A vague, but broad-based, worry about the transparency of accounting practices at several brand-name companies dragged the overall stock market lower Tuesday.
The decline began after energy trader and pipeline operator Williams Cos. (WMB) said it would delay releasing its full earnings report. The news sparked selling as investors remain on edge after the accounting problems exposed in Enron's (ENE) collapse.
Williams said it would delay the release of 2001 results as it assesses its obligations related to loss-ridden fiber-optic network operator Williams Communications Group (WCG). The company sees "recurring" earnings per share of $2.35, including a charge of $0.12 related to failed energy trader Enron.
The market-shaking news came one day after the bankruptcy filing by another fiber-optic network operator, Global Crossing (GX).
"Maybe the best thing to do is to believe in only the companies that you can understand" -- S&P's Sam Stovall
The worries about accounting are clearly tied to the recent blowup of Enron, says Sam Stovall, senior investment strategist at Standard & Poor's. However, those concerns have deeper roots -- in the Internet bust. When that sector imploded, investors felt they were lied to by analysts who touted stocks of profitless companies even as the stocks were dropping. "When you have companies themselves lying to you, the question is, 'Who do I believe?' Maybe the best thing to do is to believe in only the companies that you can understand," Stovall says.
Shares of Tyco International (TYC) and Cendant (CD) sold off sharply amid the panic. Tyco took an additional hit from press reports that said the company paid $20 million to an outside director and a charity he controls in return for his help in the June, 2001, acquisition of financing firm CIT. S&P is keeping its buy rating on the stock, while Merrill Lynch defended Tyco and reiterated its strong buy opinion.
Surprisingly, Stovall notes, the market's frenzy Tuesday happened amid two better-than-expected pieces of economic data. Durable goods orders in December were stronger than expected. And the latest report on consumer confidence showed continued optimism. The Conference Board's index showed a rise to 97.3 in January from a revised 94.6 reading in December.
The Dow was sharply lower, led by weakness in General Electric (GE), a company whose accounting practices have raised eyebrows over the years.
The Dow Jones industrial average tumbled 247.51 points, or 2.51%, to 9,618.24. The Nasdaq Composite index lost 50.93 points, or 2.62%, to 1,892.98. The broader Standard & Poor's 500 index fell 32.42 points, or 2.86%, to 1,100.64.
Along with economic data and worries over accounting, investors are contending, too, with a full slate of and earnings news along with an update on the Federal Reserve's monetary policy and President Bush's State of the Union address.
Wall Street is waiting for comments from the FOMC, the Fed's interest-rate setting arm, on the health of the economy. The committee, which lowered rates 11 times over 2001, is widely expected to leave them unchanged at its Jan. 29-30 meeting, putting an end to an unprecedented easing cycle. But policymakers are also seen leaving room to cut rates further if necessary. If Fed Chairman Alan Greenspan & Co. take no action on rates, it would signal that the central bank sees the U.S. recovering from its current economic woes.
Another closely watched event will be President Bush's State of the Union address Tuesday evening. The President is widely expected to touch on war and security issues in his speech, as well as his economic stimulus proposal. Wall Street has been speculating that Bush will express support for a cap on asbestos liability. Many of the country's biggest companies have seen their stocks crumble on worry that class-action suits involving asbestos claims could cause bankruptcies.
Investors on Wednesday will have plenty of earnings news digest. After the market close, Kraft Foods (KFT) said pro forma fourth-quarter earnings per share rose 33%, helped by cost savings from its buyout of cookie company Nabisco in late 2000.
Among tech earnings reports, software maker Veritas (VRTS) beat analysts' revenue and earnings forecasts with $370 million in sales and diluted pro forma profits of per share of $0.15. The company also raised its projection for first quarter 2002 as a result of its improved capacity and momentum.
Many other high-profile companies' most recent earnings data will be unveiled Wednesday. The big releases include AOL Time Warner (AOL) and Philip Morris (MO).
The latest revision to gross domestic product is due Wednesday as well. Economists at S&P expect real GDP to fall 1.0% in the fourth quarter.
Treasuries rallied in price amid a sharp selloff in stocks. Tuesday's economic reports showed evidence of a strengthening U.S. economy, which may lessen the chance of any further rate cuts from the Federal Reserve -- normally, bad news for Treasuries. However, jitters before the Fed meeting and rising accounting doubts are driving funds away from stocks, and into Treasuries.
Durable good orders in December rose 2%, which was stronger than expected. Orders excluding transportation were up 1.4%. The inventory-to-shipment ratio dipped to 1.58 from 1.59. The report is solid, but while the December data look stronger than expected, the downward revisions to November leave the figures relatively in line with expectations, says MMS.
European markets finished lower in late-session trading as the U.S. stock market weakened. Earlier, the markets there were mixed amid profit-taking in oil stocks and disappointing financial updates from France Telecom and its Orange cell-phone unit. In London, the Financial Times-Stock Exchange 100 index ended off 92.20 points, or 1.77%, to 5,131.40. In France, the Paris CAC 40 finished down 65.06 points, or 1.43%, to 4,476.10. Germany's DAX index stumbled 74.50 points, or 1.44%, to 5,084.52.
Asian markets ended mixed. Japan's Nikkei 225 index fell 194.82 points, or 1.91%, to 10,026.03, after Toshiba's disappointing earnings forecast. Hong Kong's Hang Seng index jumped 246.78 points, or 2.29%, to 11,014.24.