T he good news is, the third quarter is over for investors in U.S. stock funds. The bad news is, the fourth quarter got off to a lousy start.

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The first day of October found major market indexes down as the technology sector, the key support to the overall market, tripped up. All it took was a warning from computer- and printer-maker Hewlett-Packard that its fourth-quarter earnings will be off (because of supply disruptions resulting from last month's earthquake in Taiwan) to stoke fears that this linchpin might be ready to snap. Adding to the pessimism, some note that the number of names leading the technology charge has grown smaller and smaller.

While gold's reversal of fortune last week led managers of those funds to tentatively embrace the notion that conditions may be right for a more lasting bullish trend, Robert Friedman, a noted value player and chief investment officer of the Franklin Mutual Series funds, viewed the move more skeptically: 'That's like the corpse having one last heartbeat.'

The average diversified stock fund fell 5.38% in the quarter, according to preliminary data supplied by Lipper, a Reuters fund-tracking service. The S&P 500 fell 6.56%, slipping each month of the quarter. That's the first time it lost ground in a three-month period since Iraq's invasion of Kuwait in 1990. The Dow Jones Industrials fell 5.78%. The Value Line Arithmetic Index sank 10.33%. The Russell 2000 gauge slipped 6.64%. Only the tech-heavy Nasdaq Composite ended in positive territory, up 2.24%. Year-to-date, if technology stocks are removed from the equation, all indexes are down.

Bright spots for fund investors in the quarter: the average technology fund gained 7.02% while gold funds delivered 18.47% on average, with most of its move coming in the last few days of the quarter. Natural resources, helped by exposure to gold, advanced 1.19%. Of course, the international arena performed admirably, with the average international fund up 3.88% and Japanese funds up 22.97%.

Something else to cheer about: Small- and mid-cap stocks held up amid the bloodletting. 'Small-cap stocks are no longer on the critical list,' pronounced Theodore Aronson of Philadelphia-based AronsonPartners, noting that the wide gap that existed between the gains posted by large-cap company stocks and that of small-caps narrowed considerably. Smallcap growth funds gained 0.82% in the quarter and mid-cap growth advanced 0.54%. That compares with a decline of 3.61% in large-cap growth funds and 6.35% in S&P 500 index funds. For September, the S&P small-cap index gained 0.40% and the Russell 2000 eked out 0.02%.

Still, big remains more beautiful, notes Aronson, and the growth style of investing continues to beat the value style in what's become a relentless pattern. For the year, the S&P 100, an index of megacap stocks, is up 12%, and the S&P small-cap is off 0.16%. The S&P Barra Growth index is up 7.27% and the S&P Barra Value index is up 3.25%.

Frustrated, Aronson still stops short of speaking in terms of a bear market because 'nothing extreme has occurred.' There's been 'sloppy selling' but no 'panic selling,' and the market declines fall short of the 15%-20% generally associated with bear markets. It weighs on his mind, though, conceding that 'all of us are shaking our heads.'

'We still think it makes sense to buy cheap stocks,' says Aronson, who concedes that his quantitative method of choosing stocks is not a 'pure' value selection process. 'The rest of the world doesn't, but they should and they will; the question is when.'

A ramp-up in profit warnings from names such as Coca-Cola and Gillette on what appears to be a loss of pricing power, in addition to the slump that most sectors find themselves in, concerns Friedman of Mutual Series that the beginning stages of a bear market might be under way. But, ever the value manager, he opines, 'I'm pleased in a sense. The only way we're going to make money is when stocks get beaten down.' He spies opportunities in the automotive parts sector, citing Delphi Automotive Systems and its conservative and 'clear-vision' accounting practices. (See article more on Delphi.)

Steep Discounts

B low-ups in the property and casualty insurance sector have given Mutual Series the chance to buy many of them at steep discounts to their book value. He's picked up W.R. Berkley , run by a smart guy who's invested his own money in the company, as its shares languish around 22, well below its book value of around 33. Old Republic is another name that Friedman and his fellow portfolio managers at Mutual Series seized upon as it fell to about 14 1/2 a share, below its book value of 18, noting though that its title and mortgage insurance businesses make it more interest-rate sensitive.

How individuals respond to the red ink that will likely show up in the quarterly statements they receive from fund companies and financial planners in the next few weeks remains to be seen. Responding to client demands, financial planners this year have increasingly turned to individual stocks and index funds to manage their clients' money. Richard Bregman of MJB Asset Management is one of those who have been buying index funds and large-cap stocks such as Coca-Cola, Gillette and Intel to give his clients exposure to the large-cap sector.

'My stocks had a good July and a pretty good August,' he recalls. 'My funds hadn't done much, but my stock picks were okay. Then came September and I got annihilated in my stocks. I'm nervous. I don't know what I'm going to say to clients. For the people I convinced to move in September, it's not going to be pretty at all.'

