MARKET ACTIVITY/ TRADING NOTES FOR DAY ENDING MONDAY JUNE 15 1998 (2)
MARKET OVERVIEW, Con't
Monday's markets in the U.S.
Stocks tumbled Monday as Wall Street realized that the Asian economic crisis was not over, and likely will sideswipe the earnings of many U.S. multinational companies for a second straight quarter.
The Dow Jones Industrial Average ($INDUA) shed 207.01 points, or 2.3%, to close at 8,627.93. It was the fifth-worst point loss ever for the Dow, its biggest slump since Jan. 9, and its broadest decline since April 27. In the broad market, declining issues beat advances by a more than 3-to-1 margin on active volume of 611.7 million shares on the New York Stock Exchange, the most this year.
The Nasdaq Composite Index (COMP) fell 29.30 points, or 1.6%, to 1,715.75. The S&P 500 Index (SPX) fell 21.83 to 1,077.01, while the small-cap Russell 2000 Index ($IUX) dropped 7.73 to 66.02.
The price of the benchmark 30-year Treasury bond rose 1 7/32 points, or $12.19 per $1,000 in face value. Its yield fell to 5.58% from 5.66% late Friday. It was the lowest yield for a 30-year bond ever, breaking the 5.65% level that was set last Thursday.
Wall Street took its cue from overseas markets with big losses posted around the globe, starting in Japan -- where the Japanese yen extended its slide to new eight-year lows -- later spreading to Europe. The Nikkei 225 ($TOKN) ended down 197.1 points, or 1.3%, at 14,825.1. Hong Kong's Hang Seng Index ($HKHI) closed down 452.9 to 7,462.5.
Prices plunged in Europe following the Asian weakness. On the London Stock Exchange, the blue-chip FTSE-100 Index ($FTSE) closed off 54.1 points, or 1%, at 5,715.7. Germany's DAX index ($DAX) lost 2.72% to 5,516.66 points, its lowest level in nearly a month. France's CAC-40 ($PARI), Italy's Mibtel, and Spain's Ibex-35 indexes all fell 2% or more.
Technology stocks
The weakness in technology extended to virtually every sector, driving the Morgan Stanley High Tech Index (MSH) down 7.26 to 533.81. Among the biggest losers were Electronic Data Systems Corp. (EDS), down 1 7/16 to 33 15/16; Seagate Technology (SEG), off 1 to 19 9/16; and Dow component International Business Machines (IBM), down 4 1/16 to 112 3/16. Technology's other Dow member, Hewlett-Packard (HWP), was down 13/16 to 59 15/16.
Semiconductor stocks, favored earlier in the day by bargain hunters, succumbed to pressure as the Philadelphia Semiconductor Index (SOX) fell 3 to 232.62. Notable for their sharp declines were Applied Materials (AMAT), off 1 7/16 to 27 3/16; National Semiconductor (NSM), down 1/2 to 14 3/16; and Micron Technology (MU), off 1 to 20 3/16. Sector leader Intel (INTC) joined the trend, falling 1 9/16 to 66 7/8.
Lattice Semiconductor Corp. (LSCC) climbed 5/16 to 28 after it said Friday that it plans to buy back as many as 1.2 million of its 23.5 million outstanding shares in the open market.
Broadcom Corp. (BRCM) fell 1 7/8 to 53 1/4 after President Henry Nicholas told analysts he doesn't expect the company to maintain its recent torrid revenue growth. He did say that the firm, a designer of computer chips for high-speed data communications, still sees new orders coming for the second half.
Unitrode (UTR) gained 1 5/16 to 12 7/16, while shares of Benchmarq Microelectronics (BMRQ) dropped 5 3/8 to 8 5/8. Unitrode said it might scrap a previously announced plan to acquire Benchmarq, a fellow maker of specialized semiconductors.
A long-awaited merger gave a lift to the sagging networking sector. Bay Networks Inc. (BAY) rose 2 7/16 to 30 3/4 after Northern Telecom Ltd. (NT) agreed to buy the networking-products company for $9.1 billion, or $38.21 a share. Northern Telecom shares plummeted 9 11/16 to 54.
Other networkers were mixed. Ascend Communications (ASND) ascended 1/4 to 49 3/4, and 3Com Corp. (COMS) climbed fractionally to 24 3/16, while DSC Communications (DIGI) fell 2 1/16 to 25 13/16 and sector leader Cisco Systems (CSCO) dropped 7/8 to 78 1/4. The AMEX Networking Index (NWX) was off 9.18 to 348.54.
