Warnings weigh on market

Warnings weigh on market

By Julie Rannazzisi,
CBS.MarketWatch.com

Last Update: 7:18 PM ET Jun 16, 2000

NEW YORK (CBS.MW) — The Dow Industrials ended the week on a sour note as
investors punished the financial sector following a couple of earnings warnings.
  

"Wall Street had rose-colored glasses on before the Wachovia warning hit
banks," said Scott Bleier, chief investment strategist at Prime Charter. The bottom
line, he added, is that bank estimates need to be ratcheted lower as the Fed engineers
what the market believes will be a soft landing.

And, Bleier continued, the jury is still out on whether the Fed will actually be able
to craft a so-called soft-landing.

"Even if we have a soft landing of the U.S. economy, earnings will be less than
expected. They won’t fall out of bed, but estimates will have to come down," opined
Peter Boockvar, equity strategist at Miller, Tabak & Co.

Boockvar said the performance of the bank sector this week was very disconcerting
because it showed deteriorating fundamentals.

What will be relevant for the market next week, Boockvar said, are the companies
announcing earnings shortfalls. The debate on the Fed’s decision at the June 27-28 Federal
Open Market Committee meeting won’t be at center stage, he said, as enough evidence has
emerged to convince the market that the central bank can stay sidelined.

The earnings debate

There’s a battle going on in the market between those encouraged that the Fed can
remain sidelined thanks to a slower economy and those concerned that the Fed has gone too
far on the tightening front and that earnings will really suffer, said Terry Gabriel,
technical analyst at IDEAglobal.com.

"The market is gripped by these fears. There’s still a wall of worry to climb, and
there’s a lot of disbelief," Gabriel said.

"There’s potential for bad news," Boockvar said, which is keeping the market
on edge.

Bleier expects tremendous rotation between sectors as the market digests and
consolidates the recent upward move in technology stocks.

Amid the dumping of blue-chip stocks on Friday, however, the Nasdaq continued to act
well, albeit without the kind of fireworks witnessed a couple of weeks ago.

"Through this lackadaisical week, the Nasdaq has acted very well and we’re seeing
many pockets of strength, like the semis," Bleier said. The Nasdaq, he added,
continues to hang out at the high end of its recent trading range.

The Dow Industrials lost 1.6 percent this week and is down 9.1 percent for the year.

The Nasdaq was essentially flat on the week, shedding 14.28 points. The index is down
5.1 percent for the year and off 23.5 percent from its all-time closing high set on March
10.

Upcoming events

Monday: No data set for release.

Tuesday: April trade balance, first-quarter current account data and May
Treasury budget statement.

Wednesday: No data. 

Thursday: Weekly initial claims.

Friday: No data.

Earnings watch

Earnings growth for S&P 500 companies for the second quarter should be
exceptionally strong at 22 to 23 percent, according to First Call.

Early results are indicating that pre-announcements for the second quarter will likely
be somewhat less negative than usual, First Call said. Further, the pre-announcements have
not yet had enough impact to cause estimates in the aggregate to be cut.

First Call said there have been 98 negative pre-announcements so far — with 51 percent
negative.

Monday: AG Edwards.

Tuesday: Cyberian Outpost, Oracle, Verity, Micron Electronics,
Lennar, Carnival, Kroger, Goldman Sachs, HB Fuller.

Wednesday: Manugistics, Bed Bath & Beyond,
Heilig-Meyers, National Discount Brokers, Worthington Industries, H&R Block.

Thursday: Tektronix, Gtech, Micron Technology, Darden
Restaurants, Family Dollar Stores, Cutter & Buck, Stride Rite, Morgan Stanley Dean
Witter.

Friday: No releases.

Weekly recap

Monday: Technology stocks succumbed to a bout of profit-taking, with shares of
big-cap names particularly hard hit. Blue-chip issues suffered smaller losses in another
rangebound session spent waiting for the week’s dose of economic data. Dow shed 49.85
points, or 0.5 percent, to 10,564.21, Nasdaq dropped 106.92 points, or 2.8 percent, to
3,767.92.

Tuesday: Buyers showed up in droves to snap up  big-cap technology
stocks, helping the Nasdaq score smart gains. Blue-chip issues also advanced after a
volatile morning, helped by a rebound in the retail and drug sectors. Dow gained 57.63
points, or 0.5 percent, to 10,621.84 while Nasdaq tacked on 83.15 points, or 2.2 percent,
to 3,851.06.

