By Martin Cej, CBS.MarketWatch.com
Last Update: 4:47 PM ET Mar 21, 2001
NEW YORK (CBS.MW) -- U.S. stocks failed to sustain a midday recovery Wednesday as a surprise jump in inflation and concern
the Federal Reserve hasn't done enough to revive the world's largest economy drove the Dow to a two-year low.
The Nasdaq Composite Index relinquished a 40-point advance to fall more than 1 percent to its lowest close since November
1998 while the Dow Jones Industrial Average saw its early declines compounded as shares of Johnson & Johnson, Procter &
Gamble and American Express swooned.
Most financial services stocks swung between modest gains and losses before sliding as investors weighed reports of falling
profit at Lehman Brothers, Bear Stearns and Morgan Stanley Dean Witter against the perception that banks and brokerages are
traditionally among the biggest beneficiaries of lower interest rates.
"The market was a little too optimistic in its expectations from the Fed yesterday," said Luc Desbiens, a portfolio manager at
Montreal, Quebec-based Pictet & Co., which oversees about $46 billion in assets worldwide. "Even so, we're not being
aggressive in this market, we're waiting and looking for opportunities. Unfortunately, so is everyone else."
The Federal Reserve lowered its benchmark fed funds rate by half a percentage point to 5 percent Tuesday, in line with
expectations but less than some investors had hoped. The Fed indicated, however, that it's prepared to cut rates again before its
next scheduled policy meeting.
The Nasdaq Composite ($COMPQ) dropped 27.23 points, or 1.5 percent, to 1,830.21, its lowest close since Nov. 4, 1998, even
as shares of Intel (INTC), Sun Microsystems (SUNW), Oracle (ORCL) and JDS Uniphase (JDSU) notched healthy gains.
The Nasdaq 100 Index ($NDX) fell 9.25 points to 1,605.22 after staggering 116 points Tuesday. A surprise loss for 3Com and
bearish comments from Hewlett-Packard's chief executive exerted the greatest drag on tech stocks.
The Dow Jones Industrial Average ($DJ) dropped 233.76 points, or 2.4 percent, to 9,487, marking the lowest close since March
4, 1999. Declining issues outnumbered rising stocks by more than 2 to 1 on both the NYSE and the Nasdaq market. About 1.3
billion shares changed hands on the NYSE while 2.1 billion shares were traded on Nasdaq.
Barry Hyman, chief investment strategist at Weatherly Securities, said the Dow, the world's bellwether stock measure, needs to
hold firm around the 9,500 to 9,700 level or its next stop could be around 9,000.
"If it can't hold around here, we could see another 8 percent off the Dow," Hyman warned.
"The Fed did what was appropriate yesterday and they indicated their desire to be aggressive," Hyman said, but cautioned that
"Wall Street had painted itself into a corner with its expectations for a bigger cut, and that's created the perception that the Fed
is behind the curve."
The Standard & Poor's 500 Index ($SPX) fell 1.8 percent while the Russell 2000 Index ($RUT) of small-capitalization stocks
slipped 2 percent.
Not banking on it
Better-than-expected earnings from investment banking giants Lehman Brothers and Morgan Stanley Dean Witter, coupled with
falling interest rates, only helped to muddy the waters for investors interested in buying or selling financial services shares as
Bear Stearns revealed steeper-than-expected slide in profit and all three saw their earnings decline from the same quarter a year
earlier.
Lehman Bros. (LEH) said first quarter net income fell to $387 million, or $1.39 per share from $541 million, or $1.86 per share
in the year-ago period. The investment bank beat by 2 cents the estimate of $1.37 per share in a survey of analysts by First
Call/Thomson Financial. The stock fell $2 to $63.90.
Bear Stearns (BSC) dropped $1.25 to $45.50 after the company said earnings per share dropped to $1.10, down from $1.89 per
share last year. The bank missed a lowered forecast for earnings per share of $1.28. Net income for the first quarter before an
accounting change was $166 million, down 40.3 percent from $278.2 million.
