Productivity Gains Don't Impress Bears

STOCKS SQUANDERED modest gains Tuesday as jitters ahead of an earnings report by Cisco Systems (CSCO) offset strong productivity gains.

The Federal Reserve did the expected thing in leaving interest rates alone to safeguard a tentative economic recovery.

The Dow coughed up a triple-digit lead to finish 28 points ahead at 9836, while the S&P 500 fell 3 to 1049. The Nasdaq briefly came up for air then sank again, dropping 4 to 1573.

The Nasdaq has declined 19% so far this year. With 162 Nasdaq stocks setting new lows, traders worried that having fallen so far so fast, the index was headed for a sell-off more dramatic than Monday's 2% plunge.

Drug makers, biotechs and natural gas suppliers went from bad to worse. Retailers and other consumer plays fared best alongside broadcasters and home builders.

Cisco gained 1% ahead of its report, before rocketing 13% higher in afterhours trading. The networking bellwether posted pro-forma fiscal third-quarter earnings of 11 cents a share. That was two cents above the consensus forecast and much better than the three cents a share earned a year ago. But revenues stagnated amid a crash in capital spending by telecom firms who are still Cisco's largest customers. Some analysts had been concerned that forecasts for growth over the next fiscal year will have to come down as well.

Investors took heart from a government report that showed productivity grew at an impressive annual rate of 8.6% during the first three months, thanks to a 5.4% drop in unit labor costs. Many experts expect strong productivity gains to fuel a rebound in corporate profits later this year.

That rebound may not come until next year for IBM (IBM), the blue-chip computer giant whose stock fell to a three-year low Monday. New Chief Executive Sam Palmisano recently warned employees more cost cuts are in the offing, according to The Wall Street Journal. "It's clear that the industry isn't bouncing back this year" and "not going to be growing at 10%-or-11% next year either," the newspaper quoted Palmisano as saying.

Salomon Smith Barney cut its price target on the stock to $90 early Tuesday. "We would be surprised if IBM's recent 10% FY02 revenue shortfall did NOT prompt management to take a hard look at structural costs," noted analyst Richard Gardner in a note to clients. The stock rose less than 1%.

Energy traders' stocks clogged the S&P 500 cellar on fears they joined Enron (ENRNQ) in exacerbating California's energy shortages last year. Dynegy (DYN) shares dropped 17% a day after regulators released Enron memos describing get-rich-quick trading schemes with colorful names like "Fat Boy," "Get Shorty" and "Death Star," and hinting at the involvement of other suppliers. Lehman downgraded several of the stocks, citing worries that they will have to issue new equity to shore up debt-laden balance sheets. It singled out Dynegy as the player with the most "credibility issues" with regulators.

Lehman's own stock gained 1% even as probes tied to the collapse of Enron and the Nasdaq bubble darkened the outlook for investment banks.

Posting the best results among the large-caps were mostly the tarnished stocks getting a belated lift from bottom-fishers. Telecom fixer-upper WorldCom (WCOM) gained 20% on expectations that it would drastically cut costs and sell off its wireless business. Providian (PVN), a restructuring lender selling off at a loss risky credit-card loans approved in better times, appreciated 9%. The company's loss reserves were twice as large as a year ago, but it still beat expectations by eight cents with operating earnings of two cents a share.

The stock of database supplier Oracle (ORCL) held its ground for once despite a downgrade from CIBC World Markets, which cautioned that business won't recover for at least another year. Some of the missing sales were captured last year by rivals IBM and Microsoft (MSFT), reported the Gartner consultancy..

Microsoft felt confident enough to go shopping overseas even as its stock threatened to set a new low for the year. Gates & Co. is spending $1.3 billion on the Danish software supplier Navision, which caters to small and medium-sized businesses. Microsoft shares rose 2%.

But the rest of the sector has more in common with Lawson Software (LWSN), which warned that fiscal fourth-quarter earnings will amount to a penny or three a share, short of analysts' 11-cents-a-share target. Its sales forecast disappointed as well. The stock fell 46%.

Another business software supplier, Manugistics Group (MANU), saw its stock drop 33% after analysts warned the current quarter could disappoint.

Government bonds rallied late, depressing yields, helped by speculation that the Fed said little because it had little good to say. The yield on the 10-year note fell to 5.04% from 5.07% Monday, while the two-year note yielded 3.09%, down from 3.13% a day earlier