DAILY WRAP-UP
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Recession fears, analyst downgrades and continued worries over earnings
gripped Nasdaq and small cap stocks Monday, tossing those stocks to the mat
as investors greeted the new year with the word "sell!"
In the first day trading following the New Year's holiday, small cap
indexes suffered substantial losses. The Russell 2000 Index, a small cap
bellwether, gave up 21.04 points, or 4.4%, to 462.49, while the S&P 600
tumbled 9.60, or 4.4%, to 209.99. The Wilshire Small Cap 1750 dropped
36.86, or 4.9%, to 715.33.
But it was the tech laden Nasdaq Composite Index and its more than 7% slide
in Tuesday's trading that had investors gasping and wondering if 2001 would
indeed be any different from 2000.
The Nasdaq Composite Index was swamped by triple-digit losses, plummeting
178.66 points to 2291.86, following the close of its worst year ever
Friday. Investor giddiness over the new year quickly faded into caution
surrounding continued earnings woes, a slowing economy and lack of an
interest-rate cut by the Federal Reserve.
There is nothing new in this market, noted Brian Fabbri, chief economist at
Paribas Capital Markets. "People continue to adjust downward their economic
outlook and their forecast for profits. Consequently, the markets are doing
the rational thing they are looking at worse economic conditions than
thought."
The latest bits of data that showed further slowing in the economy surfaced
this morning from the National Association of Purchasing Managers, whose
December NAPM Index showed a far-greater-than-expected decline to 43.7% in
factory usage. Analysts had expected a mere 1.3% drop to 41.7% from the
previously reported 47.7%.
Compounding the bad economic data were a host of analyst downgrades,
including several small cap software issues. Netegrity Inc. (NASDAQ: NETE)
and Cacheflow Inc. (NASDAQ: CFLO) along with larger Quest Software Inc.
(NASDAQ: QSFT) pushed other stocks within the sector lower, after a
Robertson Stephens analyst downgraded each stock to 'buy' from 'strong
buy.' For the session, Netegrity sank 25% to 40 11/16, while CacheFlow
dropped in excess of 17% to 14 1/16.
Shares of Tumbleweed Communications Corp. (NASDAQ: TMWD) were blown away
after the email software maker was downgraded to 'neutral' from 'strong
buy' by Dain Rauscher Wessels. Tumbleweed shares lost nearly half of their
value, tumbling 7 3/32, or 41.6% to 10.
"Some of these companies that solve not only immediate needs but whose
budget requirements aren't that great are more in a position to weather the
storm," said Kevin Wagner, analyst at Adams Harkness & Hill, pointing to
tech issues such as SonicWall Inc. (NASDAQ: SNWL) and Watchguard
Technlogies Inc. (NASDAQ: WGRD).
Still, that didn't stop SonicWall from falling 29% to 11 1/2, while
WatchGuard followed suit, losing 10 1/2 to 21 1/8. While software issues
took it on the chin, computer-chip stocks weathered the storm and escaped
with a small loss. For the session, the Philadelphia Semiconductor Index of
large cap issues fell just 6.27 points, or 1.1%, to 570.34.
Given the failing economic data and subsequent market turmoil, there had
been increasing speculation that the Fed could move to lower rates before
the next regular meeting of its Federal Open Market Committee on Jan.
30-31. In the past, when the Fed has moved between its meetings, it has
most often done so on a Friday when the employment numbers were especially
weak.
"Chances for a 50-basis-points cut are rising," said Paribas' Fabbri, who
added he didn't expect the Fed to act in cutting rates before its Federal
Open Market Committee meeting at the end of January.
"Right now we have an economy that is still fully employed, going quickly
down hill but, nevertheless, [the Fed] doesn't need to respond as if there
was a shock here," Fabbri said.
Analysts continue to point to such an interest-rate cut as a surefire way
to put a flame under Wall Street. The lack of such a cut was blamed for
much of December's losses, as investors stayed on the sidelines, awaiting
some impetus to reveal itself in the new year.
Within other small cap stocks, it wasn't all gloom. Shares of Neff Corp.
(NYSE: NFF) soared after it received an offer from United Rentals Inc.
(NYSE: URI) to buy a majority stake in the construction-equipment rental
company for $314 million in stock and assumed debt. Neff shares gained
13/16, or 65%, to 2 1/16.
Tegal Corp. (NASDAQ: TGAL), a maker of systems and equipment used by
computer chipmakers said Applied Materials Inc. (NASDAQ: AMAT) will license
on a non-exclusive basis two of Tegal's U.S. patents for an undisclosed
amount. Shares of Tegal gained 3/16, or 11.5%, to 1 13/16.
Berlitz International Inc. (NYSE: BTZ), owner of language schools, said a
group including Chairman Soichiro Fukutake offered to buy the rest of the
company it doesn't already own for about $27.5 million.
The offer came as Berlitz planned to cut 90 jobs worldwide in the first
three months of the year to save as much as $20 million annually, with a
charge of about $17 million for the job cuts. Shares gained 4 7/16, or 55%,
to 12 1/2.
Within the other major stock averages Tuesday, the broad S&P 500 also
headed lower, dropping 37.01 points, or 2.8%, to 1283.27, while the Dow
Jones Industrial Average succumbed to market momentum and dropped over 140
points, or 1.3%, to 10,646.15.
In New York Mercantile Exchange trading, February natural gas continued to
slump as milder weather prevailed following a weekend of colder weather and
winter storms. Natural gas futures dropped $1.41, or 14.4%, to $8.36, after
gaining 45 cents in the previous session.
February crude oil futures gained strength in Tuesday's trading, adding 41
cents, or 1.5%, to $27.21, while February gold lost $3.60, or 1.3%, to
$270, after losing 10 cents Friday.
In Canadian markets, the Toronto Stock Exchange TSE 300 Index faltered
further in afternoon trading, surrendering 322.2 points, or 3.6%, to
8611.50, while the Canadian Venture Exchange surged, adding 13.2, or 0.46%,
to 2907.40, after gaining a hefty 82 points Friday.
In currency markets, the Canadian dollar advanced 0.6% to US$0.6703 from
US$0.6664, while in late New York trading the euro marched higher to US$0.9506.
Other economic data to watch this week includes construction spending due
tomorrow, factory orders Thursday, and hourly earnings and the nation's
employment levels, which debut Friday. The employment statistics will be
the most intensely watched items on Wall Street, largely as an indication
as to when the Federal Reserve might move to lower interest rates.
In 2000, small cap investors' fortunes fared better than those represented
by large cap indexes. For example, for the year, the Russell fell 4.2%,
while the Wilshire Small Cap lost 5.1%. Those compare with a 6.1% loss for
the Dow industrials and a 10.1% drop in the S&P 500.
More surprisingly, the S&P Small Cap 600 actually ended the year higher,
gaining 13% in 2000.
