Dow Plunges 374 on P&G;’s Profit Warning
Wall Street’s rush out of “old economy” stocks intensified dramatically Tuesday as a surprise earnings warning from consumer products giant Procter & Gamble sparked a frantic sell-off among old-line industrial and manufacturing companies.
The Dow’s 374.47-point, or 3.7%, plunge to 9,796.03 raised fears that the decline among non-technology stocks is accelerating, and overshadowed an early-morning jump by the tech-heavy Nasdaq composite index above the 5,000 mark. An afternoon sell-off tugged the Nasdaq down 57.01 points, or 1.2%, to 4,847.84.
Early today in Asia major stock markets were mostly lower, but the damage was minor considering the extent of the Dow’s loss--and considering the latest jump in oil prices, to more than $34 a barrel. The Hong Kong market was off 0.7% at midday. The Japanese market eased 0.6%.
Shares of P&G;, one of the 30 stocks in the Dow index, lost nearly one-third of their value after the maker of Crest toothpaste, Bounty paper towels and other brand-name products shocked Wall Street by saying that rising raw-material costs would crimp its third-quarter earnings.
The announcement spooked investors, who read it as proof that the prospects for traditional consumer and industrial stocks are deteriorating quickly, particularly as oil prices rise and the Federal Reserve boosts interest rates.
The P&G; news is likely to speed a shift in which mutual funds and other professional investors dump “old economy” issues in favor of tech names in the hope that “new economy” stocks can prop up their faltering returns, analysts say.
Many fund managers have already been forced to unload old-line stocks because of growing redemptions by their individual investor shareholders. And given that the stocks show little sign of rebounding soon, many funds appear to have recently stepped up their move to the tech sector in the hope of holding on to their current shareholders by boosting returns.
“If you’re a money manager, your job is on the line. You’ve got to get into the next 30-point gainer,” said Scott Bleier, chief investment strategist at Prime Charter Ltd. P&G;’s warning simply “cements the perception that you’ve got to sell the slow growers and buy what’s hot.”
That has fed a widening divergence in the market between the “old economy” stocks of the Dow and, to a lesser degree, the Standard & Poor’s 500-stock index, and Nasdaq. The S&P; is down almost 8% from its Dec. 31 all-time high, after falling 2.6% on Tuesday, and the Dow is down 16.4% from its mid-January high. But Nasdaq has powered up 19% this year, thanks to soaring tech stocks large and small.
The selling was heavy Tuesday, with more than 1.3 billion shares changing hands on the New York Stock Exchange and more than 2.1 billion on Nasdaq, the second-busiest day ever for both markets.
The Dow’s decline was the fourth-biggest ever in point terms, and the biggest percentage drop since Aug. 31, 1998. Combined with Monday’s loss, the two-day drop was the fifth-largest ever in percentage terms, at 5.5%.
Some experts were startled by the magnitude of the drop in a stock the size of P&G;, which is the 36th-largest stock in the S&P; 500. Its loss erased a whopping $36 billion worth of market value.
The P&G; plunge may be a sign that the extreme volatility that has been a hallmark of the Nasdaq market is seeping into the NYSE. On Monday, shares of NYSE-traded Agilent Technologies surged 47%--a huge one-day gain for a Big Board stock--after the company announced technology to boost fiber-optic networks.
Old-economy stocks, including manufacturers and banks, have suffered as the Federal Reserve has raised interest rates over the last six months to blunt nascent inflationary pressures. The Fed is expected to again raise rates when it meets March 21.
Some on Wall Street question whether Federal Reserve chief Alan Greenspan is meeting his widely perceived goal of curbing the stock market as a way to slow the economy. Rather than clipping tech highfliers, investors have scurried into the sector in the belief that it’s the only one with enough growth to withstand higher interest rates.
P&G;’s announcement also focused new attention on budding inflationary pressures. Merrill Lynch & Co. downgraded the household-products sector following the P&G; warning, arguing that rising oil and paper prices are exacting a toll on the companies.