Through the decline, however, he's been busy buying more stocks on the expectation that the market will come back as it did a year ago. Those clients that demanded to be put in cash at that time, he points out, missed out on a big run. Whether the notion of buying-on-the-dips still rings as true for other investors will likely hold the key to which way we go from here.

O ne of the guests at a luncheon last Monday in Manhattan, hosted by the Southern gentlemen running Memphis-based Longleaf Funds, was not there as a client ready to nitpick about portfolio performance. Rather, he was a friend, a peer, and a fellow value manager who cares deeply about getting the most out of investments for shareholders.

A native of Atlanta, Rob Friedman, the chief investment officer of the Franklin Mutual Series funds, also lays claim to being a Southern gentleman. And he's a longtime friend of Longleaf manager Staley Cates. But Friedman mainly was there in his role as shareholder agitator.

After dessert and coffee were served and the guests were gone, the money managers talked about some of the companies whose stocks they hold in common and bandied about different ideas to 'rattle the cages' of corporate managements that they feel aren't serving shareholders well.

Friedman says the discussions amounted to 'shooting the breeze' and insists it would be 'premature' to say what would come of the talks. But for two large holders in some of the same situations where the value of good assets isn't being recognized, the notion of sharing information and forming an alliance made sense.

One name that pops up in both portfolios is Hilton Hotels , which closed Friday at 9 3/4, down from a 52-week high of 17 1/8 . In early September, Hilton agreed to pay a steep price for Promus Hotel Corp. at a time when the hotel market in general is softening and its Doubletree brand is struggling. The $4 billion cash-and-stock deal upset holders because it is expected to dilute earnings by about 6% next year. Longleaf is familiar with Promus because it, too, is based in Memphis; indeed, it was a big holding in the Longleaf Realty Fund.

A s agitators go, Harris Associates of Chicago doesn't generally spring to mind as being on the forefront of corporate cage-rattling.

But it's a sign of the times, especially for value players, when Harris files a 13D demanding the sale of a company after getting nowhere in discussions with management. Harris, which manages the Oakmark family of funds, took the unprecedented step after its disappointment with Dun & Bradstreet management deepened to the point of despair. Owners of the stock for about three or four years, Harris and its Oakmark funds finally decided to fight to improve value when it became clear to them that management's business strategy would never lift the stock to its true value.

Based on recent transactions, Bill Nygren, the portfolio manager of Oakmark Select and a partner in Harris Associates, thinks D&B should trade at between $40 and $60 a share, instead of the 23 it sold for at the time of the filing. D&B closed Friday at 29 5/8 .

'This is an unusual step for us,' says Nygren. 'It really is an isolated event.' After discussions with management failed to bring about any meaningful change and correspondence to the board didn't elicit any response, Harris felt forced to make its demands public. Why a sale?

'The acquisition market is so robust,' Nygren points out. 'The gap between public values and private values is very large. The strategic value of Dun & Bradstreet assets to a buyer would far exceed the value you would get by bringing in new management.'

W e were glad to see gold rally last week, if only because it afforded the opportunity to talk to some really smart and friendly fellows and find them in a cheery mood for a change. Even Jean-Marie Eveillard, the Frenchman who runs the SoGen Gold fund, was given to a bit of uncharacteristic ebullience. 'It's a major turn of events,' announced Eveillard, who at one time was considering liquidating his six-year-old fund.

'It's a whole new ballgame.'

When the major central banks of Europe united last week to curtail speculation by announcing they would limit the amount of gold they sell and the amount of money they would lend to gold hedgers, the stage was set for a spectacular runup in the yellow metal's price from 20-year lows. The banks also were clearly responding to lobbying by African nations that had been hurt by the slump. The move surprised everyone. Maybe more importantly for people wondering if they should put any money into this sector, the central banks affirmed that they considered gold an important asset class.

The move has been so swift and furious -- gold funds went from negative territory to double-digit gains in a day -- that investors are naturally waiting to see if the rally is sustainable this time. A year ago, gold funds did well as markets around the world hit the skids. This move, however, has nothing to do with inflation or currency turmoil but everything to do with reduced supply and, hopefully, sustained demand. The key, says Caesar Bryan, manager of the Gabelli Gold fund, is to watch lease rates -- the rates charged to borrowers of gold. 'As long as lease rates stay high, there's still stress in the system and that would suggest higher prices,' observes Bryan.

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No one could be happier than Frank Holmes, chief executive of U.S. Global Investors, a San Antonio firm that built its reputation on gold. It's been attempting to redefine itself as a more diversified asset manager as the metal's market has shrunk to about $40 billion, about one-tenth the market cap of Microsoft .