Morgan Stanley Dean Witter (MWD) slumped $1.86 to $54.64. The investment bank said first-quarter net income slumped to
$1.1 billion, down 30 percent from last year's record first-quarter tally of $1.5 billion. Diluted earnings per share were 94 cents,
down 30 percent from $1.34 a year ago. The latest number was ahead of the 93 cents per share forecast by First Call.
The financial sector has outperformed most other sectors recently as its one of the groups that stands to gain most from a rate
cut. Elsewhere, American Express (AXP) tumbled 6 percent after analysts at J.P. Morgan raised concerns about the company's
profit outlook. Citigroup (C) slipped 4.6 percent.
The Amex Securities Broker/Dealer Index ($XBD) slumped 4.7 percent and the S&P Bank Index ($BIX) fell 2.8 percent.
In the tech sector, 3Com (COMS) reported lower-than-expected fiscal third-quarter earnings, blaming a slowing economy and
lower demand for its weaker performance. 3Com also said it plans to restructure its operations and cut costs by $1 billion. 3Com
shares fell 22 cents, or 3.5 percent, to $6.
Profit signed, sealed and delivered
Among the few bright spots in the earnings arena was FedEx (FDX). The parent of Federal Express delivery services said
Wednesday it earned $109 million, or 37 cents a share, topping the average analyst estimate by 1 penny. The profit for the fiscal
2001 quarter ended Feb. 28 included 4 cents that represented a tax-rate benefit, the company noted.
That's down from adjusted year-ago earnings of $113 million, or 39 cents a share. FedEx shares jumped $2.35, or 6 percent, to
$42.60.
Procter & Gamble (PG) fell $2.90 to $63.20. A spokeswoman for the company confirmed Wednesday that it has established an
internal task force charged with coming up with ways to cut costs. The acknowledgement follows a Wall Street Journal report
that the consumer products giant is considering slashing between 11,000 and 22,000 jobs, or 10 percent to 20 percent of its
global work force of 110,000.
Spokeswoman Linda Ulrey declined to comment on the report of job reductions, but she did say the Cincinnati-based company
several months ago set up a task force to explore cost reductions.
Overseas influence
U.S. investors took little heart from Asian markets where early Wednesday Japan's key stock index soared over 7 percent as
investors sought bargains scattered among battered sectors such as banks.
Europe's markets ended in the red, however, hit by plummeting tech and telecoms stocks after business confidence sank in
Germany and in the aftermath of Tuesday's U.S. rout.
Sweden's Ericsson (ERICY) fell 6.4 percent in Europe after reports its biggest shareholders are meeting to discuss possible board
and management changes. See more on Ericsson.
The world's No. 1 mobile handset maker, Finland's Nokia (NOK), fell nearly 5 percent in Europe.
Treasury focus
Treasury prices mirrored the rise and fall of the stock market as investors moved money between the equities and fixed income.
The 10-year Treasury note was down 2/32 to yield ($TNX) 4.77 percent while the 30-year government bond slipped 2/32 to
yield ($TYX) 5.27 percent.
In the currency arena, the dollar rose to a 22-month high against the yen of 123.49 yen while the dollar slipped 1.6 percent
against the euro to 89.52 U.S. cents, its lowest since December. While lower U.S. rates typically hurt the dollar, the Fed's
contention that other economies are also weakening prompted some investors to seek the relative safe haven of the U.S.
greenback.
Not all investors or analysts were grim about the outlook for profits and stocks, however. With little in the way of earnings or
economic data slated for release this week, investors may get a chance to assess the outlook for growth and whether prices are
low enough to reflect the boost falling interest rates can bring to an economy and profits.
"We've reached the extremes of pessimism and that may be breaking the back of Wall Street complacency," said Scott Bleier,
chief investment strategist at Prime Charter. "Is this the bottom? I don't know, but there is good risk-reward potential in the
near- to intermediate term."
"Yesterday, the Fed cut rates and in the ensuing sell-off, we achieved the mirror image of last year's extreme optimism when the
Fed was raising rates and the market kept climbing," Bleier reasoned.
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