MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING THURSDAY, MARCH 5, 1998 (1)
Friday, March 6, 1998
Wall Street stocks tumbled in the aftermath of Intel Corp.'s shock warning about its first-quarter earnings. Bay Street ended its nine-day winning streak, but Canadian stocks held up well.
Intel Corp. (INTC/NASDAQ) fell US$10 7/8 to US$759 1/816 in unusually brisk trading as investors reacted to one of the first signs that the high-flying market could be met with a serious slowdown in first-quarter profits.
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As Intel fell, it dragged a host of other tech stocks along, including Dell Computer Inc. (DELL/NASDAQ), which lost US$7 to US$131 7/8; Cisco Systems Inc. (CSCO/NASDAQ), which dropped US$3 3/8 to US$61 7/8; Sun Microsystems Inc. (SUNW/NASDAQ), which shed US$3 to US$439 1/816; and Texas Instruments Inc. (TXN/NYSE), which lost US$2 1/4 to US$52 3/4.
But a handful of the sector's bellwethers managed to duck the full fusillade that hammered Intel. Microsoft Corp. (mfst/nasdaq) turned down a modest US$2 1/4 to US$801 1/816, while International Business Machines Corp. (IBM/NYSE) was nicked for just 1 1/816 and finished at US$9815 1/816.
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The Dow Jones industrial average, with just two true technology names in its lineup - IBM and Hewlett-Packard Co. (hwp/nyse), which dropped 9 1/816 to US$6115 1/816 - suffered a relatively modest decline, dropping 94.16 points, or 1.1%, to 8445.08.
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By comparison, the technology heavy Nasdaq composite index surrendered 47.78 points, the third-worst one-day beating in its history, on a points basis. The loss of 2.72% dropped the index to 1711.92. Intel, which makes up 6.4% of the Nasdaq composite, accounted for almost half that loss.
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Declining issues beat advancers on the New York Stock Exchange by 2,122 to 803. Big Board trading reached 652.9 million shares, just ahead of the 642.4 million shares on Wednesday.
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Intel shares were the most active issue in the Nasdaq market, with 92.4 million shares changing hands. That total, though, was well off the record of 171.8 million shares of Oracle Corp. that traded Dec. 9.
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The Toronto Stock Exchange 300 composite index fell 15.04 points, or 0.2%, to 7127.74, rebounding from an early 65-point loss. On the broader TSE, decliners outpaced advancers 579 to 424, with 277 issues unchanged. A total of 114.9 million shares changed hands, valued at $2 billion, compared with a three-month average of 108.73 million.
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Northern Telecom Ltd. led the decline but banks tempered losses.
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"We're under pressure with the Intel blues pointing to softness in the U.S. economy and that's filtering through to Canada," said Philip Strathy, a portfolio manager with Strathy Investment Management Ltd.
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Northern Telecom (NTL/TSE) fell $1.95 to $74.75; BCE Inc. (BCE/TSE), which owns 51.7% of Northern Telecom, slipped 75› to $51.25; and Newbridge Networks Corp. (NNC/TSE), a rival of Northern Telecom, fell $1.65 to $32.60. Newbridge, Northern Telecom and BCE account for a combined 10% of the TSE 300.
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Most computer-related issues fell, with the TSE's software industry index declining 38.81 points, or 1.5%, to 2481.86, and the hardware index declining 366.1 points, or 2.4%, to 15146.36.
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Barrick Gold Corp. (ABX/TSE) eased 10› to $27.20 and Placer Dome Inc. (PDG/TSE) lost 25› to $17.50 as gold for April delivery fell US$2.30 to US$293.50 an ounce in New York.
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Royal Bank of Canada (RY/TSE) gained 40› to $82.60 after reporting fiscal first-quarter profit rose a greater-than-expected 16%. But Canadian Imperial Bank of Commerce (CM/TSE) fell 50› to $44 after announcing profit before a charge fell 2% to 84› a share from 86› a year ago. Six analysts surveyed by IBES Inc. had forecast earnings of 86›.
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In other markets, the Montreal Exchange market portfolio index fell 11.94 points, or 0.3%, to 3641.89.
The Vancouver Stock Exchange composite lost 3.61 points, or 0.6%, to 625.70.
For a scorecard of trading activity on all Canadian Stock Exchanges, go to:
quote.yahoo.com .
REFERENCE: Canadian Market Summary
canoe2.canoe.ca
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Major overseas markets ended lower.
London: The FT-SE 100 index closed at 5695.6, down 37.5 points, or 0.7%, as traders reacted to the Intel news.
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Frankfurt: German shares pared losses following an early 2% fall. The Dax index closed at 4623.40, down 86.18 points, or 1.8%.
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Tokyo: Stocks fell due to weakness in technology, with the 225-share Nikkei average closing at 16,848.55, down 247.05 points, or 1.5%.
