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Downgrades and PPI weigh on stocks

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U.S. stocks were slouching toward a weak start on Friday as broker downgrades on Dow Industrials members Intel and General Electric and weak U.S. economic data sapped enthusiasm.

Inventories at U.S. businesses widened by 0.5% in September, the biggest increase in nearly two years as retail sales slumped, the Commerce Department estimated Friday.

Total business sales fell 0.5% in September, the government said.

The drop in sales left businesses with overstocks in their backrooms.

The crucial inventory-to-sales ratio rose to 1.36 from a record low 1.35 in August. At current levels, inventories are not a worry.

There was a rather larger surprise in the producer price index as it rose 1.1%. Economists looked for a 0.2% gain, betting that the tame inflation that has allowed the Federal Reserve to leave interest rates at historic lows would continue.

The core rate of inflation, which excludes the volatile food and energy components rose 0.5% compared to the flat reading expected from Wall Street.

"The buzzword on Wall Street has been 'deflation,' so a bigger- than-expected PPI number is arguably good," said Art Hogan, market strategist with Jefferies & Co.

Hogan said downgrades of Dow Industrials components Intel and GE, and a $500 million convertible bond deal by 3M (NYSE:MMM), as well as a fresh warning from the FBI on a possible terrorist attack, are weighing on the market.

This morning's PPI numbers have found selling in Treasuries as YIELDS across the major maturities are on the rise.

Equity futures have turned lower with S&P futures (sp02z) down 4.5 points at 898. NASDAQ futures (nd02z) are off 5.5 points at 1,046 and Dow futures (dj02z) are down 50 points at 8,470.

Fair value for the S&P 500 today is $0.18. That price will not change during the session. HL Camp & Company has their computers set for program buying at $1.38 and set for selling at $-1.28. Fair value for the NASDAQ-100 today is $1.75.

After the close of trading yesterday, market leader Dell Computer (NASADAQ:DELL)$30.94 met the consensus expectation for its third quarter, but executives quelled enthusiasm after Dell's President Kevin Rollins said the outlook for the information technology sector remains unclear. "There is no current sign of a strong rebound in IT spending," Rollins said.

The message isn't new in the tech sector, but dealers pointed out that the Dell view carries weight, as the PC maker has been gaining market share.

Dell said revenue should grow 20% in the fourth quarter, year- over-year to $9.7 billion, but some analysts were said to be privately hopeful that Dell would set its revenue target at $9.9 billion.

Dell offered little help on a fourth quarter industry unit outlook," Credit Suisse First Boston told clients. "The company suggested a range of mid single digits to high teens although it is planning internally for 10% unit growth. We believe Dell is conservative in its guidance since most expect the industry to grow around 10% in fourth quarter and Dell usually meets or exceeds the fourth quarter industry growth rate."

J.P. Morgan cut its fourth quarter revenue forecast for Dell by $163 million to $9.7 billion.

"We had expected Dell to provide guidance in-line with our above- consensus revenue estimate," the broker said. "In our view, the company's guidance is a cautious move owing to limited visibility on holiday PC demand and increasingly aggressive pricing trends." INTC, etc cut to 'sell'

Merrill Lynch is taking a new look at valuation in the chip group, and cutting Intel (NASDAQ:INTC), Analog Devices (NASDAQ:ADI), Applied Micro Circuits (NASDAQ:AMCC), Conexant (NASDAQ:CNXT), PMC-Sierra (NASDAQ:PMCS) and Vitesse Semiconductor (NASDAQ:VTSS) to "sell" from "neutral."

Merrill did raise Nvidia (NASDAQ:NVDA) to a buy from a neutral and raised Linear Technology (NASDAQ:LLTC) and Maxim Integrated (NASDAQ:MXIM) to neutral from sell.

"Every valuation exercise that our team undertakes, from out-year price/earnings to our ROOC analysis, suggests that semiconductor stocks are already discounting a fourth quarter seasonal upturn," Merrill said. "The result is a risk/return profile for the sector that we find unappealing over the next 0-12 months."

JP Morgan is downgrading its rating on General Electric (NYSE:GE) to "underweight vs. the sector given our view of short term risk. The broker also lowered its 2003 earnings estimate to $1.60 per share from $1.70, telling clients: "earnings growth in the next two years will be skewed to GE Capital and acquisitions. We estimate the core operating earnings for industrial businesses will be down next year, and 2004 also looks difficult. Given lower multiples for financial service companies, this has negative implications for the blended GE multiple."

Jeff Bailey

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