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Dow ends off on bond fears, Nasdaq shy of record

NEW YORK: US blue chips retreated on Tuesday as inflation fears sent the long bond yield to a 2-1/2 year high, but a select technology stock buying spree drove the Nasdaq Composite to just shy of a record close.

The tech-rich Nasdaq Composite index surged 66.54 points or 1.64 percent to 4,130.81 after rallying nearly 5 percent last week. The all-time closing high of 4,131.15 was set January 3.

After the regular market close, tech bellwether Microsoft reported fiscal second-quarter earnings rose to 44 cents a share, topping the consensus estimate by two cents.

The Dow Jones industrial average was off 162.26 points, or 1.38 percent, at 11,560.72, and the S&P 500 index shed 9.98 points, or 0.68 percent, to 1,455.17, despite news of some mega-mergers. The Dow closed at a record high on Friday. The stock and bond markets were closed on Monday for the Martin Luther King Jr. holiday.

"Bonds are down and stocks are having an anxiety attack over interest rates," said Christine Callies, chief US market strategist at Credit Suisse First Boston.

Financial stocks took the brunt of the selling pressure on Wall Street as the closely watched long bond lost 20/32 to yield 6.74 percent -- the highest since July 1, 1997. Among the Dow components, American Express lost 7-15/16 to 151-9/16 and J.P. Morgan shed 4-12/16 to 123-5/16 after posting unexpectedly strong quarterly earnings.

Meanwhile, Nymex heating oil and crude prices hit nine-year highs as a cold snap hit the US Northeast and dealers worried that OPEC might opt for a lengthy extension of supply curbs.

The Commodity Research Bureau index rose 1.24 to 209.25, the highest level since Oct 14, 1999.

"The story of the day is that despite constructive inflation reports last Thursday and Friday, the bond baboons appeared focused on Chairman Greenspan's intentions at the next FOMC meeting on February 2," said Philip Orlando, chief investment officer of Value Line's Asset Management division.

"That's pressuring the Dow Jones, particularly the financial stocks and investors are reviewing the strong quarterly earnings growth of the technology stocks as a safe haven in this uncertain rate environment," Orlando said.

Analysts said stocks had largely factored in solid corporate earnings reports; while some mega-mergers drew interest in select issues.

Shares of Microsoft, the world's largest software maker rose 3-1/16 to 115-5/16 during the day, before its earnings report was issued.

El Paso Energy Corp., the owner of North America's largest natural gas pipeline system, early Tuesday said it had agreed to buy Coastal Corp. in a deal valued at about $16 billion, including $6 billion of assumed debt and preferred stock. El Paso Energy shed 2-1/8 to 35, while Coastal added 2-15/16 to 38-15/16.

In two big deals announced on Monday, Glaxo Wellcome and SmithKline Beecham agreed to merge to create the world's largest pharmaceutical company, and JDS Uniphase, the world's leading fiber optic equipment maker, agreed to buy rival E-TEK Dynamics in a stock deal valued at roughly $15 billion.

E-TEK soared 42-1/2 to 178-3/8 and JDS rose 3-8/16 to 195-11/16. SmithKline ADRs shed 8-9/16 to 61-3/16 and Glaxo ADRs were off 5-15/16 to 54-1/16.

Among individual issues, Motorola lost 6-9/16 to 143-1/2 after reporting stronger-than-expected quarterly results late on Monday.

Rockwell shares rose 2-9/16 to 50-3/4 after the electronic controls and communications company reported fiscal first-quarter earnings rose 16 percent and beat estimates.

Among financial services companies reporting stronger quarterly results but selling off, Bank of America lost 2-9/16 to 47-13/16, Bank of New York was off 1-3/4 to 37-3/8, Charles Schwab was off 1-12/16 to 39-3/16 and Wells Fargo shed 2-13/16 to 38-7/8.

Citigroup fell 1/4 to 57-3/4 after the No. 1 US financial services company reported stronger-than-expected earnings. Separately, Citigroup agreed to buy Schroders Plc's investment banking division for about $2.21 billion.

Raytheon slumped 6-3/8 to 19 after warning that earnings for the years 1999 and 2000 would fall short of expectations.

Tyco rose 4-3/16 to 38-3/4 after posting quarterly share numbers that beat the Street's consensus estimate by a penny. The company also announced a share buyback of up to $2 billion, plans to build a global undersea fiber optic communications network and offer 20 percent of the new firm in an initial public offering.

Among the tech stocks drawing buyers were Cisco, up 4-7/16 to 112, Oracle, up 4-7/16 to 111-1/4, and 3Com, up 2-14/16 to 49-3/16.

"Once again, some investors are operating as if this was a new era paradigm and that interest rates don't matter to growth stocks -- eventually they do," said CSFB's Callies. "But that doesn't mean technology stocks can't be traded short term. But at some point the Fed has to win the contest of wringing some of the cockiness out of the equities market." -Reuters