Network Solutions Inc. (NSOL) fell 4 5/8 to 35 1/4 after Barron's reported that the company is seen falling back to its initial public offering price of $18 a share. Currently the only authorized provider of Internet domain-name registration worldwide, the company will lose its monopoly in September, and analysts said they expect the stock to fall as a result.
Baan Co. (BAANF) fell 3 1/16 to 37 13/16 after money managers told Barron's that the business-management software developer may fall to as low as 22 a share by year-end. Accounting changes have reduced Baan's earnings, the analysts said, and concern remains that the company is developing too many products too quickly while losing ground to competitors.
Citrix Systems Inc. (CTXS) fell 9/16 to 54 15/16 after the software company said it will buy closely held APM Ltd. for about $40 million in cash to improve the products that it sells. APM develops software used with Java, Sun Microsystems Inc.'s (SUNW) Internet programming language that lets programs run on any computer operating system.
Remec Inc. (REMC) fell 1 to 9 7/8 after the maker of microwave systems warned that it will have lower-than-expected results in its fiscal second quarter ending July 31 because commercial customers have rescheduled existing orders. The company earned 13 cents a share a year ago.
Amazon.com (AMZN) touched another 52-week high, rising 4 3/4 to 65 3/4.
Another Internet bellwether, search-engine maker Infoseek Corp. (SEEK), continued its recent ascent, up 2 1/2 to 32 5/8, amid rumors that the company is about to be taken over by Walt Disney Co. (DIS). Infoseek also acquired San Francisco-based 280 Inc. for about $800,000 in cash.
Broderbund Software Inc. (BROD) fell 3 to 17 3/16 after the entertainment and education software maker said its third-quarter loss will be wider than expected.
Active issues
A drop in oil prices to a 12-year low, caused by a supply glut, roiled the broader markets. Oil was off $1.02 at $11.57 a barrel on the New York Mercantile Exchange, which caused both big oil companies and drilling-and-equipment firms to tumble precipitously. The AMEX Oil Index was down 10.39 to 451.73.
Oil drillers were hit especially hard, as analysts at PaineWebber downgraded their rating on the sector to "neutral" from "attractive." Schlumberger (SLB) plummeted 3 7/8 to 68 7/8, Camco International (CAM) dropped 4 1/2 to 54 1/2, Smith International (SII) lost 4 3/8 to 35 5/8, Global Marine (GLM) fell 2 13/16 to 18 1/8, Diamond Offshore Drilling (DO) lost 2 3/16 to 41 1/4, Ensco International (ESV) dropped 2 1/4 to 17 7/16 and BJ Services (BJS) was down 2 5/8 at 25.
Among big oil companies, the biggest losers were Occidental Petroleum (OXY), down 1 1/16 to 24 5/16; Mobil Corp. (MOB), off 2 11/16 to 73 7/8; TOTAL SA (TOT), down 1 11/16 to 59 13/16; and British Petroleum (BP), off 2 3/8 to 83.
Conversely inspired by the drop in oil prices, major airline stocks gained sharply as their jet fuel prices spilled lower, though the Standard & Poor's Airline Index (AIX) wound up off 1.20 to 367.61.
Leading the airline gainers were American Airlines' parent AMR Corp. (AMR), up 1 5/8 to 79 5/16; US Airways Group (U), adding 1/4 to 76 5/16; and Delta Air Lines (DAL), up 1 1/16 to 126 1/8.
The Dow Jones Transportation Average ($TRAN), which earlier had moved as high as 3,402, reversed course and followed the broader market lower despite the strength in airlines. The average ended down 42.32 to 3,336.62.
Then there was the fallout from the Asian fiscal crisis, which has sent many Wall Street analysts snipping their second-quarter profit outlooks. Currently, analysts are forecasting a rise of 3.8% in earnings vs. a year ago, according to I/B/E/S International, a tracking firm. That is sharply lower than the 13.2% forecast in the beginning of 1998.
Asia pressures were embodied in the Dow's biggest loser of the day, Minnesota Mining & Manufacturing Co. (MMM). The maker of industrial, commercial and health-products dropped 5 7/8 to 80 15/16 after reporting that Asia's economic turmoil will cut second-quarter and full-year earnings by 10%. The company sees second-quarter fully diluted earnings of between 90 and 94 cents a share, lower than last year's results, and nearly a dime below analyst estimates.
However, domestic pressures provided their own drag on the Dow as well. General Motors Corp. (GM) fell 1 1/2 to 68 3/8 after the world's largest auto maker and the United Auto Workers halted negotiations Sunday to resolve strikes by parts-plant employees. The walkouts have closed 12 North American assembly plants and idled 50,900 workers.
