97 Gets Off to Weak Start As Manufacturing Index Rekindles Rates Fears

Bank stocks continued to languish on Thursday as positive economic data refueled fears of higher interest rates.

The National Association of Purchasing Managers reported that its index on manufacturing activity rose to 54 in December, from 52.7. The news sent the bond and stock markets plummeting.

The Standard & Poor's bank index fell 1.06%, to 448.99, while the Nasdaq bank index, made up mostly of thrifts, fell 0.59%, to 1265.9.

The Dow Jones industrial average, which shed as much as 96 points during midday trading, lost only 0.9% to finish the day at 6442.49. The S&P 500 declined 0.51%, to 736.99.

"The increase in the purchaser's index was not all threatening, but the bond market took it in a bad way," said economist Scott Brown of Raymond James & Associates. "The report partially brought down the stock market, and bank stocks are already in a skittish mood."

In spite of the downslide in thrift stocks, analyst Thomas O'Donnell of Smith Barney continues to be bullish on thrifts, stating they have an upside of 10% to 20% left to go in the year.

"Thrifts are a safe haven," said Mr. O'Donnell. "If the market goes down, the credit quality concerns won't affect these companies because they have already gone through those problems."

Separately, Ryan Beck & Co. downgraded T.R. Financial Corp. to "hold" from "buy" on Thursday because the stock price surpassed the company's target.

Analyst John Kline said T.R. Financial's shares appreciated 21.7% over the last month, while the Nasdaq bank index gained only 0.7% and S&P's index declined 2.1% in the same period.

"The stock has had a heck of a run," said analyst John Kline. "But I would not be an aggressive buyer at these (stock price) levels. If the stock came off a couple of points, investors could add a position."

Shares of the Long Island, N.Y., thrift also hit its 52-week high of $35.50 on Dec. 31, on more than four times average daily volume - the highest it has been all year.

T.R. Financial's shares fell 75 cents, to $34.75, on a day when bank and thrift stocks were sluggish.

Some traders, however, speculate that the stock's loftiness - particularly on New Year's Eve - was the result of short-order execution traders, or small investors who can execute their trades faster through sophisticated computer software. Short-order execution "bandits" bid up the stock in hopes of locking in profits at the expense of short-sellers, some traders noted.

However, Mr. Kline said that he encourages long-term investors to hold their shares.

"T.R. Financial is an efficient franchise, which has done an excellent job increasing their earnings per share every quarter since they went public," argued Mr. Kline. "They've done a great job improving asset quality, generating strong loan growth, and increasing their dividends."

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