Blue chips favored on Wall St.


Investors liked Boeing after potentially damaging strike action was averted

By Parija Bhatnagar
CNN/Money Staff Writer

NEW YORK (CNN/Money) -- A succession of earnings downgrades for chip stocks unnerved the Nasdaq Monday, as investors turned their backs on the troubled tech arena and sought solace instead in a few blue-chip names, including Boeing and McDonald's.

Trading remained lighter than usual as many market participants observed Yom Kippur, the Jewish day of atonement.

The Nasdaq composite lost 15.52 to 1,275.88. The Dow Jones industrial average rose 67.49 to 8,380.18, breaking through a four-session losing streak, and after loitering in the negative for much of the day. The Standard & Poor's 500 index rose 1.29 to stand at 891.10.

Chips badly bruised the Nasdaq, sinking the Philadelphia Semiconductor Index to a four-year low. The Dow saw some late-day momentum to tack on moderate gains.

On a broader level, market watchers said the looming specter of a war with Iraq also remains a cause for concern that is likely to weigh on market sentiment.

"Today was a holiday for some people and that's why we had light volume," David Briggs, head of equity trading with Federated Investors, told CNNfn's Street Sweep.

"Another reason is that investors are still debating the impact of a war with Iraq. Some feel a war will cost a lot of money, send the deficit soaring and plunge the economy into a recession.

" Others think this round will go a lot faster and not cost as much. But this debate is causing a lot of people to sit on the sidelines."

Corporate confessions

Market breadth was negative on very light volume. On the New York Stock Exchange, losers beat winners about 2-to-1 as 977 million shares were traded. On the Nasdaq, advancers topped decliners 2-to-1 as 1 billion shares changed hands.

"It's frustrating right now because everybody says that stocks look relatively cheap yet everyday the market bounces around. Everybody is looking for the next hurdle. People are waiting to see what the earnings look like, and that seems to be the key driver in the current market," Briggs added.

As the new round of corporate confessions gets underway, consumer electronic retailer Best Buy (BBY: down $0.07 to $24.09) reports earnings before the bell Tuesday. Analysts forecast a profit of 18 cents a share in its latest quarter, according to First Call

Software maker Oracle (ORCL: down $0.45 to $9.28) is on tap to report quarterly earnings after the close Tuesday. Analysts forecast a profit of 7 cents a share in its latest quarter, down from 9 cents a year earlier, according to First Call.

On the economic front, the Federal Reserve releases figures tomorrow on August capacity utilization and industrial production. Capacity utilization is expected to hold at 76.2 percent while the forecast for industrial production is a rise of 0.2 percent.

Tuesday also marks the one-year anniversary of the biggest one-day point drop in history for the Dow Jones industrial average. The Dow fell more than 684 points on Sept. 17, 2001, when the U.S. stock market reopened after the 9/11 terrorist attacks. It went on to crumble another 685 points by week's end.

Bears hound semis

The tech-heavy Nasdaq stumbled after chip stocks stayed anchored in the negative.

Semiconductor issues took a hit from a trio of bearish reports from Prudential Securities and Merrill Lynch.

Prudential cut its December quarter and 2003 estimates for a select number of chipmakers, including Broadcom (BRCM: down $0.85 to $14.40), Texas Instruments (TXN: down $0.73 to $18.27), PMC-Sierra (PMCS: down $0.48 to $5.36) and nVidia (NVDA: down $0.67 to $9.90), saying it sees it unlikely that the companies will meet their fourth-quarter sequential revenue growth forecasts due to continued weakness in PC and wireless trends.

Merrill Lynch also widened its 2002 loss-per-share estimates on PMC-Sierra, citing risks from excess inventory. In addition, Banc of America cut its 2002 and 2003 estimates on chipmaker Taiwan Semiconductor (TSM: down $0.23 to $7.32), citing continued weakness in the consumer electronics segment.

Shares of No. 1 chipmaker Intel (INTC: down $0.33 to $15.70) were dragged lower.

The Philadelphia Semiconductor Index fell 11.40, or 4 percent, to 269.12, touching a four-year low.

Software and networking stocks as a group were also pressured lower.

But Linux operating system provider Red Hat (RHAT: up $0.59 to $5.84) was a winner on the Nasdaq after the company announced that it is expanding its alliance with IBM (IBM: down $0.18 to $72.32).

Boeing lends support to Dow

Among the Dow movers, the world's largest aircraft maker, Boeing (BA: up $1.65 to $37.23), was a winner after the company narrowly averted a strike by its machinists' union by a razor-thin margin in a vote late last week.

McDonald's (MCD: up $1.16 to $21.69), the world's largest restaurant chain, was buoyed by a Morgan Stanley upgrade to "equal-weight" from "underweight," saying it believes the shares were oversold. But the firm trimmed its 2002 and 2003 estimates on the stock, citing softer industry trends.

A judge dismissed a fraud claim by financial services firm J.P. Morgan Chase (JPM: down $0.33 to $21.71) against 11 insurers to recover nearly $1 billion in losses on trades between Enron and a company called Mahonia. Brokerage Lehman Brothers weighed in on the development, saying it is a significant setback to the company, which does not have the reserves to cover the losses.

Diversified conglomerate General Electric (GE: up $0.85 to $27.90) appeared unaffected by the news that the Securities and Exchange Commission has informally requested documents from the company regarding its employment and retirement agreement with former Chairman Jack Welch.

Energy company Dominion Resources (D: down $5.67 to $52.33) suffered a sharp selloff after warning that 2003 earnings will be flat to up 4 percent over its 2002 results.

Wary of war talk

Markets have been jittery for the past few weeks as the Bush administration prepares to confront Iraq. Administration officials, led by Secretary of State Colin Powell, appeared on the weekend talk shows to make the case, saying Iraq has not complied with United Nations mandates barring development of weapons of mass destruction.

In a policy shift, Saudi Arabia, a major ally of the coalition in the 1991 Gulf War, indicated it will allow the United States to use its military bases in a U.N.-backed attack on Iraq, Saudi foreign minister Prince Saud-al-Faisal told CNN over the weekend.

Putting a price tag on a possible war with Iraq, President Bush's top economic adviser, Lawrence Lindsey, said the United States may have to spend between $100 billion and $200 billion to wage a military campaign, but the expenditure would not push the economy into a recession.

A few defense and aerospace companies were boosted by some big military contracts.

Late Friday, the U.S. Navy said it had awarded General Dynamics (GD: up $3.58 to $86.60) and Northrop Grumman (NOC: up $2.00 to $128.00) a total of $5 billion in contracts to build 10 guided missile destroyers.

"The defense sector has had quite a run over the past 18 months. As people start to anticipate a war scenario, we're seeing a little froth in these stocks," Alan Kral, portfolio manager with Trevor Stewart Burton & Jacobsen, told CNNmoney Morning.

Unfurling the week's economic updates, inventories at U.S. businesses rose in July, the third-straight month of gains following a prolonged inventory selloff. The Commerce Department said business inventories rose 0.4 percent after rising a revised 0.3 percent in June. Economists, on average, expected inventories to grow 0.2 percent in July, according to Briefing.com.