Wake-Up Call: After Feasting, Stocks Now Face Famine
By Justin Lahart
Senior Writer
9/17/98 9:18 AM ET
After four days of feast, it looks like stocks are going to have a little famine.
For those who want to point fingers, there are plenty number of culprits. There's Japan, where deep disappointment over a government plan to deal with the sickly Long Term Credit Bank sent stocks to a 12-year low. There's Federal Reserve Chairman Alan Greenspan's testimony yesterday, which suggests that a rate cut at the next meeting isn't the sure thing some had supposed. There are the festering problems in Latin America. And then there's the likely release of those Clinton tapes -- no matter that the public doesn't appear all that interested in seeing them.
But on the day before triple witching -- the quarterly expiration of certain stock options and index options and futures -- giving reasons for stock movement can be a little pointless. Suffice it to say that at 9 a.m. EDT, the S&P 500 futures are off 25, about 17.25 below fair value and indicating a sharply lower open.
"In the last two years the expiration tends to get played out early in the week," said Todd Clark, head of listed trading at Charles Schwab. "I think the market has been buoyed artificially by strategies around the expiration. What happens is you lose that artificial bid, which is really a derivative strategy and has nothing to do with the fundamentals. I think we're just giving back some of those gains today." Clark also noted that a large asset allocator that was active in the market over the last week is done.
On the subject of the futures, it is worth noting that if ever people were playing games on the thinly traded Globex session, they are playing games with them today. Ahead of expiration, one wants to get the most out of that S&P put, or to buy back that call one wrote as cheap as possible. Early this morning, they weren't down that much at all.
With the expectation of a drop in stocks, the Treasury market was making gains. The 30-year Treasury bond was up 23/32 to 104 29/32, dropping the yield to 5.18%. Bond traders had a muted reaction to the August Consumer Price Index, which came in line with expectations.
The market's rate-cut expectations were lowered a little bit more today. John Berry, The Washington Post writer who is seen as having close relationship with Fed officials, wrote an article suggesting that an easing at the Sept. 29 meeting is not likely.
Stocks were off sharply in Tokyo, where the government's plan for LTCB -- likely to be the model for dealing with Japan's ailing banks -- didn't make anyone happy. Under the plan, LTCB will be temporarily nationalized. In return for their support in helping get through the LTCB problem, the opposition has asked that the Financial Stabilization Law, which earmarks 13 trillion yen in taxpayer money for bank rescues, be rescinded. It is hard to think of how Japan's banking mess can be cleared up without the significant infusion of public money. The possibility of a hard landing for a Japanese bank, and the specter of what the damage that would do to the Japanese and broader Asian economy, has been raised. The Nikkei slipped 338.56, or 2.4%, to 13,859.14.
Hong Kong stocks fell on the back of not just the troubles in Japan, but worries that index heavyweight HSBC has seen some big losses. The Hang Seng dropped 284.11, or 3.6%, to 7576.57.
With expectations of a bad open on Wall Street, the selling in Europe's major markets has accelerated. In Frankfurt, the Dax was off 203.94, or 4.4%, to 4654.03, with banks bearing the brunt of it. In Paris, a warning from Alcatel (ALA:NYSE ADR) added to stocks ills. The CAC was down 208.16, or 5.58%, to 3521.16. In London, the FTSE was off 154, or 2.9%, at 5137.70.
Thursday's Wake-Up Watchlist
By Brian Louis
Staff Reporter
Merrill Lynch cut its 1999 earnings per share estimates on several household-products companies, including Gillette (G:NYSE), Colgate(CL:NYSE), Procter & Gamble (PG:NYSE), Dial (DL:NYSE), Clorox (CLX:NYSE) and Revlon (REV:NYSE).
Venator Group (Z:NYSE) will close 570 Kinney and Footquarters shoe stores and take a third-quarter charge of $173 million to cover inventory liquidation, real-estate disposition and severance. The units have 1,400 full-time and 3,200 part-time workers.
Alcatel (ALA:NYSE ADR) fell 30% in Paris after it issued a profit warning.
Network Computer will provide television set-top box software to Belgacom for its new CyberTV service. Terms of the deal were not disclosed. Network Computer is owned by Oracle (ORCL:Nasdaq) and Netscape (NSCP:Nasdaq).
A Food and Drug Administration advisory panel recommended approval of Immunex's (IMNX:Nasdaq) rheumatoid arthritis drug Enbrel. But the panel warned there are safety worries about the drug.
Motorola (MOT:NYSE) halted construction of a $3 billion chip plant in Virginia, citing soft demand for semiconductors.
PacifiCorp (PPW:NYSE) warned it expects third-quarter earnings to come in 50% below expectations and fourth-quarter results to disappoint as well.
Omega Protein (OME:NYSE) set a stock buyback program covering up to 4 million shares.
KMG Chemicals (KMGB:Nasdaq) expects to earn between 53 cents and 55 cents a share for 1999, compared with 46 cents per share last year.
BTG (BTGI:Nasdaq) set a 500,000-share buyback program.
Despite the stock market's recent swoon, shares of higher-education program provider Apollo Group (APOL:Nasdaq), which caters to working adults, are up nearly 17% this year. But investors may be overlooking some risks, including a pending audit by the Education Department, today's Heard on the Street column in The Wall Street Journal said.
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