Wednesday: Blue-chip stocks registered handsome gains, courtesy of smart
advances in financial, retail and drug stocks. Technology shares meandered within a thin
range throughout the session and succumbed to a bout of selling late in the day, led by
big-cap names. Dow gained 66.11 points, or 0.6 percent, to 10,687.95, Nasdaq lost 53.65
points, or 1.4 percent, to 3,797.41.

Thursday: A jolt of buying interest in big-cap technology stocks helped
the Nasdaq score healthy gains. Advances in cyclical issues supported the Dow Industrials,
but additional gains were impeded by a significant decline in bank stocks. Dow added 26.87
points, or 0.3 percent, to 10,714.82, Nasdaq rose 48.31 points, or 1.3 percent, to
3,845.72.

Friday’s trading activity

Blue-chip shares took a veritable hit Friday following a heady sell-off in the bank sector
as well as an earnings warning from Xerox Corp. But the Nasdaq held on to modest gains
thanks to a climb in chip stocks.

Inside the broader market, biotech and oil service stocks rose while retail and
transportation shares slid. The tech sector saw the best buying interest in chip stocks.
Networking and Internet stocks also rose.

"We’re in the period of confessions when you do get earnings jitters. But I
believe the market has absorbed them well and is behaving sensibly," said Nick
Sargen, chief investment strategist at J.P. Morgan.

In the meantime, it was triple-witching Friday — a quarterly event that sees the
simultaneous expiration of futures, options on stocks indexes and options on individual
stocks — which produced a spike in volume.

"There are a lot of cross-currents in the marketplace," said Boockvar of
  Miller, Tabak & Co.

The Dow
Jones Industrial Average tumbled 265.52 points, or 2.5 percent, to 10,449.30.

For a second straight session, the Dow’s downside leaders were its financial
components: J.P. Morgan (JPM) fell 6.7 percent, or 8 1/2 to 118, Citigroup (C)
tumbled 2 1/8 to 62 3/4 and American Express (AX) fell 3 27/16 to 51 21/32. 

Philip Morris (MO) also lost significant ground, falling 7.3 percent, or 2 to 25
9/16.

The only Dow stocks ending on the upside were Alcoa, Exxon Mobil, International Paper
and Microsoft.

The
Nasdaq Composite edged up 14.82 points, or 0.4 percent, to 3,860.56 while the Nasdaq
100 index added 35.35 points, or 0.9 percent, to 3,787.36.

Among the tech winners Friday: Cisco Systems (CSCO), up 1 5/16 to 67 13/16, EMC
Corp. (EMC) up 5 to 79 1/8 and Qualcomm (QCOM), which rose 7 percent, or 4 5/16 to
65 3/4. The latter has fallen 24.5 percent over the past couple of trading sessions.

Sargen said buyers are coming back into the tech sector with more caution and more
emphasis on quality.

While the market believes the Fed can stand pat at the next meeting, the jury is still
out on what the next move will be after that and investors are playing it safe as a
consequence, Sargen said.

The Standard
& Poor’s 500 Index slipped 1.0 percent while the Russell
2000 Index of small-capitalization stocks eked out a 0.3 percent gain.

Xerox (XRX) announced that second quarter earnings-per-share will be below Wall
Street estimates due to unexpected provisions in its Mexico business. Further, the company
said gross margins are expected to be impacted by a shift to sales of lower-margin
products and services within each product segment. Xerox will announce second-quarter
earnings on July 26. First Call currently expects the company to earn 42 cents a share. Read
the full story. Shares tumbled 4 9/16, or 18 percent, to 20 3/4.

Separately, volume was heavy on the NYSE at 1.22 billion while 1.50 billion shares
traded on the Nasdaq Stock Market. Breadth turned negative, with losers beating winners by
16 to 13 on the NYSE and by 21 to 18 on the Nasdaq.

Sector movers

The chip sector got a lift from Rambus after the company (RMBS) announced that
it has signed a patent license agreement with Japan’s Toshiba for SDRAM and Double Data
Rate SDRAM memory as well as controllers that interface with those types of memory. Rambus
will receive royalties as well as a license fee for the entire agreement. Read
the story. Shares skyrocketed 26 1/16, or about 46 percent, to 82 3/4. The
Philadelphia Semiconductor Index ($SOX) rose 2.2 percent.

Bank stocks took a veritable beating, with the Standard & Poor’s Bank Index ($BIX) off 6.4 percent — after tumbling 5.3 percent on Thursday — as the sector digested
more earnings warnings.

