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Chip, software companies drag stocks lower

Tech stocks tumble after investors face the most ominous words on Wall Street: "excess capacity" and "earnings warning."

Tech stocks tumbled today as investors were spooked by some of the most ominous words that can be uttered on Wall Street: "excess capacity" and "earnings warning."

The doubly whammy came in the form of an earnings warning that swept through the software sector and an analyst's concern that the semiconductor sector could be showing signs of overcapacity.

As a result, the Nasdaq composite index fell 128.83, or 3 percent, to 3,863.10, and Standard & Poor's 500 index dropped 23.09 to 1,446.23.

The Dow Jones industrial average fell 77.07 to close at 10,483.60, led by IBM, which fell $5.50 to $104.

Among the larger tech companies, Intel shares closed down $5.25 at $131.63 while Microsoft fell $1.50 to $78.50.

Software makers Entrust Technologies, Computer Associates and BMC Software warned this week that earnings for the current quarter would not meet analyst expectations, which sparked a wave of selling in the software sector.

Entrust fell $40.50, or nearly 53 percent, to $36.63 on a volume that almost reached 19 million shares, nearly 16 times the stock's average daily volume. In terms of percentage, Entrust was the biggest loser on the Nasdaq today.

Shares of Computer Associates fell $21.63, or 42 percent, to $29.50. Volume topped 39 million shares, more than 13 times the stock's daily volume.

BMC dived $14.19, or almost 40 percent, to $21.31 on a volume of 37.5 million shares, about 11 times the stock's average volume.

BMC and Computer Associates attributed the earnings shortfall to lower-than-expected licensing revenue from their mainframe software businesses.

"We're in a period where pre-announcements take center stage," Chuck Hill, director of research at First Call, said of the pending earnings-reporting season. "I think that the announcements from both these companies are hitting them harder than usual because (the news) is being viewed as more than a first-quarter problem."

However, Hill said, "this does not indicate a broader problem within technology and software in general." He added that earnings for software companies this quarter are expected to be 22 percent higher than the second quarter of last year.

"I don't think you can draw too many conclusions (about the earnings season) because it's a post-holiday trading day," said Tony Cecin, head of trading at U.S. Bancorp Piper Jaffray.

Cecin added that "it doesn't take much to send the market in either direction."

Semiconductor stocks also fell sharply after Salomon Smith Barney analyst Jonathan Joseph said the chip sector will see slower shipments and falling prices sooner than most observers expected.

"Though a slowdown in the group may take six to nine months," Joseph wrote, "we see 'first mover' evidence of a trend reversal in decelerating industry unit shipments coupled with price declines."

He noted that peaks in capital spending, or spending for manufacturing equipment, have closely correlated with peak shipment numbers at the apex of any given industry cycle. Joseph said he expects that the semiconductor industry will peak this year.

"Peak years in capital spending (or the purchase of manufacturing equipment) closely correlate with peak years in semiconductor growth. We believe strongly that semiconductor cycles are mostly defined by excess capacity rather than by a falloff in demand, particularly in (the) economic boom of the 1990s," he said.

Joseph also released some discouraging research about semiconductor stocks. "Going back nearly 40 years, semiconductor stock performance has shown one major trend in peak years: The group has underperformed the (Dow) and the S&P 500 during the year."

His report helped dragged down several stocks: National Semiconductor fell $8.19, or 14 percent, to $49.94; Advanced Micro Devices dropped $9.75 to $74.50; Novellus fell $7.44 to $51.50; and Altera slid $13 to $92.44.

The Philadelphia semiconductor index fell 110.10, or a whopping 9 percent, to 1,070.81, led by chip equipment maker KLA-Tencor, which lost $8.25, or 14 percent, to close at $50.06.

The CNET tech index lost 92.95 to close at 2,751.51. Decliners demolished advancers, with 83 of the 94 stocks in the index falling, nine rising and two remaining unchanged.

Nearly all of the 18 sectors recorded losses. Server software and semiconductor equipment companies posted the sharpest drops, falling about 9 percent each. Computer-assisted design and manufacturing companies were the day's only gainers, climbing a slim 0.01 percent.

Among members of the CNET tech index, Qwest Communications International was one of the few companies that managed to post strong gains. The stock rose $4.81, or 9 percent, to $56.56.