter, countering a trend of disappointments. Data storage leader EMC, Internet company Yahoo! and chipmaker Texas Instruments all readied investors for shortfalls last month.

Click here for a look at recent profit warnings

The nation's corporations just wrapped up the worst quarter for profits in a decade. That weakness likely will get attention one week from Tuesday when Federal Reserve policy makers meet to set interest rates.

The Fed cut rates four times this year. And economists expect the central bank to trim borrowing costs by at least another quarter-percentage point next week.