Wall St. Takes Wild Ride With Brazil's Decision to Devaluate

By PAUL J. LIM

Jan. 14, 1999 12 AM PT

TIMES STAFF WRITER

World markets were caught off guard Wednesday by Brazil’s decision to let its currency weaken, as stocks nearly everywhere finished down sharply--echoing declines that have followed other currency devaluations since mid-1997.

But on Wall Street, an early plunge attracted a horde of buyers, and many stocks finished well above their lows for the day.

“It was just a wild ride,” said Everen Securities technical analyst Gregory Nie.

Right out of the gates, the Dow Jones industrial average fell more than 261 points, or 2.8%, to 9,213. But within half an hour, many investors concluded that Brazil’s devaluation would have little effect on the technology and Internet stocks that have been leading the market as of late.

After opening sharply lower, many Net-related stocks quickly rebounded and helped pull the broad market up.

The Dow climbed steadily to a midday peak of 9,437, then sold off again in late trading, ending down 125.12 points, or 1.3%, at 9,349.56.

The tech-heavy Nasdaq composite opened Wednesday off nearly 115 points, or 5%, but soared to a 33-point net gain by midday, before finishing down just 3.94 points, or 0.2%, at 2,316.81.

The technology sector’s rebound reinforced the notion held by many market bulls that investors’ appetite for those stocks isn’t fading, despite sky-high prices relative to earnings.

“Something like Brazil isn’t going to be enough to stop the tremendous momentum in these stocks,” said Jim Stratton, manager of the Stratton Growth stock mutual fund.

Still, the bulls couldn’t claim complete victory: Losers swamped winners by more than 2 to 1 on the New York Stock Exchange and by 25 to 16 on Nasdaq, in very heavy trading.

“The next three days are going to be real jittery,” said Standard & Poor’s market analyst Paul Cherney.

Early today in Asia, most markets were down 2% to 5%, about on par with losses in Europe on Wednesday but more than the U.S. market’s decline.

Hong Kong’s Hang Seng index was off 2.1% at midday, to 10,062. The South Korean market was down 3% and the Taiwan market fell 1.2%.

Stocks in Tokyo, by contrast, were up at midday today, with the Nikkei-225 index gaining 1.3% to 13,579.

On Wednesday, fears that Brazil’s woes would revive worries about a global recession hit European and Latin American markets hard.

The Mexican market, for instance, fell 4.6%, closing near its low for the day. Argentine stocks plunged 10.2% and the German market lost 5.2%.

Brazil’s market initially plunged 10% before trading was halted. When trading reopened, the market recouped about half its loss, ending down 5.1%. Still, it has already fallen 17% so far this year, weighed down in recent sessions by fears that a devaluation was all but inevitable--and with it, inflationary pressures, the loss of purchasing power and other problems that will exacerbate Brazil’s weak economic picture.

As for Wall Street, its fast recovery appeared to be triggered by a couple of factors, analysts said.

“I think investors recognized that last year there was a tremendous overreaction to the devaluations in Asia and Russia, and this time they seemed to be applying better analysis,” said PaineWebber strategist Mary Farrell in New York.

To be sure, Brazil’s devaluation--and the resignation of its central bank president--”were not nonevents,” Farrell said. “Brazil is in our hemisphere, and it’s the largest economy in South America.”

But roughly 80% of earnings for companies in the benchmark S&P; 500 index of blue-chip stocks are derived from business conducted in the United States and Europe, Farrell said--a point investors may have begun to recognize less than an hour or so into trading.

“It was a classic knee-jerk reaction,” said Joe Battipaglia, chief investment strategist at Gruntal & Co. He noted that the market staged another “flight to quality,” with demand for U.S. Treasury securities pushing the yield on the 30-year T-bond down to 5.13% from 5.22% on Tuesday.

Once calmer heads prevailed, “it was like a department store sale” in the stock market, said Battipaglia, noting that many prominent tech names, such as Cisco Systems, were off more than 8% in early-morning trading.

Kim Goodwin, lead manager of the American Century-Twentieth Century Growth fund, said most of the stocks in her portfolio have no more than 3% earnings exposure to Brazil. “So we took advantage of the weakness to add to some of our tech positions,” she said, including telecommunications equipment and Internet-related stocks.

Indeed, nowhere was this bargain hunting more evident than in the white-hot Internet sector. The Net directory company Yahoo, for instance, saw its shares open at $335, off a remarkable $67 from Tuesday’s close of $402.

