Stocks Tumble; Nasdaq at Five-Year Low

Reuters ^

[RCW2001]

Stocks Tumble; Nasdaq at Five-Year Low
Last Updated: July 01, 2002 04:53 PM ET
By Chelsea Emery NEW YORK (Reuters) - Wall Street began the third quarter on a dour note on Monday, with the Nasdaq composite index dropping to a five-year low as the multibillion-dollar accounting scandal surrounding former high-flying phone company WorldCom Inc. deepened. The Nasdaq dropped through the Sept. 21 low it touched after the attacks on the United States, and kept falling to close at a level unseen since June 10, 1997. Wall Street's accounting woes, along with jitters about political turmoil overseas and worries that the July 4 holiday may bring another attack on the United States, prompted investors to shy away. "People are nervous about July 4th, the next WorldCom ... just pick your poison," said Donna Van Vlack, director of trading at Brandywine Asset Management. "It's darn hairy out there." A surprisingly strong forecast from 3M Co. did little to underpin confidence as investors stayed on the sidelines in a shortened trading week. Major stock markets will be closed on Thursday for the July 4 holiday and close early on Friday. "It's called a bear market," said Dan McMahon, head of block trading for CIBC World Markets. "The concerns are that the economic recovery is not as robust as people had hoped for and there's still a huge cloud of pessimism over accounting issues. People are waiting for the other shoe to drop. It's also a holiday week so volatility is exacerbated." The technology-laced Nasdaq Composite Index was down 59.45 points, or 4.06 percent, at 1,403.76, according to the latest available figures. That was its lowest close since June 10, 1997, when the index closed at 1,401.60. Last Sept. 21, the index closed at 1,423.19. The Dow Jones industrial average was down 133.47 points, or 1.44 percent, at 9,109.79. The broader Standard & Poor's 500 Index was down 21.17 points, or 2.14 percent, at 968.64. Breadth was negative, with about two stocks falling for every one that gained on Nasdaq and the New York Stock Exchange. About 2.97 billion shares traded on Nasdaq, with trading in WorldCom contributing about half of that volume. About 1.42 billion shares changed hands on the Big Board. WorldCom, which said it faces delisting from the Nasdaq on July 5 and received notice it has defaulted on some loans, fell 93 percent, or 77 cents, to 6 cents. More than 1.5 billion shares of WorldCom were traded, breaking the Nasdaq's record for most shares traded in an individual issue on a single day -- last broken by WorldCom itself in May. Trading had been halted since last week after WorldCom's admission that it did not properly account for $3.85 billion in expenses. The telecoms firm also said its audit committee is reviewing its financial records for 1999 through 2001. "It's just a question of what industry is the next one to get a major hit," said Adam Tracy, head of listed trading at Thomas Weisel Partners. "Accounting really worries a lot of people." Computer services company EDS Corp. slumped 18 percent after it said it expects WorldCom, an important customer, to account for $160 million to $175 million of EDS revenue and 3 cents to 4 cents of EDS earnings per share in both the third and fourth quarters. Separately, EDS said it ended talks with consumer products giant Procter & Gamble Co. related to a potential contract said to be worth about $1 billion. EDS fell $6.70, or 18 percent, to $30.45. Procter & Gamble gained 73 cents to $90.03. Diversified manufacturer 3M helped limit losses in the blue-chip Dow index with a gain of $4.40, or 3.6 percent, to $127.40 after saying second-quarter earnings will be higher than expected due to improved sales. Johnson & Johnson and partner Alkermes Inc. took a hit after the U.S. Food and Drug Administration rejected their bid to market a long-acting, injectable version of the lucrative schizophrenia treatment Risperdal, the companies said. Johnson & Johnson fell $1.76 to $50.50, while Alkermes lost 68 percent, down $10.86 at $5.15. Biotech shares like Alkermes were a major drag on the Nasdaq market. The Nasdaq biotechnology index fell nearly 9 percent. Sector leader Amgen Inc. was down $3.52, or 8 percent, to $38.36. One bright spot, though, was Tyco International Ltd., which topped the list of the New York Stock Exchange's most actively traded stocks. Investors were betting the public share sale of CIT, Tyco's finance arm, would help the cash-strapped company meet its urgent debt payments. Tyco closed up 24 cents to $13.75. After the bell, Tyco raised a less-than-expected $4.6 billion from the sale of CIT. Investment bank Merrill Lynch also fanned investors' worries after it cut its year-end targets for the S&P 500, reflecting lower expectations for corporate earnings. Merrill cut its S&P 500 target to 1,050 points from 1,200. Trading volumes are expected to thin as investors slip out to begin their July 4 holiday. "By the time you get to Wednesday, everybody will be sliding out," said Larry Wachtel, market analyst at Prudential Securities. "The following week, when the second-quarter earnings actually start to arrive -- that's the moment of truth for the market, but this is really kind of a throw-away week."

