Earnings news cripples markets

Despite relatively positive economic news, negative earnings pre-announcements jolt shares in the tech sector and kick the major U.S. markets lower.

5 min read
Earnings news once again took center stage and kicked the major U.S. markets lower.

The Nasdaq composite index fell 111.06, or 3 percent, to 3,361.04, and the Standard & Poor's 500 index dropped 27.29, or nearly 2 percent, to 1,408.99.

The Dow Jones industrial average fell 128.38 to close at 10,596.54, led by AT&T, which dropped $1.56 to $27.31. The telecommunications giant hit a new 52-week low in midday trading, bottoming out at $26.38 before rebounding slightly.

The Nasdaq dropped 8 percent this week, while the S&P closed nearly 2 percent lower from a week ago. The Dow inched down about 54 points.

AT&T's share forecast was cut to $37 from $65 by Salomon Smith Barney analyst Jack Grubman, who said falling consumer sales will reduce earnings at the largest U.S. long-distance company.

Tech companies took major hits. Shares of Marimba, Razorfish, Veeco Instruments and Hyperion Solutions bombed after the companies reported that earnings would fall below Wall Street expectations for the third quarter, which ended Sept. 30.

"Tech seems to be in a slide," said Brian Conroy, head of listed trading at J.P. Morgan. He pointed to tech companies that have issued warnings, including Apple Computer, Dell Computer and Intel. "Earnings pre-announcements have been steady."

Conroy also said that a downgrade in the financial sector helped drag the markets lower. "Financials had been outperforming tech over the past few weeks?and had been relatively unscathed."

Morgan Stanley Dean Witter cut MBNA to "outperform" from "strong buy," sending the stock down $3.19 to $36.13. Some members of the Dow index were caught in the backlash. American Express fell $3 to $58; Citigroup dropped $2.69 to $53.44; and J.P. Morgan fell $6.38 to $153.

As of last night, a total of 532 companies issued earnings pre-announcements, compared to the 446 who preannounced last year at the same time, according to First Call/Thomson Financial.

Of that number, 349 companies, or 66 percent, reported that earnings would fall short of expectations, while 281 companies, or 63 percent of those that preannounced, reported an earnings shortfall last year.

Solid economic reports didn't help buoy the markets. The government reported Friday that the unemployment rate fell to 3.90 percent in September, from 4.10 percent in August. September figures matched the 30-year low reached in April.

The Department of Labor said the economy added 204,000 jobs in September, excluding 75,000 striking Verizon Communications workers who returned to work and the layoff of 27,000 temporary census workers. Total nonfarm employment rose by 252,000 for the month.

Average hourly earnings, a key gauge of inflation pressures, moderated in September. They increased 0.2 percent to $13.83 an hour, down from a 0.4 percent increase in August.

The modest gains show light pressure on wages, which indicate that companies do not have to hike salaries to compensate for a tight labor market. Economists and investors generally perceive that as a good sign to policy makers that inflation is in control and no interest-rate hikes are necessary.

At the end of regular trading, Intel closed down $1.06 at $39.94, and Microsoft inched up 19 cents to $55.56. Cisco Systems fell $1.38 to $56.19, while Sun Microsystems dropped $2.25 to $107.50

The CNET tech index lost 70.03 to close at 2,738.34. Losers chewed up winners, with 78 of the 97 stocks in the index falling, 18 rising and one remaining unchanged.

Of the 18 sectors tracked by CNET Investor, Internet e-tailers posted the sharpest drops, falling about 7 percent. PC hardware makers were the day's only gainers, climbing a slim 0.6 percent.

Some high-profile Internet e-tailers posted losses. Amazon.com fell $2 to $31.56; eBay dropped $4.44 to $59.44; and Freemarkets lost $4.56, or 10 percent, to $40.56.

Other Internet stocks had a rough day. Internet software maker Inktomi fell $11, or nearly 11 percent, to $91; Web portal Yahoo lost $3.44 to $81.25; and Lycos, another portal, fell $10.38, or about 17 percent, to $52.50.

Concord Communications shares fell $12.38, or about 58 percent, to $9, making it the largest percentage loser on the Nasdaq. The maker of programs that detect flaws in computer networks said it would report lower-than-expected third-quarter earnings.

Among members of the CNET tech index, Internet incubator CMGI fell 69 cents to $20.81. The shares traded as low as $18.31, a new 52-week low compared to a high of $163.50 over the same period.

Fellow incubator Internet Capital Group dropped $1.16 to $11.22 and set a new low of $10.19. The stock has traded as high as $212 over the past 52 weeks.

Negative earnings pre-announcements jolted shares in the technology sector. Shares of Veeco Instruments dropped $34.97, or 34 percent, to $67.56 after the builder of tools for making computer chips cut its second-half profit forecast by almost half, and the company's president quit.

Volume reached 15 million shares, more than 21 times the stock's daily average of 698,000 shares. The stock has traded within a range of $24.43 and $122.25 over the past 52 weeks.

Investors gave shares of Marimba a drubbing after the software maker warned that third-quarter earnings will fall short of analysts' estimates, blaming the results on its inability to conclude several sales transactions in the quarter.

Marimba shares fell $5.50, or 49 percent, to $5.63 on a volume of 2.5 million shares. That's about 14 times the stock's average daily volume of 180,000 shares.

Hyperion Solutions shares fell $7.38, or 38 percent, to $12 after the software company said it will report a fiscal first-quarter loss on lower-than-expected license revenue.

Hyperion also set a new 52-week low of $10.88 compared to a $65 high over the same period. Volume nearly reached 14.6 million shares, about 37 times more than the stock's average daily volume of 396,000 shares.

Razorfish fell $3.75, or about 43 percent, to $5 after the Internet consulting company said third-quarter earnings will decline from the previous quarter because of a larger-than-expected slowdown at European businesses.

The news brought down other Internet consultants. Proxicom, Viant, Scient and MarchFirst all set new 52-week lows today.

The Philadelphia semiconductor index fell 33.01, or about 4 percent, to 799.39, led by chip equipment maker KLA-Tencor, which lost $2.88 to close at $35.31.