UnionBanCal (UB) warned that second-quarter earnings will be weaker than expected
due to a decline in asset quality. The company expects operating earnings of 77 to 82
cents a share. First Call had expected earnings of  88 cents a share. See
full story. The stock dropped 30.7 percent, or 8 13/16 to 19 15/16.

Early Thursday, Wachovia Corp. (WB) warned that its earnings for the second-quarter
and full year would come in below Wall Street estimates due to slower activity in its
market-sensitive businesses. Wachovia fell 5/8 to 56 7/16 on Friday after plunging 19
percent on Thursday.

In the brokerage arena, Lehman Brothers (LEH) posted second-quarter earnings of
$2.78 per share, beating the First Call estimate of $2.49 a share. The company made $2.09
in the year-ago period. See
full story. The stock edged up 7/8 at 90 3/8 and the AMEX Securities Broker/Dealer
Index ($XBD) shed 0.6 percent.

The biotech sector was a touch higher, with the Nasdaq Biotech Index ($IXBT) up 4.2
percent and Merrill Lynch’s Biotech Holdrs (BBH) up 3.6 percent. Among the upside
movers were Immunex (IMNX), up 19.4 percent, or 7 1/4 to 44 11/16, and Biogen (BGEN)
up 4 13/16 to 61 13/16.

On the downside were shares of Genentech (DNA), which  fell 4 1/2 to 133 after
the company said that an antibody designed to treat heart attacks didn’t meet its
objectives in a Phase II trial.  See
full story.

Individual movers

Circuit City (CC) checked in with first-quarter earnings of 28 cents a share Friday,
matching the First Call consensus estimate. The company earned 20 cents in the year-ago
period. The stock lost 1 9/16 to 35 13/16.

In other earnings news, Red Hat (RHAT) posted after the close Thursday a
first-quarter loss from operations of 2 cents a share versus the First Call estimate of a
loss of 4 cents a share. The company lost 8 cents a share in the year-ago period. Read the story.
The stock added 1 5/8 to 25.

Adobe Systems (ADBE) dropped 4 1/2 to 120 1/4. The company surpassed Wall Street
expectations after the close Thursday by making 51 cents a share in the second quarter —
excluding restructuring and other charges — which beat the First Call estimate of 48
cents a share. One drawback, however, was the company’s announcement that it no
longer thinks it will be able to sell $100 million of its new professional publishing
software, due to unexpected delays in getting the infrastructure in place. Read the story.

Jabil Circuit (JBL) registered late Thursday third-quarter earnings of 21 cents a
share, in line with the First Call estimate. The company made 14 cents a share in the
year-ago period. The stock fell 2 5/16 to 44 11/16. See related story.

EBay shares (EBAY) lost 2 15/16 to 61 1/8. The Internet bellwether fell after
Merrill Lynch analyst Henry Blodget said he was "expecting another solid quarter, but
we are not looking for much upside to top and bottom line estimates." See
Net Stocks.

Perot Systems (PER) shaved 20.5 percent, or 2 7/8 to 11 1/8. The company said
revenue and earnings per share growth will decline in the second quarter relative to the
year-ago period due to a loss of business from two clients. First Call expects the company
to earn 17 cents a share.  View
story.

Smith-Gardner & Associates (SGAI) saw its shares plunge 32 percent, or 2 11/32
to 4 19/32 after warning that is expects a second-quarter loss of  13 to 16 cents a
share. First Call had been expecting a profit of 10 cents a share.

Treasury focus

Treasurys picked up steam following the release of economic numbers
revealing a slowdown in the red-hot housing market.

And weakness in equities market added to the buying interest in the
fixed-income market. The yield on the 10-year note fell below the 6 percent barrier for
the first time in two weeks.

The 10-year
Treasury note climbed 1/2 to yield 5.98
percent and the 30-year
bond tacked on 20/32 to yield 5.88 percent. See
Bond Report.

Regional
market

coverage

In economic news, Friday saw the release of May housing starts, which fell 3.9
percent to a 1.59 million rate — the lowest level of the year. Economists had been
expecting a 1.62 million rate. And building permits dropped 4.3 permits to a 1.62 million
rate. Read
the story and see Economic
Preview, economic
calendar and forecasts and historical economic data.

In currency markets, dollar/yen lost 0.1 percent from the
previous close to 106.38 while euro/dollar jumped 1.1 percent to 0.9646.

In the commodity market, July
crude dropped $0.62 to $32.33 while the Bridge
CRB index lost 0.76 to 223.51. View latest commodity prices.

Julie Rannazzisi is markets editor
for CBS.MarketWatch.com.