AFTERNOON MARKET SNAPSHOT: Rate cut incites market sell-off
Fed moves by an as-expected 25 basis points
By Julie Rannazzisi, CBS.MarketWatch.com
Last Update: 4:05 PM ET Aug 21, 2001
NEW YORK (CBS.MW) -- Stocks tumbled on the back of the Fed's expected 25-basis-point rate cut Tuesday as investors focused on the central bank's still downbeat comments on capital spending.
The overnight fed funds rate now stands at 3.50 percent from 6.50 percent before the easing cycle began. It marks the Fed's seventh rate cut this year -- including two inter-meeting slashes of 50 basis points in early January and April.
In its statement, the Federal Open Market Committee said household demand has been sustained but conceded that business profits and capital spending continue to weaken. In addition, the Fed said economic growth abroad was slowing and weighing on the U.S.
"There wasn't any fresh news in the Fed's statement. It was a very balanced portrayal of the [economic situation]," said Jeffrey Kleintop, chief investment strategist at PNC Advisors. He said investors may have wanted to see a more upbeat tone in the statement and that's likely inciting the sell-off Tuesday afternoon.
Checking sector action, only oil service and chemical stocks remained higher while retail, airline, transportation and brokerage shares moved lower. All tech sectors declined, led by chip, software and Internet issues. Check market stats and latest sector performance.
The Dow Jones Industrial Average ($INDU) gave back 145 points, or 1.4 percent, to 10,174. All Dow stocks were in the red, led by American Express, Wal-Mart, Home Depot, Intel, Procter & Gamble and General Electric.
The Dow's reaction to the Fed's action Tuesday is in contrast with historical tendencies. In fact, Palm-Beach, Fla.-based HL Camp & Co. revealed that since 1995, FOMC meeting days during the month of August have seen the Dow close positive 83 percent of the time.
The Nasdaq Composite ($COMPQ) dropped 50 points, or 2.7 percent, to 1,831 while the Nasdaq 100 Index ($NDX) declined 55 points, or 3.6 percent, to 1,480.
The Standard & Poor's 500 Index ($SPX) fumbled 1.2 percent while the Russell 2000 Index ($RUT) of small-capitalization stocks slipped 1.4 percent.
Volume came in at 1.02 billion on the NYSE and at 1.30 billion on the Nasdaq Stock Market. Market breadth was negative, with decliners defeating advancers by 17 to 13 on the NYSE and by 23 to 13 on the Nasdaq.
Inside the Fed's move
In its statement, the central bank added that easing of pressures on labor and product markets is expected to keep inflation contained and noted that long-term prospects for productivity growth and the economy remain favorable.
The Fed also indicated that risks remain skewed toward conditions that may generate economic weakness in the foreseeable future, which leaves the door wide open for future rate cuts. The next FOMC meeting takes place on October 2.
"The Fed reminded us that it has already done the heavy lifting and that there's 300 basis points in the pipeline. What happens at the October meeting depends on many factors, including whether the tax rebate checks are being spent," Kleintop said.
"As in June, it reminded investors of the cumulative easing -- now 300 basis points -- which might be meant as a hint there is not much more -- if any -- easing to come. We think the Fed is done," remarked Ian Shepherdson, chief U.S. economist at High Frequency Economics.
Tony Crescenzi, chief bond strategist at Miller, Tabak & Co., echoed that the Fed's aggressive actions this year could prove enough for a while.
"By the next meeting on Oct. 2, the Fed may feel that the economic news released in September was strong enough to justify a cessation of their rate cut campaign," Crescenzi said.
Cohen's lowered targets
Goldman Sachs' influential head of investment strategy Abby Joseph Cohen lowered her year-end target for the S&P 500 to 1,500 from 1,550, acknowledging that the U.S. economic slowdown had a deep impact in corporate profits.
Cohen's target represents an upside of 28 percent from current levels. Her year-end target for the Dow Industrials stands pat at 12,500, which roughly represents a gain of 21 percent from current levels.
Cohen also slashed her S&P operating earnings-per-share projections to $51 from $56.50 for 2001 and to $56 from $61.50 for 2002. Cohen last trimmed her targets on earnings and the stock averages on April 18.
Cohen said the second quarter is likely be one of the "worst ever" in terms of declines from the prior year and shortfalls relative to original consensus expectations.