DuPont Co. (DD) fell 3 1/16 to 71 11/16 after the chemical company agreed to sell its hydrogen-peroxide business to closely held OCI Chemical Corp.
Excel Communications Inc. (ECI) fell 5 13/16 to 21 3/4 after Canadian telephone company Teleglobe Inc. (TGO) agreed to buy the No. 5 U.S. long-distance phone company for about $3.1 billion in stock to expand its presence in the U.S. Teleglobe rose 1/2 to 52 1/8.
Sunbeam Corp. (SOC) fell 2 5/16 to a 52-week low of 15 3/4 after the company fired chairman and CEO Al Dunlap, who was hired in July 1996 to turn the appliance maker around. Dunlap had failed to produce a profit for the company during the last six months. Sunbeam will post a second-quarter operating loss and probably won't meet its financial goals for the year, which was the main reason why the board's outside
directors unanimously fired Dunlap, director Charles Elson said.
A flurry of companies projecting disappointing second-quarter profits worsened investor jitters. Among companies issuing warnings: Rio Hotel & Casino (RHC), which was off 2 1/8 at 19 1/4; Guilford Mills (GFD), off 1 3/8 at 21 1/8; and CCC Information (CCCG), down 2 3/16 to 16 5/16.
Albank Financial Corp. (ALBK) rose 13 1/4 to a 52-week high of 64 3/4 after Charter One Financial Inc. (COFI) agreed to buy the Albany, N.Y.-based bank for $1 billion in stock. Charter One dropped 2 7/8 to 31 3/16.
Cincinnati Financial Corp. (CINF) fell 2 11/16 to 36 5/8 after the insurance company said that it estimates April and May storm losses at $40.3 million pretax.
Gencor Industries Inc. (GX) fell 2 1/4 to 21 1/4 after the engineering and construction company said it filed a registration statement with the U.S. Securities and Exchange Commission to sell 3.6 million common
shares.
Triangle Pacific Corp. (TRIP) rose 11 1/4 to 55 after the flooring and cabinet maker agreed to be acquired by Armstrong World Industries Inc. (ACK) for $1.15 billion in cash and assumed debt; Triangle Pacific
shareholders will receive $55.50 a share. Armstrong World fell 1 3/8 to 79 5/8.
Aluminum Co. of America (AA) fell 1 1/4 to 63 3/4, and Alcan Aluminum Ltd. (AL) dropped 7/8 to 26 1/16 after the largest and second-largest aluminum producers in the world, respectively, said they won't make a joint bid for Venezuela's four state-owned aluminum companies.
American Precision Industries Inc. (APR) fell 2 7/8 to a 52-week low of 15 1/8 after the maker of heat-transfer equipment said it expects second-quarter earnings to fall to 8 cents to 12 cents a diluted share from 23 cents in the year-earlier period, and well below consensus estimates of 25 cents a share.
After the bell
Solectron Corp. (SLR) reported higher third-quarter results, in line with expectations, and announced that it is in a PC manufacturing pact with Ingram Micro Inc. (IM). For its third quarter, Solectron reported earnings of 41 cents per share, which matched analyst estimates. Solectron and computer wholesaler Ingram said they signed a letter of intent to make and sell build-to-order personal computers, servers and other computer products in the United States, Canada, Europe, Asia and Latin America.
Another PC maker, Micron Electronics (MUEI), reported third-quarter earnings of 6 cents a diluted share, beating analysts' estimates by 3 cents. Micron Electronics is majority-owned by Micron Technology Inc. (MU), a maker of memory chips used in personal computers and other electronics.
Alliance Semiconductor Corp. (ALSC) announced that its chief financial officer and vice president of finance and administration will leave the company "to pursue other interests."
Water-treatment specialist Culligan Water Technologies Inc. (CUL) announced that president Douglas A. Pertz resigned following shareholder approval of the company's acquisition by U.S. Filter Corp. (USF).
Biotech firm Emisphere Technologies Inc. (EMIS) announced third-quarter earnings of 10 cents a diluted share, well above a loss of 22 cents per share in the year-ago period.
Oil-services specialist Halliburton Co. (HAL) announced that its Brown & Root Energy Services unit won a 10-year contract to provide Chevron Corp. (CHV) with drilling products and services in the Gulf of Mexico. Financial terms were not disclosed.
MindSpring Enterprises (MSPG) reported that it has purchased the consumer subscribers of closely held Internet services provider Pensacola Internet for an undisclosed amount. Customers should be transferred within 90 days, MindSpring said.
