U.S. Stocks
Drop; Investors Book Gains on Profit, Rate Concerns
New York, Jan. 4 (Bloomberg) -- U.S. stocks suffered
their
biggest declines since 1998 as the appointment of Federal
Reserve
Chairman Alan Greenspan to a fourth term and the absence
of
computer errors related to the century date change prompted
many
investors to book market gains now on a bet that corporate
earnings
may be buffeted by rising interest rates and a slowing
economy this
year.
``We're past Y2K; now you've got to focus on `Gee, higher
interest
rates are bad for stocks,''' said Vincent Farrell, chief
investment officer
for Spears Benzak Salomon & Farrell Inc.
The Nasdaq Composite Index dived 229.46, or 5.6 percent,
to
3901.69, dropping 200 points for the first time in its 29-year
history.
In percentage terms, it was the biggest decline since
Aug. 31, 1998, when
markets around the world tumbled following
Russia's debt default. Qualcomm
Inc., the best-performing stock
of 1999, led the rout, falling 17 1/4 to 162
1/16.
The Dow Jones Industrial Average fell 359.58, or 3.2
percent,
to 10,997.93, the biggest loss since Sept. 10, 1998. The
Standard &
Poor's 500 Index sank 55.80, or 3.8 percent, to
1399.42, led by
communications equipment, software and computer
shares.
Only five of the S&P 500's 89 industry groups rose.
More
than seven stocks fell for every three that rose on the New
York
Stock Exchange, the broadest decline since Oct. 15.
Acceleration
Stocks fell at the open, and the decline accelerated
in
afternoon trading. ``People didn't want to sell in November
and
December, so the opening day is the first chance they get, and
boom --
they start selling,'' said Bruce Bittles, an analyst with
J.C. Bradford &
Co.
Over the past five years, the S&P 500 fell at least two
days
in the first five trading sessions.
One yardstick of U.S. stock-market volatility -- the
``VIX
Index'' on the Chicago Board Options Exchange -- rose 4.95 to
29.64,
its highest level since Oct. 15, when the Dow tumbled 288
points.
The VIX measures investors' expectations of future moves
in
the Standard & Poor's 100 Index. A rising index indicates
investors
are becoming concerned and may be saving cash rather
than investing in the
market. Technical analysts say when the VIX
reaches an extreme level, the
cash could fuel a rally, once they
start buying again. On Oct. 15, the VIX
closed at 31.48.
U.S. central bankers refrained from raising rates in
December
because of concern about computer problems related to
the century date
change. When the date switch passed without
disruption to business, it began
to look as though interest rates
would rise sooner rather than later,
investors said. Fed policy-
makers next meet Feb. 2. Higher rates increase
the cost of
holding stocks.
FreeMarkets
FreeMarkets Inc. tumbled 63 3/8 to 278 1/2 after
General
Motors Corp. said it would end its contract with the
online
auctioneer and shift its business to rival Commerce One
Inc.
FreeMarkets' software and services allowed GM to buy and
sell
supplies on the Internet. GM will cancel the contract in 90
days,
FreeMarkets said. Commerce One rose 14 7/8 to 218 1/2.
Drug stocks fell on concern that President Bill Clinton
could
propose measures to regulate drug prices in his State of
the Union address at
the end of this month. Schering-Plough Corp.
fell 2 13/16 to 38 and
Bristol-Myers Squibb Co. fell 4 7/8 to 59
9/16.
The Amex Pharmaceutical Index is down 14 percent since
the
end of November. Investors are worried that Clinton
Administration
proposals to add prescription coverage to the
Medicare health plan for the
elderly could hurt drugmakers'
profits.
Utility companies, including Duke Energy Corp., PG&E
Corp.
and Consolidated Edison Inc., gained as other stocks
fell.
``Electricity, water, gas -- they're steady and
predictable,'' said
Timothy Winter, a utilities analyst with A.G.
Edwards and Sons Inc. in St.
Louis. ``You get a decent yield in
these stocks which offers some support.
You'd expect the premier
companies in these group to do well.''