[UnBlinkingEye]

Good thing we are in a recovery or this could really be bad news.

[JohnGalt]

I am afraid Bush has missed the opportunity for a modest, even 'temporary,' capital gains tax reduction for this election cycle. Democrats, with any suburban districts, would have little choice but to support a cut with the way the market has behaved. However, now the Left will be able to make the case for greater regulation and inject ever more fear into the market.

[The Vast Right Wing]

It seems to me you would want to make the case for a capital gains tax cut when the market has had a rally and people are facing actual capital gains taxes, not after reaching lows for the past 5 years?

[Gritty]

This albatross will be hung around Bush and the GOPs neck.

[JohnGalt]

Well, we know that didn't work/didn't happen. Greenspan made sure of it by rate hike threats.

Bush is the only one who can make the case that Republicans are for the investor class. While boasting a 70% approval rating, I am not sure how any on the right side of the spectrum can be happy with how he has handled the economy-- including a failure to make the estate tax repeal permanent. By denying Republicans the chance to claim they "are doing something" about the economy, the Democrats will fill the void with investigations and ever more regulation.

[marvlus]

Trading had been halted since last week after WorldCom's admission that it did not properly account for $3.85 billion in expenses.

The telecoms firm also said its audit committee is reviewing its financial records for 1999 through 2001.

Now, let's see - was this on Clinton/Gore's watch?

[lds23]

Besides the fact that the Dems won't let the economy recover regardless of what happens.

I've posted similar sentiments elsewhere, but basically it boils down to leverage and liquidity.

The stockmarket "boom" of the late 90's was basically liquidity driven (lots of new investors bringing lots of money to chase too few opportunities). Then this got leveraged (basically a "rationalization") as price/earnings went through the roof so earnings had to be over-estimated going forward. Add to the mix the further leveraging through margin, futures, hedge contracts, etc.

Now that past earnings are appearing to be ephemeral, and future earnings further in doubt, the market may be overvalued by a third.

I have been on a cautious accumulation since May of this year. Still keeping a low profile.

[Lee_Atwater]

The problem is that most capital investments are long cycle. Thus, the efficacy of temporary tax changes are low.

I'm not hopeful for a capital gains tax reduction, as long as the Harvard Yard Keynsians (i.e. Dr. Lawrence Lindsey) dominate the fiscal policy of the Administration.

[JohnGalt]

Chronologically and culturally speaking, yes, but we play the game of the left by indicating the Washington has a role in the economic affiars of compaies people freely chose to invest in.

[areafiftyone]

This albatross will be hung around Bush and the GOPs neck.

I agree and the hanging has already begun. I was hoping Bush would come out swinging on this. He's gonna have to do alot more if he wants to win in 2004. If he doesn't watch out GORE may be sitting in the White House. GOD I HOPE NOT!

[JohnGalt]

Of course, I favor permanent cuts and elimination, but the political opportunity is there for a temporary cut-- politics being the art of the possible. Let Bush run in 2004 on the effort to make it a permanent cut.

