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Sellers Target Last Refuge--Big Tech Stocks

Wall Street: Fears of a spending slowdown batter firms that had weathered recent weakness. Nasdaq plunges 4.9%.


Big-name technology stocks whose prices had held up fairly well throughout the market's summer pullback were pounded hard Monday amid worries that a global economic slowdown will cause their sales to drop.

The Dow Jones industrial average ended down only 58.45 points, or 0.8%, at 7,726.24, after recouping most of an early 233-point loss. But the tech-heavy Nasdaq composite index plummeted 78.29 points, or 4.9%,to 1,536.69, and many prominent tech stocks fell even harder.

The loss was Nasdaq's fifth-largest ever in point terms and seventh-worst by percentage. The 35-stock Morgan Stanley high-tech index dropped 5.6%, and the American Stock Exchange computer-networking index sank 6.7% to a 52-week low.

Attracted as much by the stocks' perceived safety as by the companies' prospects, investors have been loath to part with longtime leaders such as Microsoft and Intel even as the rest of the market floundered. But the selling in the group began late last week and picked up steam Monday as anecdotal evidence mounted that companies are paring information-technology spending to cut costs.

For example, a survey of 22 companies by investment firm SG Cowen & Co. showed that info-tech budgets are being slashed. More than a third of financial services firms are cutting spending, according to the study.

Some analysts said tech stocks' slide was inevitable.

"God, this was so due it was unbelievable," said Fred Hickey, who writes the High Tech Strategist newsletter from Nashua, N.H. "The last place for [investors] to hide was in the big techs and the Internets, and they all piled into the same corner. Yet these companies are no more immune than Coke is to a worldwide synchronized recession."

Formerly durable Coca-Cola has warned that profits will suffer because of weak foreign markets.

The tech sector got a bit of good news after the market closed when Motorola unveiled better-than-expected earnings. The company reported third-quarter profit of 7 cents a share, 87% less than the 51 cents it earned a year ago but better than the 1 cent expected by Wall Street.

Some analysts believe the heavy dumping of formerly prized stocks represents a so-called selling climax. This occurs when investors give in and unload leading stocks. When these stocks fall, it may signal that the end of a downturn is in sight because investors have already sold most other stocks and can only part with their favorites to raise money.

However, even after sliding Monday, many large tech stocks remain richly valued and may be vulnerable to short-term selling, experts said.

An index of 10 major tech stocks maintained by Hickey is still up almost 50% for the year and reached a new high last Wednesday, despite a price-to-earnings ratio of 43 and falling earnings in the first half of the year.

Cisco Systems was among the worst losers Monday, sinking $7.44, or 13.3%, to $48.31. That came on top of a 16% drop last week.

Along with worries about slowing sales, investors reacted to Cisco's announcement that it is being investigated by the Federal Trade Commission. The agency is looking into whether Cisco sought to illegally divvy up the computer-networking market with Lucent Technologies and Northern Telecom.

Trading was heavy in the options market, but sentiment was mixed. The prices of "put" contracts, which give holders the right to sell stocks at specific prices, soared for many tech companies.

For example, an option to sell Cisco this month at $50 a share soared to $4.50 from $1 on Friday. Cisco's put volume jumped to 23,000 contracts, almost four times the 10-day average.

But the options activity also illustrated the bullishness of many investors. There was an equally large jump in "call" volume for Cisco. Calls bestow the right to buy a stock at a set price. It appears that while some investors hesitated to buy the stocks themselves, they jumped into calls in case prices rebound from their lows.

"It was not overwhelmingly bearish," said Joe Sunderman, a senior research analyst at Schaeffer's Investment Research in Cincinnati. "I would have thought there'd be more put volume."

Internet stocks rebounded from heavy losses early in the day to end with relatively modest losses.

Lise Buyer, an Internet analyst at Credit Suisse First Boston, expects strong earnings from Yahoo and in the next two weeks. However, the stocks remain extremely pricey and could be vulnerable if investors ever cash out in favor of safer holdings, she said.

"The companies are performing well ahead of what anyone expected them to, but there's still a disconnect between the [stock] prices and the fundamentals," Buyer said.

Many analysts said the tech sell-off was driven largely by emotion rather than changes in the companies' outlooks--therefore a rebound may be in the offing.

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