489-Point Pop: Blue-Chip Dow Rises 6.3% as Buyers Return, Nasdaq up 5%

July 24, 2002

Dow zooms higher as financials rally
J.P. Morgan, Citigroup battle back

NEW YORK (CBS.MW) -- The Dow saw its most powerful rally of the year Wednesday, soaring over 6 percent on heavy volume as components J.P. Morgan and Citigroup battled back from tremendous losses. Progress on corporate reform legislation also contributed to the enthusiasm on Wall Street.

The Senate and House reached an agreement Wednesday on a pact to overhaul regulation of the accounting industry and implement new punishments on executives that commit fraud.

Early in the session, a conference call from J.P. Morgan worked to temper investor anxiety with regard to its dealings with Enron. J.P. Morgan and Citi got creamed Tuesday as investors questioned their role in the financing of now bankrupt Enron as well as other companies.

"This day was the obvious response to all the pessimism that had built up over the past few weeks. J.P. Morgan's turnaround was key in helping the market [after all the] rampant rumors on Tuesday of systemic risk to the financial system," remarked Barry Hyman, chief investment strategist at Ehrenkrantz King Nussbaum.

"It's tough to say whether the rally will stick. I think it will be sold into," Hyman surmised. Still, he concedes that the market's risk-reward ratio has improved dramatically.

The Dow Jones Industrial Average rallied 488 points, or 6.3 percent, to 8,191. Exxon Mobil, J.P. Morgan, Caterpillar, DuPont, 3M and Honeywell topped the list of advancers while AT&T, Philip Morris, Procter & Gamble and McDonald's dripped in red ink.

The Nasdaq Composite gained 35 points, or 2.9 percent, to 1,264 and the Nasdaq 100 Index added 32 points, or 3.6 percent, to 929.

Jeffrey Kleintop, chief investment strategist at PNC Advisors, notes that in the past, disconnects between improving fundamentals of economic and profit growth and a slide in the stock market have lasted for an average of seven months -- with a recoupling in the form of the market returning to the fundamentals.

"We are optimistic that by year-end the trend in the fundamentals will remain positive and will pull the market out of its current slump."

The Standard & Poor's 500 Index put on 3.5 percent while the Russell 2000 Index of small-capitalization stocks climbed 1.8 percent.

Volume was again very heavy, 2.38 billion on the NYSE and 2.12 billion on the Nasdaq Stock Market. Market breadth was mixed, even as the averages advanced, with winners taking out losers by 18 to 15 and decliners outnumbering advancers by 19 to 16 on the Nasdaq.

Richard Dickson of Hilliard Lyons notes that the market's recent sell-offs have been accompanied by very heavy volume. He points out that of the five heaviest volume days recorded on the NYSE, three have occurred in the past four days.

"Waterfall price declines accompanied by very heavy volume are, historically, very reliable indications of market bottoms. Most recently, the two best examples occurred in October 1987 and again in September 2001. Whether the current example proves to be a third remains to be seen, but we think chances are good that it will," he said. "Overall, we would be making a list of stocks to buy right now."

The major question, Dickson said, is whether an eventual market turn proves to be a bear market low or simply an intermediate-term low within an ongoing bear market.

J.P. Morgan, Citi recover

J.P. Morgan rallied 6.6 percent after falling as much as 9.3 percent intraday to lows not seen since mid 1995. In a morning conference call, the company said it was comfortable with its liquidity and capital positions while stressing that its fundamentals hadn't changed. The banking titan also said it "acted properly," referring to its dealings with Enron. And Citigroup climbed 1.9 percent after reaching a nadir not witnessed since late 1998 early in the trading day. J.P. Morgan upped Citi to a "buy" from a "market performer" on belief that it's unlikely the company knowingly participated in fraudulent activity related to Enron.

UBS Warburg's Diane Glossman feels the recent decline in Citi and JPM shares represents a "unique entry point," while acknowledging that the stocks are not for the "faint of heart" since the headline risk could be prolonged.

And Standard & Poor's said it believes market concerns about the liquidity position of J.P. Morgan are unfounded. "JPM is not currently having any difficulties meeting obligations or accessing capital markets. There are no stock price triggers in any debt covenants that would accelerate the need for funds," S&P said in a research note.

Dow stock General Electric recovered early losses, gaining 1.2 percent in recent dealings. On Tuesday, GE Power Systems announced plans to slash about 2,500 jobs over the next nine months -- with additional reductions expected in 2003 -- to respond to the reduction in demand for power generation equipment.

