Nasdaq Gets Mauled, and Dow Bleeds Too
By Lawrence Carrel
PLEASE DON'T FEED the bears!
That seems to be the cry of investors who climbed into the bear cage only to realize
today that valuation does matter.
Hungry bears spent the day exacting their revenge on the formerly highflying Nasdaq
? gutting it of 7% in one day's slash. Then, late in the session, they bared their
claws in the New York Stock Exchange and started ripping into blue chips
The Nasdaq Composite plummeted 286.27 points, or 7.1%, to 3769.63. It was the second-worst one-day
point drop ? behind only the carnage on April 3? and the sixth-worst percentage drop. It came on the
heels of a 9% drop over the past two days, which completely erased all this year's gains. The Nasdaq is
now 25% off its all-time high set on March 10, which puts it well below the 20% decline Wall Street
defines as a bear market. It is also now off 7% for the year.
While investors spent most of this week rotating out of technology into defensive blue chips, by the end of
today's session, even that provided no safety. The Dow Jones Industrial Average, up 138 at one point,
succumbed to the wave of investor uncertainty and sank 161.95 points to 11125.13. The broader S&P 500
index, which contains both Old and New Economy stocks, tumbled 33.42 to 1467.17.
Bonds fell for the second straight day, but recovered from their lows late in the session as investors fled
blue chips for the safety of debt. The yield on the 30-year Treasury, which moves inversely to price, rose
to 5.81% from 5.76% in late trading yesterday. Yields on the 10-year Treasury note jumped to 5.94% from
5.87% late Tuesday.
"The mood is dismal," Ben Marsh, director of equity trading at Adams, Harkness & Hill, said to describe
the equity market.
The Nasdaq's decline fulfills the fears of many. Investors, analysts and commentators have been talking
about the high valuations of technology stocks for months ? debating whether the prices these stocks
command can be justified by their earnings, or, in some cases, lack of earnings.
"We have a big self-fulfilling prophecy," says Brian Belski, chief investment strategist at George K. Baum
& Co. "We say it will go down a lot, and then it becomes true. Everyone has decided that the Nasdaq
needs a big sharp correction. I don't know if that will be true, but if it breaks 3650 that means we will have
our big slam and the big event we are looking for." (The 3650 level is the low point the Nasdaq fell to on
Tuesday of last week ? one day after the Microsoft ruling ? before rebounding sharply by the close.)
"I think we're near the bottom," says Belski. "Will we get a perfect retest of 3650? I don't know, but the
Nasdaq is very oversold at these levels." However, even Belski isn't recommending investors jump right
back in. "If I were an investor waiting to get into technology I would be sitting my hands," he says. "I
would be much more in the defensive growth categories, because that's where the market is levitating."
Online-brokerage officials said today was another heavy margin call day, with investors who bought stock
on credit getting calls to pay up some of the debt or sell off stocks. Given the late sell-off today,
brokerages expect more margin calls tomorrow morning.
"You will see a shake out among the day traders," says Adams, Harkness's Marsh. "For this to turn
around you need to get a change in sentiment like one of the market pundits saying, 'This is it. We
believe this is a bottom and we're telling clients to jump in.' But just when you expect it, then Goldman
comes in and slams Microsoft. I don't understand why." Marsh adds that many professional traders are
also caught with big losses ? having loaded up on Nasdaq stocks at higher prices ? and that some are
"doing the cardinal sin in terms of trading. We are averaging down [buying more of a holding as its price
drops, cutting the average price paid]. It's like throwing good money after bad."
One thing that could save the market is a great earnings season. Although good news is predicted this
first quarter ? and early results bear this out ? companies have also released information suggesting a
less rosy picture for later this year. Such a mixed signal was one reason for yesterday's sell-off.
On Monday, Motorola (MOT) reported a profit double that of the year-ago quarter. However, on Tuesday,
it released future earnings estimates lower than analysts expected. Motorola's stock plunged 18% on the
news. The stock dropped another 6.9% to $115.50 today, despite Warburg Dillon Read reiterating its Buy
rating and $188 share-price target. Also yesterday, Biogen (BGEN) reported an earnings shortfall, which
slashed its share price 18%. Today, Biogen advanced 4%.
With investors so shaky, bad news gets magnified.The catalysts for today's rout were Goldman Sachs'
cautious comments about Microsoft's (MSFT) future revenues and an earnings warning from
Compuware (CPWR).
Microsoft shares tumbled more than 5% to $79.38 ? a price last seen last summer ? after Goldman
Sachs analyst Rick Sherlund sliced his revenue estimates on the software company to $5.75 billion from
$5.95 billion. The firm is concerned about slowing PC demand. However, Goldman kept Microsoft on its
Recommended List ? and left its earnings forecast unchanged.
With the Goldman report essentially attacking the entire computer industry, Internet, semiconductor,
telecom-equipment, computer-hardware, software and biotech stocks all tumbled. None of the tech
bellwethers were spared. Cisco Systems (CSCO) and Dell Computer (DELL) dropped 7%. Oracle
(ORCL) and JDS Uniphase (JDSU) fell almost 6%. And Sun Microsystems (SUNW) sank 8.5%.