[JohnGalt]

I do not buy that at all. There was real value, certainly in telecomm and biotech, added to the marketplace, however, over regulation and government taxation assured that any bump in the road would be a disaster to an economy that operates on finance and debt loads rather than cash under the mattress.

[The Vast Right Wing]

Well, I would have pushed for larger tax cuts that start earlier to rescue the economy. To say that Bush didn't get the estate tax permanently repealed is not fair. The Dem's are the ones that killed it, blame Tommy D.

[TightSqueeze]

Those wild and wonderful dip buyers who were busy at work last Friday ignoring the latest bad news and buying with abandon must have called in sick today.

This bear will be unrelenting in its punishment of bottom callers and dipsters, making sure that when the bottom is finally reached there will be no funds left to expand the bubble again.

As a pure play I suggest shorting companies whose primary business is decorative wallpaper, as it will be far cheaper to cover walls with the stock certificates of bankrupt tele and dot coms.

There will continue to be bear market rallies where stocks move from strong hands to weak and the dollars that the fed pumped into the market can be consumed. This market will not end in a crash but die in a whimper as hot pocketed speculators chase overpriced stocks all the way down the stochastic curve, thinking all the while they just bought the buy of the century.

[Vets_Husband_and_Wife]

This albatross will be hung around Bush and the GOPs neck.

I think the American Public is savvy enough to realize it was going on before President Bush took office. Candidate Bush was wise enough to point it out before the elections. It took 8 years to make this mess.. why do people think it can be fixed so quickly?

This economy hasn't hit bottom yet. Thanks in large part to an NON existent oversight during the Clinton Admin,. Dot.coms were artificially inflated. Sure, lots of people made millions.. but it was baised un unrealistic expectations.

This is a correction. And the bottom could very well be around 6 to 7 thousand for the DOW,..and 1000 or under for the NASDAQ.

People have been predicting this for some time on FR. Way before the elections. The reasons for it were long in the making. But no one would listen. They even re-elected CLINTOON!!

Historically it takes 5 to 7 years for a Presidents economical policies to take effect. Clinton inherited a recovering economy. President Bush 43, inherited one in decline .. you figure it out!!

[lds23]

There are lots of other factors, too. I still think Greenspan had a lot to do with the doldrums we're now in. He slammed on the brakes too hard for too long.

As you say, there was perhaps lots of potential in a lot of companies, if their stock price had held up. Greenspan was too busy looking at his existing basket of goods to account for the innovation potential that was also a major driver to the bubble. For example, if, say, the fiber glut (which was built on the promise of broadband internet taking off)was allowed to fill up with lots of content and trading amongst all those goofy dot-coms (I'm being simplistic), maybe that would have further spurrred innovations in markets, transportation, and supply-chain management.

But again, the earnings were ephemeral.

[JohnGalt]

Making excuses for the Bush team rarely helps in November. Bush's tax cut was more an Inflation Correction as bracket creep in the nineties pushed people into higher brackets. By touting such a large number (1.3 trillion) he appealed to Republicans who might have thought about Steve Forbes, but by enacting it over 10 years, he made Conservatives very cynical, if not left feeling betrayed that, after all, he was not a supply-sider.
The $300 rebate check is a laughable insult in retrospect when most Americans have seen their 401Ks lose 20% of their value and state governments are raising fees and taxes at every opportunity in GOP and D administrations. This economy is a train wreck with the States practicing Hoovernomics and Bush coming across as a do nothing, rejecting even the lesser political minefield of deregulation (as opposed to raising steel tariffs and de facto consumer products made of steel/big ticket items.)

[JohnGalt]

I think you are dead on...we are (allegedly) Conservatives and Libertarians on this site who believe in potential and the marketplace, not leftwing conspiracy fantasy i.e. Oliver Stone's Wall Street.

The 1996 Telecommunications Bill hindered the financing of broadband's installation cost which killed the dot.coms. The biggest piece you mention is supply chain management which more rapidly translates to lower consumer good prices and cheaper big ticket items.