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| Home Front: Economy |
| Stocks Suffer Biggest Loss in 2 Years |
| 2005-04-16 |
| Investors who thought they had suffered earlier this week got a true dose of pain Friday when blue chips posted their biggest loss in two years. Lingering concerns of a global economic slowdown, even as interest rates are rising, painted a grim picture of corporate health. It's not just corporate health - the heavy social benefits countries are up against a wall with the impending retirement of the boomer generation and the stranglehold their government policies have on businesses Indeed, markets in the United Kingdom, Germany, Japan, Hong Kong and Mexico all declined sharply this week. Those concerns were magnified late Thursday after International Business Machines, citing struggling growth overseas, surprised Wall Street by reporting weak first-quarter earnings ahead of schedule. That set the ball in motion for Friday's third-straight day of triple-digit losses. The Dow Jones Industrial Average dived 191.24 points, or 1.86%, to 10087.51. IBM shares, down 8.3%, weighed heavily on the Dow industrials, and dragged down other technology shares. Hewlett-Packard was off 4.2%, Microsoft fell 1.5% and Intel lost 1.7%. The losses were broad-based, however. General Motors fell another 3.9% and is down 35% year-to-date. Two other Dow components, Citigroup and General Electric, posted strong earnings for the first quarter, but couldn't stem the bleeding from IBM, which delivered the knockout blow to a teetering market. The Nasdaq Composite Index shed 38.56, or 1.98%, to 1908.15, while the Standard & Poor's 500-stock index declined 19.45, or 1.67%, to 1142.47. Crude-oil prices slid 64 cents to $50.49 a barrel on the New York Mercantile Exchange, and Exxon Mobil lost 4.4%. Some technical factors bloated Friday's losses. At about 3:40 p.m. Eastern time, there was still $580 million worth of S&P 500 April options, which expired Friday, available for buying. Investors weren't biting, though. That "sell imbalance" accelerated the decline, knocking about 40 additional points off the Dow industrials, said Larry Peruzzi, senior equity trader at Boston Asset Management Company. IBM stunned the market when it reported financial results for the first quarter that fell five cents shy of Wall Street expectations. The company blamed trouble closing deals overseas in late March. Spokesman John Bukovinsky said "there are occasions when the analysis is done and the information is complete and we will move." To be sure, IBM announced fourth-quarter earnings ahead of schedule in January 2004. But last year, Big Blue issued a press release at least warning the markets that it was reporting ahead of schedule. Even without the warning, IBM's earnings miss came as no surprise to industry watchers, Fred Hickey, editor High Tech Strategist newsletter. "IBM's backlog has been declining, and their order rates have been falling apart over the last year," he said. "The fact that they missed this number was no shock at all." He pointed out that other large computer firms, including JDA Software, Foundry Networks and Borland Software, also announced earnings troubles recently. The same catalyst driving down stocks -- a global economic slowdown -- sent oil down 5.3% this week. Stocks have taken a hit in 2005 after a sharp run-up in oil prices. But oil's decline this week seemed to worry traders just as much. "The worry was that oil was going up to 100 dollars," said Mr. Peruzzi. "But now, oil is coming down because demand is waning, and that's creating concerns because it's showing a slowdown" of the world's economy. Earlier this week, the International Monetary Fund projected that world economic growth would slow to 4.3% in 2005 from 5.1% last year, and put growth at the U.S. at 3.6% this year, down from 4.4% a year ago. Poor retail-sales results for March added to fears that a major driver of global-economic growth, the U.S. consumer, was faltering. On Friday, an economic report by the Federal Reserve Bank of New York showed a sharp slowdown of activity in the U.S. That added to worries that an economic soft patch is on the way. Wall Street is reacting more to the bad news than the good days. Volume has been consistently heavier when stocks fall. Friday, volume hit 2.2 billion shares on the New York Stock Exchange, the heaviest volume in four months, with decliners outpacing gainers by a more than 3-to-1 margin. Dick Green, president of Briefing.com, said the market may be overreacting. "People are repositioning for the summer months," he said. "It's a traditional slow period." He says over the past 50 years, most of the annual gains have come from November to April, with the outlook of "sell in May and go away." In major market action: Stocks declined. On the Big Board, where 2.2 billion shares traded, 780 stocks rose and 2,525 fell. On the Nasdaq Stock Market, where 2.4 billion shares changed hands, 735 stocks advanced and 2,337 declined. Bonds were higher. The 10-year Treasury note rose 19/32, or $5.94 for each $1,000 invested, pushing the yield down to 4.25%. The 30-year bond gained 31/32 to yield 4.61%. Yields move inversely to prices. The dollar weakened. It traded at 107.80 yen, off from 108.14 yen late Thursday, while the euro rose against the dollar to $1.2919 from $1.2818. The trade imbalances plus high oil prices are devastating world economies, exacerbated by China's refusal to allow their currency to float to its true value. US consumer buying (often on credit) has been keeping the global economy going somewhat, but that can't go on forever -- we have our own baby boomer retirements to deal with, not to mention the cost of operations in Iraq and Afghanistan. Not saying those aren't worth doing, just that we can't do it mostly alone AND still prop up the economies in Europe plus feed the vampire Chinese |
| Posted by:MBA |
| #8 tw, many American consumers have been living beyond their means, resulting in our massive trade deficit and also the trade surplus (and therefore employment) in other countries. A lot of American consumer spending is being financed/enabled by credit cards and home equity loans. The latter is a particular problem because home values are ephemeral and subject to bubbles -- just because the house is worth $xxx today doesn't mean you will be able to sell it for that tomorrow, especially as the baby boomers retire and want to trade down. Result: consumers getting tapped out, more bankruptcies &/or slower spending --> lower sales and profits for companies. What has kept this whole dynamic going as long as it has been is cheap goods from China, but the hidden costs of that are now facing the western economies directly. Ironically, but no coincidentally, the best off Americans tend to have international investment portfolios. But if there is a worldwide slowdown due in part to high oil prices, even holding oil stocks won't immunize them entirely from losses. |
| Posted by: MBA 2005-04-16 11:01:09 PM |
| #7 A bit hyped for a 1.86% drop, I'd say. They're not going to be picky. Anything that happens that can be used to their advantage, will be. |
| Posted by: Bomb-a-rama 2005-04-16 10:58:52 PM |
| #6 Our Chinese "friends"? |
| Posted by: Frank G 2005-04-16 10:53:52 PM |
| #5 there is way too much debt out there Whose debt, specifically? |
| Posted by: trailing wife 2005-04-16 10:41:03 PM |
| #4 A bit hyped for a 1.86% drop, I'd say. |
| Posted by: Tom 2005-04-16 9:22:26 PM |
| #3 Count on this development being used as part of the lefties' argument against the President's Social Security plan. |
| Posted by: Bomb-a-rama 2005-04-16 9:10:31 PM |
| #2 That's why we have printing presses Phil. |
| Posted by: Shipman 2005-04-16 6:49:23 PM |
| #1 What turns a cyclical downturn into a prolonged recession is debt that can't be repaid (in bad times) and there is way too much debt out there. Far higher than it has ever been in the past. Oil prices will get the recession going but debt will prolong it. |
| Posted by: phil_b 2005-04-16 5:26:47 PM |