Old Kent Financial Corp. (OKEN) said it plans to buy back 6 million shares of stock, or 6.6% of outstanding shares. The bank also declared a 5% stock dividend.
Pfizer Inc.'s (PFE) Viagra sales rose 21% in the week ending June 5, rebounding after a May decline in sales of the impotence drug, according to a pharmacists' survey.
Luggage maker Samsonite Corp. (SAMC) reported losses of 54 cents a diluted share for its first quarter, well below analysts' estimates for earnings of 32 cents a share.
Telecom Semiconductor Inc. (TLCM) announced that it expects second-quarter earnings to be 50% to 60% lower than its first quarter, based on weak sales to Motorola Inc. (MOT). The company is expected to earn 11 cents a share, according to analyst estimates. After-hours trading of the shares was halted.
Commentary
It's the feeling you get, standing on the edge of the diving board -- maybe the plunge you're about to take is even farther down than you thought.
Traders stepping into the pits Tuesday have probably already braced themselves for just such a sense. While most of Wall Street is looking for an extension of Monday's 207-point loss on the Dow, many hope it's only a short hop downward.
Technical analysts, meanwhile, are predicting that it'll be a steep and deep jump -- at least for the short term.
In its fifth-worst point loss ever, the Dow fell 207.01 points to a three-month low of 8,627.93, trimming its year-to-date gain to 9%. In addition to the drop, traders will also have a handful of economic releases to chew on, including the consumer price index and housing-starts and industrial-production data.
What seems most likely is more of the same. Most analysts predicted that stocks may fall another 3% to 5% before investors feel more hopeful about corporate earnings and have the end of Asia's financial crisis in sight. "There is probably a few more percent left on the downside before people say there is enough value in the market to step back in," said Arun Kumar, senior stock strategist at Lehman Brothers in New York.
U.S. stocks continue to get pounded by fears that the recession in Japan, the world's second-largest economy, will hurt profits of American corporations, especially exporters and major industrial companies, including oil producers. The weaker economies mean lower demand for U.S. products, while the stronger dollar erodes what profits are earned in local currencies overseas.
"There is worry that Japan is not going to get its house in order soon enough and that could lead to more troubles in the rest of Asia," said Kumar.
"It's difficult for the market to find a bottom with meltdown in Asia," said Dan Ascani, president of Global Market Strategists. "The Asian markets are continuing to make new lows, so it's difficult to find a bottom in the face of all that."
Asia's weakness is "just going to make it that much more difficult for us to export, and it's going to make our profit outlook even weaker."
The close below 8,700 on the Dow is ominous to traders and investors who use technical analysis, studying past price movements and statistical measures for clues to future market moves. The average rebounded from 8,700 in recent days, and its failure to hold above that level could signal further declines, they said. The Dow last closed below 8,700 on March 13.
"It does suggest that you're in this downtrend for the immediate future," said Kenneth Tower, technical analyst at UST Securities Corp.
Some technicians say the bottom will hit at around 8,300 -- and then the market will make the steady march back to its current levels. "Basically, the decline sets up further losses to 8,270 -- that's the long-term moving average," said Terry Bedford, president of Bedford & Associates Research Group in Hamilton, Ontario. "The real problem is that most people have conceded the decline, which feeds on itself."
However, Bedford believes the nation's economic fundamentals remain sound enough to ward off a sustained drop. "I don't look for a watershed decline because interest rates are too low," he said. "There is some concern for earnings, but the interest rates are low enough you won't get a big decline. The return for bonds is not likely to be substantially great enough to attract a lot of the money to that market.
"The money has been shifting late cycle out of certain sectors and into others. Because of that, the money will likely shift back as the cycles progress. It'll be a rotating correction. It might get back to 8,300, but I don't think it will be a more substantial decline than that."
Other investors say a sustained bear market in U.S. stocks is unlikely because investments here still look attractive compared with the rest of the world.
"If you want to own financial assets, and you want to be in a market where you don't have political risk and currency risk, the U.S. is the place to go," said Philip Schettewi, chief portfolio strategist in the Washington office of Loomis Sayles & Co.
A.C. Moore, chief investment strategist at Dunvegan Associates, a research and money management firm in Santa Barbara, Calif., said stock prices remain at what he called the highest level since 1990.
"There is a legitimate concern about earnings at this point, and we're looking at potential for a 5% earnings gain for second quarter -- and that is not sufficient to justify current stock multiples," he said. "The valuation is extremely high here still with all these things occurring."
