Scandals, Profit Worries Send Stocks Near 9/11 Lows
By Ben White
Washington Post Staff Writer
Saturday, June 22, 2002; Page E01
NEW YORK, June 21 -- Shaken by a scandal-du-jour business climate and concerned about
the
nation's underlying economic strength, investors dumped stocks again today, pushing the
major indexes back near lows last touched after the Sept. 11 terrorist attacks.
The Standard Poor's 500-stock index fell 17.15 points, or 1.7 percent, to close at
989.14, the first time the broad index has ended the trading day below 1000 since Sept.
21. And the Dow Jones industrial average dropped 177.98 points, to 9253.79, the worst
close for the blue-chip indicator since Oct. 31.
We are at maximum pain, said Stephen J. Massocca, president of Pacific Growth
Equities
in San Francisco. The dollar is declining, earnings estimates keep getting revised
lower,
corporate malfeasance and accounting scandals continue to erupt daily and the Middle
East
is still a tinderbox. All the big issues facing the market are negative.
An upbeat forecast from wireless technology firm Qualcomm Inc. today could not overcome
bad news about IBM and Merck and the indictment of three former executives and one
current
employee of Rite Aid on securities and accounting fraud charges.
The indictments further unnerved investors already spooked by fresh scandals at
conglomerate Tyco International and biopharmaceutical firm ImClone Systems.
And they came as the collapse of Enron, recently written off by some observers as old
news, sprang back into investors' consciousness this week with the conviction last
Saturday of the energy trader's accounting firm, Arthur Andersen, on an
obstruction-of-justice charge.
Tepid second-quarter earnings reported by several companies also helped push stocks to
their fifth straight down week as investors questioned whether the sluggish economic
recovery will ever gain steam or simply putter out.
People have been waiting for profitability to return for several months now, said
Michael Obuchowski, a quantitative research analyst and portfolio manager at Ashland
Management, which manages about $2 billion. But despite lower unemployment numbers and
several leading indicators inching higher, not much is happening in terms of profits.
. .
. And because of all these scandals, people are really waiting for tangible results
before
they put money back in the market.
For the week, the Dow fell 2.3 percent, the Nasdaq dropped 4.2 percent and the SP
slipped
1.8 percent. Since May 17, the last time the indexes finished up for the week, the Dow
and
the SP have each lost 10.6 percent and the Nasdaq has dropped 17.3 percent.
The Dow has had the best year so far of the major indexes and is still 12.4 percent
above
its Sept. 21 finish of 8235.81. The Nasdaq is just 1.3 percent above its Sept. 21
close,
and the SP has only to drop another 2.4 percent to pierce its September low.
Amid all the grim numbers, Qualcomm provided a lone bright spot today, announcing that
increased demand for its wireless technology would improve third-quarter earnings. Its
shares fell 21 cents, to $26.12.
But IBM fell $2.83, or almost 4 percent, to $68.75, after Lehman Brothers Inc. lowered
its
earnings expectation on the stock. And investors sold shares in Merck after a Wall
Street
Journal report questioned the drug giant's accounting practices. Merck has denied
wrongdoing. Both IMB and Merck are Dow components and helped drive the overall index
down
for the day.
Market observers had expected hectic trading today on what's known as a triple
witching
day, when index futures and index and stock options all expire at once. The
simultaneous
options expirations occur only four times a year.
Several academic observers and money managers said that despite recent drops, stocks
remain expensive by historic ratios to corporate earnings and could fall even more if
scandals continue to pile up and erode investor confidence.
Something is true today which has been true only now and again in the past, said
Harvard
Business School professor Richard S. Tedlow. And that is that there is a spotlight on
individuals. You see their pictures in the paper. You see them testifying before
congressional committees. They have names. You can understand what they did wrong.
Tedlow said the current market environment felt different from the events leading to
the
crash of 1987.
It's hard to recall anyone particularly associated with that, he said. What's going
on
now has far more in common with the 1920s and 1930s, when a number of famous people
went
to jail.
But Tedlow and several money managers cautioned that the underlying economy is far
stronger than it was in the days of the Great Depression and that, should earnings
finally
pick up in the second quarter as many expect they will, stock prices could begin to
recover late this year or early next year.
In general, the economy looks reasonably solid, particularly housing and
