IBM and Microsoft Drag Down Indexes

Technology stocks sank Friday for a third straight day as investors reacted to disappointing comments from tech bellwethers IBM Corp. and Microsoft Corp. about the outlook for this year. The losing streak has erased two-thirds of Nasdaq’s gains for the new year.

Stock market analysts said some investors also were reluctant to hold big positions going into a long holiday weekend, especially against a backdrop of weak economic signals and the rising threat of war with Iraq.

“Everybody’s still jumpy,” said William E. Rhodes, chief investment strategist at Rhodes Analytics in Boston. “They took some money off the table, and now they’re saying to the tech firms: ‘Prove it. Show me some earnings.’ ”

The Nasdaq composite index fell 47.56 points, or 3.3%, to 1,376.19, its worst one-day drop since Dec. 9. The tech-heavy index, which as of Tuesday was up 9.4% for the year, now is showing a gain of just 3.1% for 2003.

The Standard & Poor’s 500 index lost 12.82 points, or 1.4%, to 901.78, with technology shares accounting for more than half of the loss.

The three biggest tech stocks among the Dow Jones industrials -- IBM, Microsoft and Intel -- also were the biggest losers in the blue-chip index, bringing it down 111.47 points, or 1.3%, to 8,586.40.

IBM dropped $4.75 to $81.30, Microsoft sank $3.89 to $51.46, and Intel lost 86 cents to $16.34.

Losers outnumbered winners by 2 to 1 on the New York Stock Exchange and Nasdaq in moderate trading.

The three-day slump dragged all three of the major indexes to their first losing week of the new year, with Nasdaq falling 4.9%, the S&P; 500 losing 2.8% and the Dow shedding 2.3%.

Subodh Kumar, chief investment strategist for CIBC World Markets, said investors appear to be looking at the negative side of the technology picture.

“The fourth-quarter numbers clearly show things are improving,” he said, but the markets seemed to focus instead on the companies’ cautious comments about the future.

Microsoft, for example, on Thursday announced its first dividend and a 2-for-1 stock split and reported earnings that were better than the Wall Street consensus. The shares slid because the company said it didn’t see signs of improving demand for at least the next two quarters.

IBM’s fourth-quarter profit -- though weaker than a year earlier -- also exceeded analysts’ expectations. The bad news, in a comment from Chief Financial Officer John R. Joyce, was that the software market will continue to be “difficult” this year.

Analyst Robert Austrian, who follows Microsoft for Banc of America Securities, said after the recent run-up in tech shares, nervous investors “are taking a bit of it back.” A sustained rally in tech shares probably won’t come until there is “a more positive indication” of information technology spending, he said.

Although profit taking may have sparked the three-day mini-slump, a more pressing problem is the possibility of war, said Krishna Shankar, an analyst who covers Advanced Micro Devices for JMP Securities.

“The geopolitical situation is having an effect on spending plans for technology,” Shankar said, adding: “CEOs take a very cautious view toward new projects, given all the insecurity.”

AMD shares dropped $1.17 to $6.03 after the computer chip maker reported a wider-than- expected fourth-quarter loss. A key index of semiconductor stocks fell 5.7%

Economic reports suggesting continued sluggishness in the economy also weighed on investors’ minds Friday.

Consumer sentiment soured further, industrial production fell more than expected, and the U.S. trade deficit swelled to a record $40.1 billion in November.

The University of Michigan reported that its consumer sentiment index for January fell to 83.7, from 86.7 in December. Analysts had expected the reading to hold up better.

High household debt levels and slumping confidence may restrain consumer spending and economic growth in the months ahead, said Rhodes, the Boston strategist. Stocks in the consumer discretionary category -- autos, shoes and restaurants, for example -- probably will struggle as a result, he said.

Meanwhile, oil rose to its highest level in more than two years, rising 25 cents to $33.91 a barrel in New York trading, after U.S. officials said they had proof that Iraq was hindering U.S. weapons inspectors.

War jitters also sparked further declines in the dollar, which fell to a new three-year low against the euro.

Market Roundup, C4-5