Separately, The Washington Post reported that the Department of Justice is leaning away from a breakup
of Microsoft. However, today Joel Klein, prosecutor in the Microsoft case, said he was keeping all options
open. Klein, as well as other members of the Justice Department and representatives from the Federal
Trade Commission, appeared before the House of Representatives Judiciary committee to answer
questions on the case.
As for Compuware, its stock plunged 41% to $11.93 after warning that earnings would miss expectations.
The software company now expects fiscal fourth-quarter profits to land between 13 cents and 15 cents a
share, compared with consensus estimates of 35 cents a share. Compuware blamed lower-than-expected
sales at its professional services and products divisions. J.P. Morgan and Chase Hambrecht & Quist
downgraded the stock to Market Perform from Buy.
However, old industries boasted great earnings. J.P. Morgan (JPM) rose slightly on blockbuster results.
The Dow component reported first-quarter earnings of $3.37 a share, compared with $3.01 in the year-ago
period and well above the First Call/Thomson Financial estimate of $2.81. Total revenue rose 14% to
$2.84 billion on its strong investment-banking and asset-management businesses. This sparked a rally in
the financial sector, lifting both Wells Fargo (WFC) and Bank of America (BAC) more than 4%
Consumer-products and basic-materials stocks also boosted the Dow. Boeing (BA) was the average's
biggest gainer, with Proctor & Gamble (PG), DuPont (DD) and American Express (AXP) close behind.
However, the Dow's tech components ? IBM (IBM), Microsoft, Intel (INTC) and Hewlett-Packard (HWP)
? were all under water, tumbling more than 5% each.
Unilever (UN) rose 2% after making a tasty double deal. The Anglo-Dutch consumer-products company
agreed to acquire Ben & Jerry's Homemade (BJICA), the ice cream company known for its commitment
to social causes, for about $326 million. Ben & Jerry's shares gained a sumptuous 23%, to $43.06. Then,
turning the table, Unilever squeezed into a deal to buy privately held SlimFast Foods for $2.3 billion.
Research in Motion (RIMM) dived $36.25, or 44%, to $45.75, after the company warned that it expected
first-quarter revenue to be flat with the fourth quarter and that it was increasing its marketing and research
spending in fiscal 2001. Analysts quickly slashed their ratings and estimates.
Palm (PALM), the maker of the PalmPilot and RIM's main rival, dropped 13% to $33.31. Palm is now
below its initial offering price of $38.
Enron (ENE) gained almost 3% on its blow-out quarter. The world's biggest gas and electricity marketer
reported fiscal first-quarter profits rose nearly 18% to 40 cents a share, three cents above Wall Street's
consensus forecast. Revenue rose 72% to $13.1 billion.
And Avon Products (AVP) leapt 19% after telling The Wall Street Journal that it expects to report
first-quarter earnings above the Street's consensus forecast and sales growth of at least 9%. Andrea
Jung, president and chief executive of the cosmetics company, told the Journal that increased advertising
and marketing initiatives would boost earnings above the expected 29 cents a share.
However, solid results from Time Warner (TWX) were met with disdain. The media giant fell 6% and its
merger partner, America Online (AOL), lost 5%, after it reported that first-quarter earnings before
interest, taxes and amortization (EBITA) ? a commonly used measure of performance for cable
companies ? rose 13% to $1.17 billion on revenue of $6.55 billion. Earnings came in at five cents a share
? three cents above the Street's expectations.
Rambus (RMBS) fell in after-hours trading despite a positive earnings report. The company reported
operating income of 15 cents per share for the fiscal second quarter ended March 31, compared with eight
cents last year. First Call/Thomson Financial had a consensus earnings estimate of 14 cents per share.
Net income fell to $6.98 a share due to acquisition-related costs and one-time employee compensation
expenses.
Advanced Micro Devices (AMD) saw its stock halted after hours after reporting first-quarter earnings
that blew past Wall Street's recently upgraded estimates. The company said the quarter was the best in
its history. The Intel rival for the microprocessor business posted net income of $1.15 a share, versus a
loss of 88 cents in the year-earlier period. Wall Street analysts had expected the company to have
earnings of 58 cents a share, according to First Call/Thomson.
E-commerce services company Ariba (ARBA) edged higher in after-hours trading after reporting
stronger-than-expected second-quarter results, following through on a recent report that they would do
better than analysts had been forecasting. For the period ended March 31, Ariba posted a loss of six
cents a share, compared with a loss of seven cents in the same period last year. Wall Street expected an
eight cent loss.
Two major economic reports could impact the market later this week. Tomorrow, the Labor Department
will release the producer price index ? a measurement of wholesale prices. Economists expect to see
growth of 0.5% for March, after a 5.2% surge in February. Core prices, excluding food and energy, are
predicted to rise 1% after February's tame 0.3% gain. Friday will bring the consumer price index.
Economists expect a 0.5% jump in March for the headline number, and 0.2% growth in the core number. |