Oil prices continued to rocket on Tuesday, with near-term futures in New York soaring $1.95 to a nine-year high of $34.13 a barrel, on fears that the Organization of Petroleum Exporting Countries won’t increase supplies enough to prevent shortages.
The extent of the collateral damage from P&G;’s bombshell seemed excessive to some market watchers. Several analysts noted, for example, that Kimberly-Clark and Colgate-Palmolive each plunged more than 10%, despite their insistence that they were confident of achieving Wall Street’s profit projections.
“With oil hitting $34 a barrel, there will be higher materials costs for all big multinationals, but the impact will be even more severe for those like P&G; in an intensely competitive arena with slow unit growth,” said Thomas M. Galvin, chief equity strategist for Donaldson Lufkin & Jenrette.
But even as investors run to technology and other new-economy stocks, some analysts question that logic.
Higher interest rates may cool spending by old-economy companies on Internet infrastructure, software, wireless equipment and other products offered by the highflying tech firms, some warn.
“The new economy has to sell to somebody,” said Arthur Micheletti, chief investment strategist at Bailard Biehl & Kaiser in San Mateo, Calif. “These stocks don’t exist in a vacuum--even though they look like it now.”
DLJ’s Galvin disagreed.
After Tuesday’s earnings warning, he removed P&G; from its place on the firm’s “focus list” of recommended stocks, replacing it with FreeMarkets, a company that organizes online auctions to help large industrial firms save money on parts and materials.
If industrial America is indeed being squeezed by rising rates, Galvin said, it may move even more quickly to seek cost-cutting answers from technology companies.
The news that oil prices had climbed to $34 a barrel may have a longer-lasting effect than P&G;’s warning, according to Christine Callies, chief investment officer at Credit Suisse First Boston.
Tuesday’s market plunge indicated to her that “investors are finally paying attention to inflation.”
Heavy fuel users, such as airlines, are first to be hurt by rising oil, but inflation fears typically spread to “stable growers,” including blue-chip members of such sectors as soft drinks, cosmetics and pharmaceuticals, Callies said.
Among the day’s highlights:
* Industrial blue chips down sharply included GE, off $7.50 to $129.94; DuPont, down $3.44 to $46.31; and 3M, down $4.50 to $82.75. Many drug, airline and retail stocks also were hammered.
* On the plus side, energy stocks zoomed as crude soared. Exxon Mobil rocketed $7.06 to $80, Texaco gained $3.63 to $50.25 and Chevron surged $7 to $81.
* In the tech sector, Terayon Communication Systems rose $23.19 to $253.13, as the company said it expects earnings in its fiscal first quarter to exceed analysts’ expectations. Terayon cited increased demand for its broadband networking systems.
Among Southland tech stocks, Power-One rallied $7.44 to $55.88 and Stamps.com rocketed $6.13 to $29.69, but Leap Wireless lost $10.13 to $78.63.
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Market Roundup, C8
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Consumed by Selling
Shares of major consumer product companies, once the darlings of Wall Street, have fallen dramatically in the last year as earnings have stalled and investors have focused increasingly on technology. A sampling of leading consumer stocks, ranked by percentage decline from their 52-week high.
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% decline Ticker Tuesday Tuesday from 52-wk. Company symbol close decline high Dial DL $14.50 -$1.25 -62% Philip Morris MO 19.56 -0.31 -55 Gillette G 32.44 -2.44 -50 Procter & Gamble PG 61.00 -26.44 -48 Unilever UN 41.69 -3.31 -47 Clorox CLX 36.25 -3.81 -44 Am. Home Products AHP 41.50 -5.38 -41 Johnson & Johnson JNJ 68.50 -2.00 -36 Kimberly-Clark KMB 45.38 -5.25 -35 Coca-Cola KO 47.13 -1.88 -34 Anheuser-Busch BUD 56.56 -3.69 -33 Colgate-Palmolive CL 46.75 -6.06 -30
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Source: Bloomberg News
