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Comstock Partners, Inc.
Washington Post By Carol Vinzant and Robert O'Harr
March 23, 2001
Dow Escapes Bear Trap With Late Rally - 380-Point Loss Is Trimmed to 98
NEW YORK, March 22 -- After thudding into bear-market territory in the morning, the Dow Jones industrial average staged a dramatic comeback in the last 90 minutes of trading today. "The Dow was down 300 and all of a sudden I turned around and looked at my screen and it was down 44. I almost rebooted my machine to make sure it wasn't a glitch in my computer," said Erick Maronak, director of research at New York-based NewBridge Partners, which manages $6 billion in growth and technology stocks. The Dow at its worst was down 380 points today, or 4 percent, pummeled by more bad news from the likes of Procter & Gamble, which announced plans to cut 9,600 jobs. It ended the day at 9389.48, down only 97.52 points, or 1 percent. Although that's only 11 points from the widely accepted bear-market definition of a 20 percent decline from its peak of 11,722 in January 2000, traders declared it a victory, given the unrelenting drops in broad market averages in recent weeks. Investors, although relieved by the abrupt change in sentiment, were loath to declare the rally a significant and sustainable change in market direction. "I'm not saying the coast is clear," said Kenneth Sheinberg, head of trading at SG Cowen. "But for the short term this could be it for a little while." Only eight of the 30 Dow stocks finished the day in positive territory. In contrast to the Dow's roller-coaster ride -- which involved companies in the oil, financial, retailing and manufacturing sectors -- the technology-laden Nasdaq composite index held firm and closed at 1897.70 -- up 67.47 points, or 3.7 percent. Intel gained 12 percent, and Microsoft was up 7.9 percent. The two companies are components of both the Dow and the Nasdaq composite, and traders said their gains helped steady the broad market. "This is the first sign we're seeing that institutional money is starting to seem more comfortable with the valuation in the Nasdaq," said Ken Walker, vice president of options trading at First Union Securities, a bank and brokerage firm based in Charlotte. The blue-chip Dow average is the sole holdout among the major indexes from bear-market territory. The Nasdaq has lost 62 percent of its value in a free fall from its peak last spring. The Standard & Poor's 500-stock index has lost one-quarter of its value. According to Wilshire Associates, which tracks every publicly traded stock, the market has lost $5.1 trillion in value since its peak last year. Despite the short, powerful rally this afternoon, larger economic concerns and a slowdown in corporate profit growth are expected to continue to weigh heavily on stocks. According to First Call/Thomson Financial, a Boston-based research group, analysts expect corporate earnings to drop this year. The consensus estimate for 2001 earnings is 10 percent below last year's results. When earnings drop, under traditional stock valuation models, so too should stock prices. Charlie Minter, a longtime bear and co-portfolio manager at Comstock Partners, noted that stocks have historically traded at an average of 14.5 times their earnings. Using previous market bottoms as a guide, Minter predicted the S&P 500 could drop as low as 750; it closed today at 1117.58 after losing 4.56 points. Meanwhile, the broader economic slowdown has others worried. Many traders were still disappointed this morning that Federal Reserve policymakers only lowered their target for short-term interest rates by 50 basis points on Tuesday, instead of the 75 points that investors had been hoping for to help goose economic growth. "[Fed Chairman Alan] Greenspan came up short, and the markets are letting him know," said Bill Gross, manager of the nation's largest bond mutual fund, the $41 billion Pimco Total Return Fund. Rate-sensitive financial stocks such as Citigroup continued their swoon today. Citigroup, which closed Monday at $46.30, dipped as low as $39 by midafternoon. It ended trading today at $40.60, down 3.9 percent for the session and 12.9 percent since Monday's close. Those broader worries were what greeted traders today when the U.S. markets opened. European markets had fallen overnight because of shrinking corporate earnings announcements, such as France Telecom's. Its shares fell 3 percent after it posted earnings slightly lower than analysts had expected. The British FTSE index was down 4.1 percent. The Bloomberg European index was down 4 percent. "It started off with a negative tone and continued all the way through this morning," said ABN Amro's U.S. economist, Steve Richiuto. "Europe had some pretty negative earnings reports by telecoms, and it just fed right through to New York hours. It's just continued unabated." More negative news from U.S. companies dragged down the market. Not only did P&G announce layoffs, but Charles Schwab trimmed earnings estimates for a second time in a week and announced 3,400 layoffs. United Parcel Service announced that, because businesses are shipping less, it expects lower earnings for the first half of the year. "It was a pretty miserable day all around -- until 2:45," said Michelle Clayman, chief investment officer for New Amsterdam Partners. "There sometimes can be this herd mentality on Wall Street. The animals panic and say, 'Let's go this way.' " Clayman said she believes many investors saw how far the Dow had dropped late in the trading day and reckoned it was too much. "It's people saying the market's are down enough," she said. Peter Green a technical analyst for Gerard Klauer Mattison & Co., offered a more involved explanation. He believes that some of the worst selling was touched off by release this morning of the minutes from the Federal Reserve's policymaking meeting at the end of January. The minutes were not overly pessimistic about the economy and were thus interpreted in Wall Street logic to indicate the Fed was less likely to make the necessary cuts in interest rates that many investors believe are necessary to boost the economy. That interpretation helped push the Dow down. But Green said investors noticed the Nasdaq wasn't moving as precipitously. They also saw that Microsoft, IBM, Micron and Intel were holding relatively steady. And so they assumed, even as the Dow was sliding, that must mean that all was not as bad as they assumed. "That gave people solace that perhaps things are not all that bad," he said. Intel and other semiconductor stocks led the way up, despite a warning from Intel's chief executive on British television that "we don't know how long this slowdown is going to last." "It's been so volatile, every 30 seconds you say something different because [the Dow] moves 30 points," said Carol Stone, deputy chief economist at Nomura Securities. Other Indicators • The New York Stock Exchange composite index fell 8.79, to 566.35; the American Stock Exchange index fell 19.30, to 841.81; and the Russell index of 2,000 small stocks fell 2.94, to 432.80. • Declining issues outnumbered advancing ones by nearly 3 to 1 on the NYSE, where trading volume rose to 1.74 billion shares, from 1.34 billion on Wednesday. On the Nasdaq, decliners outnumbered advancers by more than 3 to 2 and volume totaled 2.42 billion, up from 2.06 billion. • The price of the Treasury's 10-year note rose $3.13 per $1,000 invested, and its yield fell to 4.73 percent, from 4.77 percent late Wednesday. • The dollar rose against the Japanese yen and the euro. In late New York trading, a dollar bought 123.52 yen, up from 123.49 late Wednesday, and a euro bought 88.92 cents, down from 89.65. • Light, sweet crude oil for May delivery settled at $26.54 a barrel, down 26 cents, on the New York Mercantile Exchange. • Gold for current delivery fell to $261.10 a troy ounce, from $261.90 on Wednesday, on the New York Mercantile Exchange's Commodity Exchange. © 2001 The Washington Post Company

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