Dow component Merck was a bright spot, rising 3.8 percent after announcing late Tuesday that it approved a $10 billion share repurchase program. Standard & Poor's reaffirmed its "AAA" credit rating on the Dow component following its buyback announcement. S&P said it believes Merck will "gradually restore its earnings to a higher growth level." Fellow Dow component Johnson & Johnson rose 3.8 percent.

Among the Dow companies reporting, McDonald's reported a second-quarter profit that topped analysts' projections while offering a full-year earnings-per-share view that surrounded Wall Street's forecasts. Still, shares edged down 1 percent.

DuPont ascended 3.6 percent after registering better-than-expected second-quarter earnings, though it offered a cautious outlook for the remainder of the year, citing a modest recovery pace expected for the economy, stock market volatility and a difficult pricing environment.

Software giant Microsoft rose 1 percent after falling over 7 percent on Tuesday. RBC Capital Markets upgraded the Dow stock to an "outperform" from a "sector perform" on belief that its valuation is now compelling.

Exxon Mobil jumped 6 percent after Banc of America Securities upped its view on the Dow stock to a "strong buy" from a "buy" on belief recent underperformance is being driven mainly by technical factors.

Salomon lowers Dow, S&P 500 targets

Tobias Levkovich, Salomon Smith Barney's chief U.S. equity institutional strategist, lowered his year-end target on the S&P 500 to 1,000 from 1,200 to 1,250 and cut the Dow's to 9,650 from 11,200. He last lowered his targets on the two indexes on June 10. On Monday, Lehman Brothers and Banc of America Securities also lowered their S&P and Dow outlooks.

In a note entitled "a wounded bull pulls in his horns," the Salomon strategist said the "sense of corporate rot is overpowering economic and earnings gains and causing a run on equities that cannot be easily undone."

Levkovich said revelations of accounting irregularities have undermined investor confidence in a more meaningful way than the shocks of the 1987 crash, Long Term Capital Management's collapse in 1998 -- or even the anguish following the Sept. 11 terrorist attacks. While those exogenous events caused market reverberations, the strategist said the core issues of earnings quality and management accountability were never questioned.

Levkovich conceded that it's very difficult to assess the impact of the stock market's rumblings of late on consumer spending trends or corporate decision-making regarding hiring or investment plans.

The Salomon strategist upped his view of the consumer staples group to a "market weight" from an "underweight," with Procter & Gamble recently added to the firm's "Recommended List." He said he'd be a buyer of financial companies that appear to have been unduly punished over the past sessions: Bank of America, Bank One, Wells Fargo and American Express look attractive to him while he feels J.P. Morgan has "priced in all kinds of bad news already."

Nortel, Lucent decline; oil service issues

The networking group was among the worse performers in the tech sector. Nortel Networks dropped 4.4 percent even as SoundView Technology upgraded the stock to an "outperform" from a "neutral" on favorable risk-reward ratios. Lucent Technologies declined 3.6 percent after a downgrade from Raymond James to an "underperform" from a "strong buy."

Amazon's 6.7 percent decline weighed heavily on the Net sector. The online retailer reported late Tuesday a second-quarter loss that was narrower than the Wall Street consensus estimate. Amazon's outlook was also bright, as it projected a pro forma profit for the full year, better than Wall Street's current target.

AOL Time Warner also took a nosedive, falling over 6 percent ahead of its quarterly results, to be released after the close of trading.

Shares of Level 3 Communications rose 6.2 percent in recent action after moving lower early on. The company is looking to acquire Williams Communications, a bankrupt competitor, for $1.1 billion.

Oil service stocks got a boost from Halliburton's 29.2 percent ascent. The company detailed that its exposure to asbestos liability would total $602 million over 15 years, much less than had been expected by market participants. Additionally, the company announced a better-than-expected second-quarter profit from operations.

Treasurys rally, dollar resumes descent

Treasury issues rallied as they responded to more weakness in the equity realm and benefited from safe haven flows.

The 10-year Treasury note heaped on 18/32 to yield 4.33 percent while the 30-year government bond jumped 13/32 to yield 5.25 percent.

The dollar resumed its downward trajectory at astounding speed, erasing the bulk of Tuesday's heady gains. The buck declined 1.1 percent to 116.22 yen while the euro edged up 0.8 percent to 99.67 cents after falling below parity for the first time in over a week on Tuesday.

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