NEW YORK (CNNfn) - U.S. stocks tumbled Wednesday after the Federal Reserve's report on regional economic activity signaled further slowing and popped an earlier bubble of optimism.|
The major indexes flip-flopped for the first half of the session before finally giving way and accelerating downward. The Dow Jones industrial average lost more than 165 points and the Nasdaq composite index closed below 2,000 for the first time since July 25.
The selling gained steam after the Federal Reserve's "beige book" report showed a continuation of the U.S. slowdown.
"The 'beige book' really hurt the market today," Brian Finnerty, head of Nasdaq stock trading with C.E. Unterberg Towbin, told CNNfn's The Money Gang. "I think this report is much weaker than anyone thought."
U.S. economic activity remained slow in June and July, according to the Fed's report, a compilation of anecdotal evidence about the economy's health in June and July. Adding to the slowdown, retail sales were worse than expected and weakness in the manufacturing sector spilled into other businesses.
The one bright spot from the report is it further cements the belief that the Federal Reserve will cut interest rates for the seventh time this year when its monetary policy making arm meets on Aug. 21.
This did little to hearten investors. Industrial and manufacturing stocks like 3M (MMM: down $2.66 to $108.19, Research, Estimates), United Technologies (UTX: down $1.63 to $71.43, Research, Estimates), and General Motors (GM: down $1.10 to $62.19, Research, Estimates) pressured the Dow Jones industrial average sharply lower.
The Nasdaq composite index fell 61.43 points, or more than 2 percent, to close at 1,966.36. The Dow Jones industrial average tumbled 165.24 points to 10,293.50. The Standard & Poor's 500 index shed 20.87 to 1,183.53.
A negative outlook from Cisco Systems weighed on the technology sector from the opening bell. Visibility remains cloudy for tech firms and investors are unwilling to make significant bets until more clarity is revealed.
"Cisco is doing absolutely nothing today and that's indicative of what's going on in the tech sector," Mark Donahoe, institutional equity trader with U.S. Bancorp Piper Jaffray, told CNNfn's The Money Gang. "We didn't really get a lot of forward guidance – it's much the same as what we've seen before and you don't get a feeling that the business has stabilized."
Earlier in the session, market participants also grasped at straws of hope that the day's economic news – a decline in wholesale inventories – would inspire investors to come in off the sidelines. And they did – briefly. But with little conviction, the gains quickly evaporated.
The store of unsold goods at U.S. businesses shrank in June, according to the Commerce Department, offering hope that the beleaguered manufacturing sector eventually will begin to increase production.
"There's nothing for investors to latch on to with conviction. We're being tested on both sides," said Brett Gallagher, head of U.S. equities with Julius Baer. "With no clear-cut view that things are getting better, the (economic) recovery keeps getting pushed out."
Market breadth was negative but volume remained, signaling an ongoing lack of conviction. "The drops are exaggerated because there is a buyers strike and there is no one to catch that falling knife," said Finnerty.
Nasdaq losers topped winners 2,443 to 1,216 on volume of 1.65 billion shares. On the New York Stock Exchange, decliners beat advancers 1,896 to 1,187, as 1.09 billion shares changed hands.
In overseas stock markets, Europe's slipped and Asia's finished lower. Investors flocked to the bond market sending Treasury securities sharply higher. The dollar faltered against the euro and the yen.
While most market participants expected little change in guidance from what other tech leaders have said, investors still held hope that Cisco would buck the trend.
They were wrong – and hopes were dashed.
"There was nothing that was said to inspire confidence," Gallagher said. "Until we see some end-market pickup, I'm not going to be convinced the end is near."
Some analysts said investors should not have been surprised by Cisco's report.
"They already pre-announced the bad quarter and nobody knows when this is going to end," said Jon Burnham, chairman and CEO of Burnham Funds. "The facts are everybody knew Cisco's quarter was going to be bad and no one expects it to get better anytime soon, so the news on Cisco was no news."
Cisco (CSCO: down $1.28 to $17.98, Research, Estimates), the No. 1 maker of Internet router and switching equipment, warned of continuing weakness in the U.S. and Asian markets. Revenue in the current quarter could be down as much as 5 percent from the prior three months, in contrast to the modest increase expected by analysts. Cisco reported fiscal fourth-quarter earnings that tumbled sharply, but were in line with analysts' lowered expectations. Company executives told analysts to be "more conservative" when setting financial expectations for it in the coming months.
Other techs that followed Cisco's lead included IBM (IBM: down $1.92 to $104.19, Research, Estimates) and Dell Computer (DELL: down $1.07 to $26.64, Research, Estimates).
And chip stocks, which made an early attempt at advancing, also lost ground. Those leading the semiconductor sector down included Intel (INTC: down $1.01 to $29.61, Research, Estimates), Altera (ALTR: down $2.00 to $29.51, Research, Estimates), and Applied Materials (AMAT: down $2.06 to $44.74, Research, Estimates) .
But given the large gains in the chip sector last week, analysts are not surprised to see the selloff.
"The Philadelphia Stock Exchange Semiconductor Index last week had a 20 percent move in six trading days and now we've given back over 50 percent so it's really volatile," said Finnerty. "This lack of liquidity in the marketplace exacerbates these moves."
Data storage equipment maker Emulex (EMLX: down $2.33 to $23.36, Research, Estimates) said it anticipates first-quarter earnings per share of 9
cents before one-time items, a penny below estimates, and fiscal 2002 earnings per share of 43 cents before one-time items, 7 cents below estimates. The company also reported fiscal fourth-quarter operating income of 11 cents a share, a penny ahead of estimates.
Aetna (AET: down $0.36 to $25.99, Research, Estimates) reported a sharp second-quarter loss that was far wider than Wall Street expectations as the nation's biggest health insurer continued to log higher costs.
Clorox (CLX: up $0.36 to $35.66, Research, Estimates) reported fiscal fourth-quarter and full-year earnings that edged past Wall Street estimates, though a slump in sales of home-care, food and laundry products offset gains of such seasonal products as charcoal.
Two retailers posted higher quarterly results, with catalog merchant Lands' End (LE: up $1.74 to $36.90, Research, Estimates) blowing past Wall Street expectations and clothing designer and merchant Polo Ralph Lauren (RL: up $1.95 to $25.10, Research, Estimates) matching forecasts.
Cooper rejects Danaher
Cooper Industries' (CBE: up $6.26 to $60.25, Research, Estimates) board of directors unanimously rejected Danaher's (DHR: down $0.80 to $57.75, Research, Estimates) unsolicited $5.5 billion bid to acquire the company, calling the bid inadequate, highly conditional and not in the best interests of shareholders.
Additionally, Cooper said it has authorized management and its financial advisor, Credit Suisse First Boston, to explore "all strategic alternatives that would maximize shareholder value," including mergers, sales, strategic alliances, acquisitions or other similar alternatives.
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