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Hong Kong: Stocks suffered a pullback as regional problems shook the market and dashed hopes of a near-term drop in local interest rates. The Hang Seng index closed at 10,803.68, down 547.13 points, or 4.8%.
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Sydney: The Australian market was also hit by the Intel news, the all ordinaries index tumbling 52.7 points, or 2%, to 2652.7.
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U.S. investors await more red flags
NEW YORK (Reuters) - Beware the Ides of March. That is what one Wall Street veteran -- Don Hays, director of investment strategy at Wheat First Union -- is saying about the upcoming earnings season and the few weeks before, when companies start "preannouncing" results.
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Hays is worried that price-cutting by troubled Asian companies will curtail U.S. firms' ability to raise prices, which could hurt earnings and lead to a rash of downgrades by Wall Street analysts that will continue through 1998.
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"You're going to see wages and benefit costs moving up, and pricing pressure with the Asian-Pacific competition will be horrendous, so people will be cutting their prices all year long," he said.
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Hays predicts a bear market through the first quarter of next year and expects stock prices to fall about 25 percent.
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Still, many investors remain bullish. They say the market will catch its breath and resume its rise based on solid economic growth, low interest rates and tame inflation.
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Tom Galvin, chief equities strategist at Deutsche Morgan Grenfell, expects the Dow to hit 9,200 this year, though he said the market may move lower or sideways in the meantime.
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"As we saw last May and June, the market needs to take a breather," he said. "We'll see some profit-taking and it doesn't mean it's tragic. We just need the fundamentals to catch up to the share prices."
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The sober warning from Hays came as Intel Corp., the world's biggest computer chip maker and a leading technology stock, took the wind out of the market's sails with a warning that quarterly revenues and earnings would be weaker than expected.
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Intel tumbled 13 percent and the Dow Jones industrial average fell 94 points, or 1.1 percent, to 8,444. The index had risen 9 percent this year to Tuesday's record 8,585.08.
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The Ides of March, or March 15, is the date Julius Caesar was slain after he ignored a soothsayer's warning, according to the Greek biographer Plutarch. It falls on Sunday this year, a day before earnings "preannouncements" should start in earnest.
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The market could be especially vulnerable to slower earnings growth because stock prices are high, some analysts said.
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First Call, which tracks earnings figures, said stock prices were about 21 times expected earnings from continuing operations over the next four quarters, the highest in more than 30 years. The previous high was 18.1 in late 1968, when interest rates were about the same as now, it said.
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Yet some analysts said the higher multiples are justified, as long as economic growth continues.
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"As far as we are concerned, the fundamentals are not completely out of whack, said Arun Kumar, senior U.S. equities strategist at Lehman Brothers. "We haven't had this kind of environment in the past either, where you had low inflation, low interest rates and good growth prospects all at the same time."
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Some professionals say individual investors will serve to cushion any drop in stocks -- as they did in October. Others say that more importantly, corporate merger activity has boosted stock prices, as have companies buying back their own shares and money coming in from overseas.
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"The public has almost nothing to do with this market, in our opinion," Hays said.
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But mutual funds remain hugely popular with individual investors, despite ever-higher prices, analysts note. "A lot of people are basically holding their nose and buying stocks" despite high prices, said Peter Gottlieb, a portfolio manager at First Albany Asset Management, with over $500 million in assets.
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An estimated 66 million Americans own shares in some 6,800 mutual funds with $4.58 trillion in assets, according to the Investment Company Institute, a fund industry group.
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The proliferation of discount brokers and the growing popularity of the Internet have lured more investors into the market, which also should act as a cushion, Gottlieb said.
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"People are so much more interested in what Greenspan is saying or what Bill Gates is doing or what Warren Buffett is buying," he said. "These people are treated like Michael Jordan and Charles Barkley and they have this star quality these days. That's dramatically different from what it was years ago."
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For the time being, though, earnings are the focus, and analysts have cut forecasts. They now say earnings for the S&P 500 companies will grow 3.7 percent in the first quarter from a year earlier, down from forecasts of 10.4 percent at the start of the quarter, according to First Call.
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The red flag, said First Call research director Chuck Hill, is that the cuts are deeper and earlier than normal. If that continues, it could spell trouble for the market.
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A slowdown in earnings growth could have "real negative implications for the market," Hill said.
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Analysts now expect corporate earnings, as measured by the S&P 500, to
grow 11.0 percent this year, down just a shade from 11.1 percent in 1997, Hill said.
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That still is decent after seven years of economic growth, analysts said.
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Meanwhile, with inflation low and a generation of Baby Boomers saving for retirement, individuals seem set to keep plowing money into stocks.
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"In prior times, people looked at the stock market based on a lot of risks and now they're almost scared into believing that if you don't put into the market, you won't have enough for retirement," First Albany's Gottlieb said.
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"I think the level of interest in the stock market right now is frightening."
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