This Bear May Be In for Steeper Slide
Wall Street’s steep slide Tuesday is another signal that the worst probably lies ahead for stock prices, analysts warn.
Since the beginning of October, the Dow Jones industrial index had hovered mostly around the 2,510 mark. Many analysts believed that the market had already assumed the worst would happen with the economy and the Mideast situation, and that stocks were in the process of bottoming--after a painful decline of 16% from the Dow’s July peak of 2,999.75.
But the Dow’s 78.22-point, 3.1% drop on Tuesday showed the selling hasn’t exhausted itself. Instead, investors were spooked by another round of depressing news from the Mideast, more dismal corporate profit announcements and another jump in interest rates.
Robert Urquhart, money manager at RCM Capital Management in San Francisco, said analysts had believed that many big investors had “cleaned house” in late September, “dumping any stocks they didn’t feel comfortable about” with an economic recession bearing down.
The Dow’s ability to stabilize in the first week of October lent credence to the idea that money managers were holding only what they really wanted to keep.
But Tuesday, big investors’ patience snapped again. And this time, some of the worst-hit stocks were those that had held up best thus far in the bear market--such as retailer Home Depot, soft-drink giants Pepsico and Coca-Cola, and IBM.
“It’s as if everybody’s wondering whether they should hold anything now,” said Urquhart.
Though trading volume wasn’t very high--145.61 million shares on the New York Stock Exchange--analysts said they weren’t sure they could take solace in that. One of the problems big investors have faced all year is a severe liquidity problem: Increasingly, capital-short brokerages have refused to step up and buy stock from institutional customers in times of need.
The result has been that big investors often are paralyzed, unable to buy easily in a rising market, and shut out from selling in a falling market. So trading volume has remained thin, and many institutions have been forced to persuade themselves that they’re content to remain on the sidelines rather than trade in this market.
Tuesday, however, another group of investors obviously decided that enough was enough. And when the decision was made to dump, the sellers turned to the remaining few stocks that had been held in relatively high regard.
The danger in seeing those stocks plunge is that their decline could deal a severe blow to already fragile investor psychology--leading to another wave of selling in the broad market. “If we lose those stocks, you could be looking at a new down leg in the bear market,” said Kenneth Spence, technical analyst at Salomon Bros. in New York.
He now sees a “50-50” chance that the market is about to slump to new lows. If the Dow can’t hold at the current level of 2,445, Spence says, it could soon test the low of 2,380 reached during trading on Sept. 27.
Another potential catalyst for renewed selling is that a large number of Wall Street analysts still appear to be too optimistic about corporate earnings prospects for 1990, considering the economy’s slide. Indeed, the devastation of Motorola stock Tuesday--down $7 to $52.75--occurred after the company reported third-quarter earnings of 78 cents a share. Wall Street had expected 90 cents to $1 a share.
“I think the analysts on Wall Street are dangerous,” said Peter Canelo, market strategist for Bear, Stearns & Co. in New York. He contends that most analysts have been overly optimistic about earnings all year.
Now, more analysts are likely to throw in the towel and slash earnings estimates, to avoid being blindsided. And as more stocks are downgraded by analysts, the money managers who listen to those analysts (and they do) will start selling anew.
William Paternotte, research chief at brokerage Alex. Brown & Sons in Baltimore, admits that he has recently gone before his analysts and declared that “we’ve got too many ‘buy’ recommendations on stocks,” given his concern over the weakening economy. The result, he said, is that “we’ve had a lot more downgrades to ‘sell’ in the last few weeks than we’d had for many months.”
The Motorola debacle Tuesday showed that most analysts haven’t had a realist like Paternotte cracking a whip over their heads. That is probably going to change drastically soon.
Big Volume in IDB: Trading in shares of Culver City-based IDB Communications has jumped sharply over the last two days, the result of a big deal between two institutional investors. The trade is potentially good news for IDB.
Harris Associates of Chicago sold a 250,000-share block of IDB on Monday to Dimensional Fund Advisors of Santa Monica, for about $5 a share, sources say. That represented about 4% of IDB’s outstanding shares. The trade helped spark more action Tuesday because, as one trader put it, one large transaction “makes everybody smell that something’s going on.”
IDB, which has built a big business transmitting TV, radio and data signals for companies and governments around the world, stumbled in the second quarter. Saddled with heavy debt from expansion, IDB posted a second quarter loss when revenue fell short of expectations.
That news caused some big investors to decide they didn’t have the patience to wait for IDB’s recovery. The stock has slumped from $12.50 earlier this year to $5.50 now.
Why would DFA want the stock? The $5-billion investment firm is the nation’s biggest “index investor” in small stocks. DFA owns about 6,000 small stocks, and the firm doesn’t make an effort to discern which small companies are promising and which are dogs--it just tries to own them all, so that its investment performance ultimately tracks the small-stock market overall.
DFA always has a “buy” list of small stocks it wants to add, and Harris’ IDB stake must have fit the bill. The good news for IDB: DFA tends to be a long-term investor, selling only when a stock outgrows the “small” definition. So DFA offers a company like IDB a safe haven for its shares, which can lessen their volatility.
Meanwhile, IDB Chairman Jeffrey Sudikoff confirmed that the firm has been picking up substantial new communications business in the Mideast because of the crisis there. The company is routing some Air Force communications, for example, and also is handling broadcast transmissions for the exiled Kuwaiti government, from remote IDB stations in Saudi Arabia. Coupled with cost-cutting efforts, Sudikoff said he is “hopeful” that the third quarter ended Sept. 30 now will show a profit rather than a loss--which could be more good news for the stock.
HOW THE MIGHTY FELL
Some of the stocks that got hit worst on Tuesday were those that have held up relatively well thus far in the bear market. That’s an ominous sign, some traders say.
52-week Tues. close Pct. Stock high-low and change loss Home Depot $43 1/2-$20 1/8 $27 1/2,-2 1/2 -8.3% Pepsico 27 3/4-17 7/8 23,-1 3/8 -5.6% U.S. Healthcare 22 1/4-9 5/8 18 1/4,-1 -5.2% Merck 91 1/8-67 75 1/8,-3 1/4 -4.2% Philip Morris 50 7/8-36 45 5/8,-1 7/8 -4.0% Coca-Cola 48 3/8-30 7/8 41,-1 3/4 -4.1% Proc. & Gamble 91 1/4-59 76 7/8,-3 1/8 -3.9% IBM 123 1/8-93 3/8 105 3/8,-4 1/8 -3.8% Amoco 60 3/8-45 3/8 55,-1 3/4 -3.1% S&P; 500 369-301 305.10,-8.38 -2.7%