Though the stock was still trading at more than 500 times its projected 1999 earnings, it was enough of a pullback to lure investors back in. Yahoo shares proceeded to rally to as high as $406, before giving a good deal of that back in the last hour of trading. The stock closed at $368, down $34.

Online bookseller Amazon.com, which opened down about $36 at $127.06, immediately zoomed back in early-morning trading, but finished off $15.38 at $148.

“Usually, on a day where there’s a big opening plunge, it reverses after the first 20 minutes as the bears who’ve shorted stocks [betting on a market decline] come in to cover their positions and as short-term momentum investors try to play the rebound,” said S&P;’s Cherney. “Obviously, some of the short-term traders were taking some profits at the end of the day.”

Fueling the rally were positive earnings announcements in the last couple of days by Yahoo, computer disk drive maker Seagate and chip maker Intel.

“Intel’s numbers are often a precursor of what you can expect for the entire computer industry,” said Jim Oelschlager, manager of the White Oak Growth Stock fund.

Also, money continues to pour into stock mutual funds, according to Trimtabs.com. Year-to-date through Monday, Trimtabs estimates, a net $9.7 billion had been poured into stock funds, which is nearly as much as was invested in all of November.

If history is any guide, the bulk of that money was probably invested in the top-performing funds of the previous year. And those tended to be portfolios that make big bets on growth stocks in the technology and Internet sectors.

“Where do you think those managers are going to employ that cash?” asked Stratton. They’ll invest right back into those same stocks “for fear that they will lose their performance numbers if they do anything else. So it’s really a self-fulfilling prophecy.”

Wednesday’s rally signals that “it’s premature to say that this bull market is over,” said Everen Securities’ Nie.

But it’s just as uncertain whether Wall Street can continue to shrug off a worsening situation in Latin America, analysts say. If the entire region falls into a deep recession because devalued currencies destroy purchasing power, that’s one more drag on U.S. exports and thus the earnings of many U.S. firms.

With much of Asia still depressed, that would leave U.S. corporate profits almost totally dependent on the domestic economy’s health, and that of Europe--where manufacturing activity now is in decline in Britain and Germany, among others.

Also, unlike last fall, when the Federal Reserve bailed out battered markets with three cuts in short-term interest rates, that tonic may not be forthcoming again any time soon, experts warn.

Among Wednesday’s highlights:

* In the tech sector, stocks finishing higher included Intel, up $3.44 to $139; Seagate, up $2.69 to $41.63; Sun Microsystems, up $3.44 to $96.81; and Microsoft, up $1.63 to $143.81 after sliding to $136.

* In the Internet sector, most stocks ended lower, though above their worst levels of the day. EBay lost $25 to $215.50 after hitting $212.38; America Online ended down $7.88 at $145.75 after hitting $130 at its low point.

Among other Net stocks, Lycos lost $7.56 to $96.94 and Broadcast.com sank $53 to $170.

* Financial stocks were hit by worries over Latin American loan losses and trading losses. J.P. Morgan sank $5.25 to $106.56 and Citigroup lost $3.56 to $52.19, while Merrill Lynch dove $3.56 to $69.44.

* Among industrial stocks, Ford slid $1.50 to $61.38, Georgia-Pacific lost $3.88 to $64 and Deere fell $1.50 to $34.75.

For Markets, Devaluation Deja Vu

Global markets were hammered on Wednesday after Brazil joined the list of nations whose currencies have been devalued since mid-1997. The feared fallout from devaluations riled U.S. stocks in the second half of 1997 and again last August, but the market rebounded quickly both times. On Wednesday, other markets suffered much more than Wall Street. Weekly closes and latest for the Dow Jones industrial average:

Wednesday: 9,349.56 (-125.12)

1: July 1997: Thailand devalues

2: Early-Oct. 1997: Asian currencies sink

3: Early-Jan. 1998: Indonesian currency collapses

4: Spring-1998: U.S. stocks resurge as economy stays healthy

5: Late-Aug. 1998: Russian ruble collapses

6: Oct. 1998: U.S. stocks resurge as Fed cuts interest rates

7: Wed: Brazil devalues

World Stocks Sink With Brazil ...

How key market indexes fared Wednesday:

Argentina (Merval): --10.2%

Germany (DAX): --5.2%