That caution is an eerie reminder of the sell-off last October when the Asian crisis first reared its head. Then, the Dow industrials lost about 15% over a few weeks, only to gradually march higher at the start of 1998.
"This is a case where everybody knows what's going on and we're waiting with bated breath to see what happens in Asia," said Richard Hoey, chief economist and director of equity research at The Dreyfus Corp. "When you're in these kinds of financial crises, it is really hard to define which week it's over, let alone what day."
The sharp sell-off came as Goldman Sachs & Co. said its partners have voted to sell stock in the investment bank to the public. After rejecting such a move six times in the last 20 years, the firm decided to end its 129-year-old partnership structure so that it can better compete with its publicly traded rivals.
Abby Joseph Cohen, the firm's influential co-chair of investment policy, said in a report Monday that the effect of Asia's financial problems on the U.S. economy will only be slightly negative despite Japan's weakening situation.
"We reiterate our long-standing conclusion that the effect of Asian conditions on aggregate U.S. economic growth (and) corporate profits is a moderate negative," she wrote.
Commentary
Analysis - U.S. stocks may fall another 3-5 percent
Stocks may fall another 3 percent to 5 percent before investors feel more hopeful about corporate earnings and have the end of Asia's financial crisis in sight, analysts and money managers said Monday.
In its fifth-worst point loss ever, the Dow Jones industrial average fell 207.01 points to a three-month low of 8,627.93, trimming its year-to-date gain to 9 percent. But the 2.3 percent drop did not even come close to breaking into the top 10 percentage declines.
With investors rushing into the bond market or raising cash to avoid the turmoil in Asia and lock in gains from the stock market's run-up earlier this year, the blue chip index has fallen about 5 percent in the last week and is down 6.3 percent from its record close of 9,211.84 on May 13.
"There is probably a few more percent left on the downside before people say there is enough value in the market to step back in," said Arun Kumar, senior stock strategist at Lehman Brothers in New York.
The Nasdaq composite index fell 29.30 points, or 1.7 percent, to 1,715.75. The technology-heavy index is down 4 percent in the last week and 11 percent off its high.
U.S. stocks continue to get pounded by fears that the recession in Japan, the world's second-largest economy, will hurt profits of American corporations, especially exporters and major industrial companies, including oil producers.
The weaker economies mean lower demand for U.S. products, while the stronger dollar erodes what profits are earned in local currencies overseas.
U.S. oil prices continued to tumble Monday to 12-year lows while the dollar hit another eight-year high against the Japanese yen.
Meanwhile, the 30-year Treasury bond jumped jumped 1-3/16, or $11.875 on a $1,000 bond, lowering its yield to 5.59 percent from 5.67 percent, as investors sought the perceived safety of government bonds.
"There is worry that Japan is not going to get its house in order soon enough and that could lead to more troubles in the rest of Asia," said Kumar.
Indeed, early profit warnings ahead of the second-quarter reporting season are nailing some leading companies.
Shares in Minnesota Mining & Manufacturing Co. Inc. (3M) fell $5.81, or 7 percent, to $81, after the diversified manufacturer said second-quarter and 1998 profits would be lower than expected, in part because of Asia.
A.C. Moore, chief investment strategist at Dunvegan Associates, a research and money management firm in Santa Barbara, Calif., said stock prices remain at what he called the highest level since 1990.
"There is a legitimate concern about earnings at this point, and we're looking at potential for a 5 percent earnings gain for second quarter -- and that is not sufficient to justify current stock multiples," he said.
"The valuation is extremely high here still with all these things occurring," he said.
That caution is an eerie reminder of the sell-off last October when the Asian crisis first reared its head. Then the Dow industrials lost about 15 percent over a few weeks, only to gradually march higher at the start of 1998.
"This is a case where everybody knows what's going on and we're waiting with bated breath to see what happens in Asia," said Richard Hoey, chief economist and director of equity research at The Dreyfus Corp.
"When you're in these kinds of financial crises it is really hard to define which week it's over, let alone what day," Hoey said.
The sharp sell-off came as Goldman Sachs & Co. said its partners have voted to sell stock in the investment bank to the public. After rejecting such a move six times in the last 20 years, the firm decided to end its 129-year-old partnership structure so that it can better compete with its publicly traded rivals.
Abby Joseph Cohen, the firm's influential co-chair of investment policy, said in a report Monday that the effect of Asia's financial problems on the U.S. economy will only be slightly negative despite Japan's weakening situation.
"We reiterate our long-standing conclusion that the effect of Asian conditions on aggregate U.S. economic growth (and) corporate profits is a moderate negative," she wrote.
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