US stocks hit by profit worries

NEW YORK: Stocks were bloodied on Friday by the double whammy of a financial scare due to the California utilities crisis and resurfacing worries over sagging corporate earnings, ending the first trading week of the new year on a dour note.

The sell-off eroded a historic rally on Wednesday after a surprise interest rate cut by the US Federal Reserve, designed to prevent the world's largest economy from slowing further. "People are rethinking how big of a bet they want to make on the economy recovering right away," said Henry Herrmann, chief investment officer at Waddell & Reed which manages $26 billion. "Over the past couple of days there was wholesale selling of defensive issues and buying into aggressive sectors. Today definitely that slowed," he said.

The tech-heavy Nasdaq Composite Index plunged 159.18 points, or 6.20 per cent, to 2,407.65, led by stalwarts like top Web gear maker, Cisco Systems Inc., which fell 12.5 per cent. The blue chip Dow Jones industrial average was down 250.40 points, or 2.29 per cent, at 10,662.01, weighed down by financial shares like Citigroup. The broader Standard & Poor's 500 Index was down 34.99 points, or 2.62 per cent, at 1,298.35.

Despite Nasdaq's monster rally on Wednesday of 324 points, or 14 per cent, the market ended the week down 2.5 per cent. The Dow was off 1.16 per cent for the week. "It is still premature to make the case that techs should be a priority in terms of investing," said Barry Hyman, chief market strategist with Weatherly Securities. "And on top of that you have the financials scare again, the Bank of America story today."

Rumors circulating around Bank of America Corp. unleashed a wave of tension on Wall Street. Speculation mounted that one of California's largest utilities, which is teetering on the edge of bankruptcy, had drawn down a line of credit at Bank of America and that the bank had large trading losses.

The bank issued a statement denying any significant losses, and said its bad loans shouldn't be any worse than it had previously forecast. But its stock lost $3-13/16 to $47-11/16. Investors stampeded out of financial stocks, including Citigroup - down $2 at $53-11/16 - and JP Morgan Chase & Co. - down $3-1/16 at 48-15/16.

"The California power crisis is a big deal," said Waddell's Herrmann. "The politicians better get together to fix that one or you are going to have a serious problem in the commercial paper market. The ability of these (utilities) to finance themselves is going to go out the window."

The widening crisis prompted the White House on Friday to step in to save consumers from electricity blackouts, two utilities from bankruptcy and potential reverberations throughout the economy. Treasury Secretary Lawrence Summers, Energy Secretary Bill Richardson and other members of the Clinton administration will meet on Tuesday with executives of troubled utilities PG&E Corp. and Edison International.

The market's mood also soured as Wall Street's top brokerages continued to hack away at earnings estimates for a wide array of bellwether names. Those included computer maker Hewlett-Packard Co and top car company General Motors Corp.

Added to the mix were new economic data that only served to confirm the economy was slowing. The nation's unemployment rate held steady at 4.0 percent in December as the number of workers on payrolls grew modestly, the government said in a report issued before the opening bell.

"After the digestion of the news and the euphoria, what we are interpreting the rate cuts to mean is that there is more weakness and a greater slowdown in the economy than thought," said George Rodriguez, head of trading at investment firm Guzman & Co.

Nasdaq was weighed down by Internet infrastructure firms, issues still deemed to be trading at rich prices despite their battering last year. Among the tech indices, the S&P computer networking index shed a whopping 12.7 percent, reflecting the losses by Cisco, down $5-1/4 at $36-5/8, and others like Network Appliance, down $11-3/4 at $54-5/8.

Hewlett-Packard, whose losses weighed on the Dow index, saw its earnings estimates cut by both Goldman Sachs and UBS Warburg on Friday. It fell $4 to $30-5/8 on the Big Board. Applied Micro Circuits fell $9-7/8 to $63-1/2 on the Nasdaq after Bank of America Securities cut its share price target for the communications chip maker.

Industrial conglomerate Minnesota Mining and Manufacturing Co. fell $4-7/16 to $114-9/16 after Lehman Brothers cut its 2001 earnings estimate due to the slowing U.S. economy. Another Dow component, top retailer Wal-Mart Stores Inc., shed $2-1/4 to $53-15/16 after Robertson Stephens lowered its year 2000 and 2001 earnings target.

Salomon Smith Barney lowered earnings estimates on auto makers Ford Motor Co. and General Motors. Ford fell 11/16 at $26-1/4 and GM, a Dow component, shed $3-1/8 at $54.

(C) Reuters Limited 2001.