The S&P electric utilities index yields 5.8
percent,
compared with 1.2 percent for the S&P 500. Duke rose 3/4 to
49,
PG&E gained 7/8 to 20 11/16 and Con Edison advanced 7/16 to
34
3/16.
Earnings Warnings
Parametric Technology Corp., the second-most active
stock
after Dell computer Corp., fell 5 1/8 to 20. The maker of
software
used to design industrial products warned fiscal first-
quarter earnings
won't meet estimates. Parametric was expected to
earn 15 cents, the average
forecast from analysts polled by First
Call. Instead, it will earn 6 cents to
8 cents a share, before
charges.
Genesis Microchip Inc. lost 5 7/16 to 16 3/4. The maker
of
computer chips for video display said it expects break-even per-
share
earnings for the fiscal third quarter. Analysts had
expected earnings of 16
cents a share.
This week and next are likely to be the peak time
for
companies to give early estimates for fourth-quarter
earnings,
according to First Call/Thomson Financial.
New Tel Ltd. American depositary receipts, each worth
10
ordinary shares, soared almost fourfold after investors approved
the
Australian telecommunications company's plan to issue 25
percent of its stock
to the official Chinese news agency, Xinhua
Holdings Ltd. The ADRs jumped 23
9/32 to 31 1/2.
Defense Shares
Alliant Techsystems Inc., General Dynamics Corp. and
Northrop
Grumman Corp. gained after a Merrill Lynch analyst
raised his ratings on the
defense electronics companies.
Alliant jumped 3 1/2 to 65 after Byron Callan said the No.
1
ammunition supplier to the U.S. military could benefit from
broader U.S.
defense spending. He upgraded Alliant to near-term
``buy'' from ``neutral.''
General Dynamics climbed 2 1/16 to 51 1/8. Callan raised
the
top U.S. Navy shipbuilder to near-term ``buy'' from
``accumulate'' on
optimism naval ship and submarine program
spending increases of 5 percent to
9 percent will bolster
profits.
Northrop gained 11/16 to 53 9/16. Callan said he
expected
Northrop's earnings per share to rise by 12 percent to 13
percent
in 2001 on electronics sales, and he upgraded the No. 4
U.S.
defense contractor to near-term ``buy'' from ``accumulate.''
Interest Rates
Byron Wien, Morgan Stanley Dean Witter & Co.'s chief
U.S.
strategist, yesterday said there's more than a 50 percent chance
the
Fed will raise interest rates by 1 percentage point or more.
The benchmark 30-year bond yield fell 7 basis points to
6.55
percent, as yields at 28-month highs attracted buyers. At
these
levels, analysts said, bonds may become more attractive than
stocks
to some investors.
``The bond market is to blame for a lot of this,''
said
Anthony O'Bryan, a stock-market analyst at A.G. Edwards Inc. in
St.
Louis. ``The rise in yields makes it more competitive and
throws some fear
into people buying stocks.''
Salomon Smith Barney Inc. investment strategist John
Manley
cut the recommended stock allocation and raised the cash
weighting
in his model portfolio.
Manley, who is betting the stock market will fall in the
next
three to six months before rebounding later in the year,
reduced stocks to 55
percent from 60 percent and raised cash to
10 percent from 5 percent. He left
bonds unchanged at 35 percent.
Greenspan's renomination ``is positive for the
longer-term
structural integrity of financial markets,'' said A.C.
Moore,
chief investment strategist at Dunvegan Associates in
Santa
Barbara, California. ``It doesn't suggest a short-term
improvement,
owing to the Federal Reserve's stance on probably
tightening'' interest
rates.
Greenspan's Credit
Greenspan, who became head of the central bank on Aug.
11,
1987, has received much credit for the bull market of the 1990s,
and
for a U.S. economic expansion expected to set a record next
month as the
longest ever, just short of nine years.
In Europe, the prospect of higher interest rates sent the
Dow Jones Stoxx
50 index of European companies down 4.5 percent.
Earlier, the index fell 5.1
percent, its biggest drop since
October 1992. Germany's DAX index slumped 10
percent from
yesterday's high to today's low.
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