Stocks Mixed as Retail Shares Fall; Nasdaq Up

Stocks closed mixed Wednesday as investors digested the dual effects of modest inflation brought about by a cooling economy.

The Dow Jones industrial average fell 58.61 points, or 0.5%, to 11,008.39. Broader stock indicators were mixed: The Standard & Poor’s 500 dipped 4.58 points, or 0.3%, to 1,479.85, while the Nasdaq composite rose 9.54 points, or 0.3%, to 3,861.20.

A sell-off in retail stocks helped drag down the Dow. Home Depot fell $2.50 to $51 and Wal-Mart Stores slid $1.63 to $49.94.

Investors dumped retail shares in the fear that second-half profits could fall short of expectations if consumer spending eases in step with the Federal Reserve’s policy of hiking interest rates to cool the economy to fight inflation. Economic data released Wednesday provided further evidence that the Fed’s strategy to slow the economy may be working.

“There’s been some disappointment with the stalwarts among retailers,” said Joe Stocke, a money manager at StoneRidge Investment Partners in Malvern, Pa.

An analyst at Salomon Smith Barney downgraded Home Depot to “outperform” from “buy,” saying the company’s margin improvements and sales increases could lessen as the economy slows. He cut his fourth-quarter profit estimate for the company by a penny.

Donaldson, Lufkin & Jenrette downgraded Home Depot, Wal-Mart and Costco Wholesale, which eased $1.69 to $33.06.

“Everybody’s scared about [retailers’] earnings disappointments becoming more pronounced,” said John Cleland, chief investment strategist with Security Benefit Group, a money manager in Topeka, Kan.

A handful of technology stocks helped keep Nasdaq in positive territory. Online auctioneer EBay led Nasdaq gainers, jumping $5.63 to $57.50 after a brokerage analyst set a $70 price target. Internet portal companies Yahoo, up $1.69 to $134, and Lycos, up $3.13 to $61.06, also provided a lift.

Advancing issues outnumbered decliners by a 4-3 ratio on the New York Stock Exchange, where volume was up slightly from Tuesday’s pace, and by a slender margin on Nasdaq.

In the bond market, Treasury yields edged up amid anxiety over interest rates.

Among commodities, coffee futures fell for a third straight session, reaching a 6 1/2-year low, after an industry report showed a larger-than-expected increase in U.S. inventories.

Other equity highlights:

* Elsewhere in the retail sector, Ross Stores fell $1.47 to $15.13 after the chain of off-price apparel stores warned its third-quarter earnings could fall below the 38 cents a share reported in the year-earlier quarter.

Home-goods seller Williams-Sonoma skidded $3.56 to $36.31.

* Several software stocks powered higher. Kana Communications rose $5.50 to $38 as the company said it will work with IBM to help corporate clients manage their online communications with other companies and customers.

BEA Systems rose $8.13 to $57 after the electronic-commerce software maker reported second-quarter profit that beat analysts’ estimates by a penny.

But Mercator Software fell $12.88 to $16.06 after the maker of products that link incompatible computers delayed its quarterly financial filing.

* Among telecom stocks, Alltel dropped $5.81 to $56.75 as the stock was downgraded at First Union Securities, which trimmed its profit estimates for the third and fourth quarters.

* In the chip group, equipment maker Applied Materials rose $3.13 to $80.94 and National Semiconductor rallied $1 to $42. The Philadelphia semiconductor index has risen 14% over the last four sessions.

* Biotech stocks declined after a technical analyst at Arnhold & S. Bleichroeder said the sector will probably face a pullback and weakening momentum in the near term. Immunex fell $6.75 to $40.31, Cephalon sank $4.25 to $42.63, Incyte Genomics sagged $2.34 to $68.94 and Celera Genomics dropped $2.50 to $83.

* Profit-taking helped pull down the financial services sector across the board.

J.P. Morgan declined $4.25 to $142.44, Chase Manhattan dropped $1.44 to $50.38, Morgan Stanley Dean Witter lost $3 to $98.50, Goldman Sachs Group fell $5.19 to $113.

The financial group may also face “some concerns about credit quality,” said Stocke of StoneRidge Investment Partners, because loan defaults are more likely as the economy slows.

* UST rose $1.88 to $19.94 after an analyst at Salomon Smith Barney suggested the parent of the company that makes Skoal and Copenhagen snuff tobacco could be acquired by R.J. Reynolds Tobacco Holdings. R.J. Reynolds gained $1.44 to $36.

* Pepsi Bottling Group slipped $3.56 to $28.50 as two analysts lowered their third-quarter estimates for volume growth for the beverage distributor, citing slower East Coast sales after a rainy summer. PepsiCo slid $1.94 to $44.

* Among Southern California stocks, Rubio’s Restaurants tumbled $3.25 to $6.13 after the Carlsbad-based restaurant chain said it expects lower same-store sales for the year, citing a huge increase in electricity costs because of the utility deregulation of the California market.

Quest Software of Irvine rose $3.19 to $55.69 after the maker of database software was upgraded to “strong buy” at Robertson Stephens.

Market Roundup, C11-12