U.S. Stocks Fall as Profit Concern Deepens; Treasury Bonds, Dollar Rise
Wednesday's U.S. Markets: Stocks Fall; Bonds, the Dollar Rise
New York, Aug. 26 (Bloomberg) -- U.S. stocks fell, led by United Technologies Corp., J.P. Morgan & Co. and other companies that do business overseas, as a plunge in Russian markets deepened concern that slumping economies around the world will cut into corporate profits.
The Dow Jones Industrial Average fell 79.30, or 0.9 percent, to 8523.35. The Standard & Poor's 500 Index fell 8.67, or 0.8 percent, to 1084.19, and the Nasdaq Composite Index dropped 30.08, or 1.7 percent, to 1768.09.
The worldwide economic slowdown is ''calling earnings growth into question and pressuring stock prices,'' said Thomas Madden, chief investment officer at Federated Investors Inc., which oversees $95 billion. ''It's likely to continue.''
U.S. Treasury notes rose after Russia's plan shook confidence in emerging markets and boosted the appeal of U.S. government debt as a refuge. The 10-year U.S. Treasury note rose 1/4, pushing its yield down 3 basis points to 5.20 percent, an almost five-year low. The 30-year bond rose 4/32, or $1.25 per $1,000 bond, trimming its yield 1 basis point to 5.42 percent. The dollar rose to 1.8060 marks in late New York trading from 1.7994 yesterday. It was little changed at 144.15 yen from 144.14.
Stocks pared losses after Stanley Druckenmiller, manager of the Quantum Fund for billionaire investor George Soros, told CNBC that the U.S. stock market is the most attractive in the world, and predicted that money will pour into U.S. assets because of the turmoil in markets around the world. He said large stocks will lead the rally.
The Russell 2000 Index of small stocks dropped 9.35, or 2.4 percent, to 380.41. The index dropped 21 percent below its April 21 record yesterday. Investors typically define a bear market as a decline of 20 percent or more.
Investors were willing to pay record-high valuations for U.S. stocks for the past three years because interest rates were low, inflation was under control and economies around the world were growing. Now, emerging markets are stumbling, raising concern about stability and undermining growth in developed nations, and that's making stocks more risky.
Still, optimistic investors say that low interest rates and a growing domestic economy will support U.S. earnings and share prices.
United Technologies
United Technologies, which gets more than 40 percent of its sales outside the U.S., fell 3 3/16 to 82 7/8, leading the decline in the Dow industrials.
U.S. companies ''are tied to economic activity abroad, which is slowing, so eventually we are going to see slowing here too,'' said Donald Coxe, chief investment strategist at Harris Investment Management Inc., which oversees $12.5 billion. ''Analysts will realize profit estimates are overstated.''
The latest evidence that the recession in Asia and the slowdown elsewhere is hurting the U.S. came from Applied Materials Inc. and Harnischfeger Industries Inc.
Applied Materials fell 1 15/16 to 29 1/2 after the world's largest maker of semiconductor-manufacturing equipment said it will cut 2,000 jobs, or 15 percent of its workforce, in the face of slumping sales to computer-chip makers in Asia and elsewhere. The company said it will take an unspecified charge for the firings, which will result in a fourth-quarter loss.
Harnischfeger fell 3 5/16 to 16 15/16 after the maker of mining and paper-making equipment reported a bigger-than-expected quarterly loss because of weak demand stemming from a paper glut. The company said it expects depressed business conditions into 1999, and will cut 3,100 jobs, or 20 percent of its workforce, and ''aggressively'' reduce spending. Prices for pulp, the raw material used to make paper, aren't expected to rebound soon, because slack demand and cheaper Asian imports are causing a pileup in inventories.
As the dollar strengthens against other currencies, U.S. exports become more expensive and import prices drop, both of which mean lower profits for U.S. companies. Also, United Technologies and other companies get fewer dollars when they exchange their foreign revenue for U.S. currency.
The slump in Russia and other emerging markets ''implies potential deflation in the U.S. -- not just low inflation, but falling prices -- and it's very tough for corporate profits to keep up in that kind of environment,'' said Arthur Micheletti, chief investment strategist at Bailard, Biehl & Kaiser, which manages $1.2 billion in Foster City, California. The firm has cut its U.S. stockholdings and bought Treasury bonds.
Banks
While the exposure of U.S. banks to Russian economic problems is small compared with that of their European counterparts, some of the biggest U.S. financial companies, including J.P. Morgan and Citicorp, stand to lose money. Russia's plan forces debt holders to swap ruble government securities for new bonds, an exchange investors said would leave them with about 30 cents on the dollar.
Underscoring the risk facing Western financial companies exposed to Russia, Credit Suisse Group said its CSFB investment banking unit lost $254 million since June, mostly on its Russian investments.
J.P. Morgan, one of the U.S. banks doing business in Russia and other emerging markets, fell 2 15/16 to 117 15/16. Institutional investors have been selling J.P. Morgan shares, while small investors have been buying, according to money flow analysis.
Citicorp lost 3 to 133 1/8 and Bankers Trust Corp. dropped 4 3/4 to 92 1/8. Travelers Group Inc., which is merging with Citicorp, fell 3/4 to 54 3/8.
Russia's debt plan ''sends another shock wave through the global financial system,'' said Richard Cripps, chief market strategist at Legg Mason Wood Walker Inc. in Baltimore.
Bonds ''I've stayed mainly in Treasuries for their safety,'' said Jim Somers, who manages $2.5 billion of bonds at Martindale, Andres & Co. in West Conshohocken, Pennsylvania. ''Credit risk is the key.''
Investors are flocking to U.S. government securities as a haven from financial and economic crises in Russia, Latin America and Asia. Thirty-year yields fell to 5.38 percent Friday, the lowest since the government began regular sales of the securities in 1977. The securities returned 24.8 percent in the past year, including price action and interest payments. ''People aren't very happy'' about the Russian package, said Andrew Brenner, head of global fixed-income trading at Fimat USA Inc. A lot of traders in Russian debt ''took the risk and lost, plain and simple.''
Dollar Assets
With so much turbulence in the rest of the world, ''everybody wants dollar-based assets,'' said Dan Busiel, an analyst and bond salesman at NationsBank CRT Services in Chicago.
For its part, the dollar climbed to the highest level in more than a week against the deutsche mark, a currency vulnerable to Russian events because Germany is its biggest trading partner and lender. A rising currency boosts the appeal of U.S. Treasuries because returns are worth more when converted to international investors' home currencies.
Jim Cusser, who helps manage $20 billion in assets at Waddell & Reed in Overland Park, Kansas, said some of his customers are switching out of equities. ''There is a flight to quality that includes stocks to bonds.'' More international turmoil could push 30-year bond yields as low as 5 percent by year-end, he said.
bloomberg.com |