But the strategist expects earnings growth to resume in 2002, mostly in response to stabilization in domestic economic conditions, and thus expects above-trend returns from stocks over the next 12-to-18 months. She notes that stock prices have already fallen to levels that are consistent with the "new reality of corporate profits."
Cohen added that her model portfolio remains overweight in information technology and financial services and underweight in some cyclical sectors, including those with exposure to the global economy.
Individual and sector stock action
Amazon (AMZN) fell 4.9 percent after climbing almost 4 percent earlier in the day. The Net bellwether saw its rating upped by Prudential Securities to a "hold" from a "sell." The analyst said the e-tailer's deal with Circuit City mitigates downside risks in the stock.
Chip stocks saw the biggest losses in the tech group and the Philly Semiconductor Index ($SOX) slid 4.4 percent. Rambus was the biggest decliner among the SOX's components, falling 12 percent, while Motorola (MOT) bucked the trend, edging up 0.4 percent. UBS Warburg said Motorola's improved handset portfolio is positioning the company to reach profitability in the fourth quarter. The firm reiterated its "buy" rating on the stock after meeting with management Monday and said it continues to favorably view the stock based on handset momentum.
Agilent Technologies (A) added 1.4 percent after losing ground early in the session. The company said after the close Monday that it lost 24 cents a share in its fiscal third quarter, narrower than the 35-cent loss that Thomson Financial/First Call had estimated. But in an effort to cut costs, Agilent said it's slashing its workforce by 4,000 employees by mid-2002.
Among the online brokers, E-Trade (ET) climbed 4.3 percent. The company E-Trade announced late Monday that it acquired 7.19 million shares of its common stock from Softbank, its largest shareholder, for over $39 million, or $5.45 per share. Moreover, CEO Christos Cotsakos purchased an additional 2 million shares from Softbank at the same price, for a total of $10.9 million.
UBS Warburg said it's encouraged senior management is buying E-Trade shares and maintains a "buy" rating based largely on the company's revenue diversification efforts.
Retail stocks struggled as they processed earnings news in the group. Target (TGT) faltered 4.7 percent after posting a second-quarter profit of 30 cents a share, in line with estimates. The company also reiterated its goal of "reasonable growth" for per-share earnings through the rest the year and average annual earnings-per-share growth of 15 percent or more. Staples (SPLS) slumped 5.7 percent after registering a second-quarter profit of 9 cents a share, matching expectations. For the year, the company said it expects earnings-per-share of 65 to 70 cents, also in line with expectations.
American Eagle Outfitters (AEOS) tumbled 28.1 percent. The company reported late Monday second-quarter earnings of 21 cents per share, which matched the Wall Street consensus estimate. But the casual apparel outfit but lowered its third-quarter financial targets. And Talbots (TLB) fell 9.7 percent after reporting second-quarter earnings of 28 cents a share, a penny ahead of Wall Street expectations.
Shares of Coach (COH) climbed nearly 3 percent. UBS Warburg raised its rating on the upscale retailer to a "strong buy" from a "buy" based on expectations for above-average growth rising from its newly formed Japan joint venture. Warburg said earnings growth could be sustained at a rate of around 17 to 20 percent annually over the next few years, with international growth representing a big opportunity for Coach.
Medical device market Guidant (GDT) saw its shares fly almost 12 percent after announcing a deal with privately held Cook to distribute drug-coated stents, which are used to open clogged arteries. The stock was upgraded by Merrill Lynch, US Bancorp Piper Jaffray, Wedbush Morgan and Deutsche Banc Alex. Brown on the wings of the deal.
Check for individual stock market action.
Treasury focus
Government bonds climbed following the Fed's move to ease, taking their cues from soggy stock prices.
The 10-year Treasury note jumped 10/32 to yield ($TNX) 4.87 percent while the 30-year government bond put on 9/32 to yield ($TYX) 5.435 percent.
No economic news was released on Tuesday and no data is on tap Wednesday. and economic calendar and forecasts.
In the currency sector, the dollar declined against the major currencies after news of the Fed's rate cut hit wires. The greenback shaved 1.0 percent to 119.52 yen while the euro rose 0.3 percent to 91.67 cents.
-------------------------------------------------------------------------------- |
