Steve Quayle News Alerts

Sept. 27, 2002
By Julie Rannazzisi, CBS.MarketWatch.com

NEW YORK (CBS.MW) -- The Dow plunged Friday, moving almost 300 points lower in late afternoon action, whacked by a lethal warning from Philip Morris, downgrades of General Electric and massive job cuts at SBC Communications.

The Nasdaq was also dragged lower after a brief stint in the plus column earlier in the day, although losses were more contained.

"You will continue to see bad news come out for the third quarter. Corporate America will now err on the side of caution," said Uma Rajeshwar, first vice president at Glenmede Trust. What's mind-boggling, he said, is the size of many of the negative pre-announcements being issued.

At the end of the day, Rajeshwar believes the market will also err on the side of caution.

"The market is being driven by redemptions. Institutions are not stepping up to buy and the shorts know there's not enough firepower right now to [sustain] a rally," said James McGlynn, managing director at Summit Everest Fund.

"People just don't want to own stocks now."

The Dow Jones Industrial Average skidded 285 points, or 3.6 percent, to 7,711, stifled by losses in Philip Morris, SBC Communications, General Electric, Merck and Boeing. Only Hewlett-Packard and Coca-Cola ascended.

The absence of high-profile warnings over the past couple of trading sessions allowed the Dow to rally over 300 points on Wednesday and Thursday, effectively reversing Monday's and Tuesday's losses.

The Nasdaq Composite lost 19 points, or 1.6 percent, to 1,202 and the Nasdaq 100 Index slid 10 points, or 1.2 percent, to 863.

In sector action, warnings

The Standard & Poor's 500 Index slumped 3.1 percent while the Russell 2000 Index of small-capitalization stocks sagged 2.3 percent.

On the data front, the final reading on second-quarter gross domestic product revealed a 1.3 percent growth rate, up from the previously reported 1.1 percent rate and more than the projected revision to 1.2 percent.

And the University of Michigan consumer sentiment index dipped to 86.1 in September from August's 87.6, close to expectations for an 86 reading.

Some economists found the modest slip encouraging.

"With all of the negative news out there this month, renewed declines in stocks, more widespread layoffs, and looming war with Iraq, it is encouraging that both the University of Michigan and Conference Board gauges slipped only modestly in September. The bottom line is that consumer spending has held up surprisingly well this year and in fact accelerated noticeably in July and August," commented Steve Stanley, economist at Greenwich Capital Markets.

"While Fed officials will have to remain nervous about the ability of consumers to sustain the recovery until the corporate sector begins to chip in, at least for now, the signs are good that we will muddle through," he concluded.

Volume came in at 1.21 billion on the NYSE and at 1.19 billion on the Nasdaq Stock Market. Market breadth was shoddy, with losers stomping on winners by 23 to 9 on the NYSE and by 22 to 10 on the Nasdaq.

On the fund flow front, Trim Tabs reported that all equity funds had outflows of $7.3 billion over the past week compared with outflows of $4.6 billion in the prior week. Equity funds that invest primarily in U.S. stocks got outflows of $6.7 billion compared with outflows of $2.3 billion in the prior week. And bond funds had inflows of $900 million vs. inflows of $2.2 billion during the prior week.

Merrill cuts '02, '03 EPS and Q4, Q1 GDP

Merrill Lynch chief economist Bruce Steinberg said "repeated shocks" to the U.S. economy are delaying the onset of a full-fledged recovery.

"Sharp stock market declines and the threat of war are increasing uncertainty, depressing confidence, widening credit spreads and raising oil prices," the economist told clients. "Once the Iraq conflict is past, U.S. growth should accelerate."

Steinberg lowered his S&P 500 operating earnings-per-share estimates to $45 from $46 for 2002 and to $52 from $55 for 2003. On Thursday, Salomon sliced its 2003 EPS estimates on the S&P 500.

The Merrill economist also cut his gross domestic product forecast to 2.5 percent for both the fourth quarter and first quarter of 2003 but upped his growth rate projection for the second half of 2003 to 4.5 percent.

Steinberg said his targets assume a war with Iraq commencing in the first quarter of 2003 that'll end quickly and that won't disrupt oil supplies in the Gulf region. But, he cautions, a double-dip recession could ensue should Iraq manage to shut down even part of the flow of Saudi or Kuwaiti oil.

Steinberg now believes the central bank will ease at the next two FOMC meetings to bring the overnight fed funds target to 1.25 percent by year-end from the current 1.75 percent.

SBC, Philip Morris and GE slide

General Electric was under the gun, falling 5.9 percent after receiving a downgrade from Lehman Brothers to an "equal weight" from an "overweight" on belief that earnings at its GE Capital unit are under pressure and that recovery of the short-cycle businesses has stalled. Lehman also trimmed its fourth quarter and 2003 earnings estimates on the industrial giant.

And CS First Boston lowered its rating on GE to a "neutral" from an "outperform."

GE backed its third-quarter numbers Wednesday but also appeared cautious. Speaking before Boston College's Chief Executives Club, in fact, GE CEO Jeff Immelt cautioned his fellow CEOs to not count on a strong recovery later this year or in early 2003. On Thursday, GE held its investor day.

Checking SBC's news, the company announced late Thursday that it would be forced to eliminate 11,000 jobs because of the sluggish economy and heated competition. It also blasted what it labeled an "outmoded" regulatory policy. The telecom company also sliced its spending plans for 2003, a move that bodes ill for the group. Shares dropped 7.7 percent.

Tobacco titan Philip Morris, meanwhile, tumbled 10.1 percent after deeply slicing its 2002 profit targets late Thursday due to sagging sales, a weak economy and higher promotional spending.

Salomon lowered its view of the tobacco industry to a "market weight" from an "overweight" because of the continued deterioration in the group's fundamentals. Morgan Stanley made a similar move earlier in the week.

But Procter & Gamble backed its sales and earnings-per-share targets for its fiscal first quarter and for all of 2003. P&G fell 1.7 percent.

And retailer Lowe's said it was "comfortable" with the "upper end" of its earnings-per-share outlook for the third quarter and for all of 2002, noting that comparable store sales continue to track within its outlook. Shares shed 0.5 percent.

3M fell 2.1 percent after the Dow company announced it would restructure its business into seven units as strives to zero in on its best markets and customers.

And Dow company American Express fell 3.4 percent after Merrill Lynch trimmed its 2002 and 2003 earnings estimates due to declines in the equity markets and the "apparent slow levels of spending" in the economy in September.

Warnings weigh on market

Warnings continued to pour in unabated, affecting most sectors of the marketplace.

Drugmaker Wyeth tumbled over 15 percent after slicing 2002 earnings expectations due to sales misses in several products. Banc of America Securities cut its rating on the stock following the news.

Children's Place cratered 32.8 percent after cautioning that it would miss fiscal third-quarter profit targets by a mile due to a steep drop-off in September sales.
Callaway Golf dropped over 22 percent after advising investors late Thursday that its third-quarter targets would fall short of expectations. Downgrades from Bear Stearns and A.G. Edwards ensued.

Tasty Baking Co. slid 13.2 percent after announcing that its third-quarter results would miss Wall Street's projections due to warm temperatures and heated competition.

Airline issues were the biggest broad market decliners after Delta Air Lines projected a wider-than-expected loss for its third quarter. The carrier also reportedly plans to cut 1,500 jobs. Delta shares plunged 20.3 percent.

In the insurance sector, Chubb relinquished almost 6 percent after its Chief Financial Officer Weston Hicks resigned late Thursday. Salomon followed with a downgrade of the stock to an "underperform" from an "outperform" on belief that the news raises near-term uncertainty at Chubb to the point where the stock is likely to underperform its peers.

Manugistics skidded 32.2 percent after the company reported a much wider second-quarter loss and announcing job cuts. UBS Warburg lowered the stock to a "hold" rating from a "buy," indicating that it was uncomfortable maintaining its previous rating on the stock until "the company can stabilize their license revenue run-rate." Deutsche Bank Securities and Thomas Weisel Partners also chimed in with downgrades of their own.

Treasurys generate safe-haven bid

Government bonds rose across the board, picking up steam as stocks wavered.

The 10-year Treasury note was up 26/32 to yield 3.675 percent while the 30-year government bond gained 20/32 to yield 4.69 percent.

In the currency sector, the dollar rose 0.6 percent to 122.79 yen while the euro edged up 0.3 percent to 98.01 cents.

Julie Rannazzisi is markets editor for CBS.MarketWatch.com in New York.

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