) Chapter 11 bankruptcy filing. Troubled United Airlines failed to secure government loan guarantees to help it meet its obligations, so it was forced it to seek bankruptcy protection. United says it will continue flying, as well as honor and issue frequent-flyer miles.
But investors seemed concerned about what the bankruptcy of United, the world's second largest airline, says about the improving market and economic picture that emerged in October and November. "The market was due for a correction, and now it appears that we're in the middle of one," says Scott Brayman, portfolio manager for NL Capital, which manages the Sentinel Funds.
Economists and market analysts said the market continues to let go of much of the October-November gains because of disappointing earnings guidance from bellwether companies in several sectors, weaker economic news on the employment front, and the escalating conflict with Iraq. Says Chip Jones, senior vice president of Fulcrum Global Research, in a note to clients: "The last rally ended badly because of poor economic news and lower (corporate) guidance," as well as a feeling among many Americans that weapons inspections would prevent the need for a war with Iraq.
In the last few trading days, signs of an improving stock market and economy have faded. The Dow Jones industrial average finished down Monday 172.36 points, or 1.99%, to 8,473.41. The tech-heavy Nasdaq composite fell 55.35 points, or 3.89%, to 1,367.09. And the broader S&P 500-stock index lost 20.23 points, or 2.22%, to 892.
Among the sectors on the move Monday, many computer hardware stocks were down after Banc of America downgraded IBM (IBM
) to market perform from buy due to full valuation and lack of catalysts for the shares. On Friday, Big Blue announced it will acquire Rational Software (RATL
) for $10.50 per share, or $2.1 billion in cash. IBM shares fell 3.38%.
Many big tech stocks actually fell less than the market did. Intel (INTC
) fell 1% and Applied Materials (AMAT
) 1.1%, while Cisco (CSCO
) fell 0.68%.
But tech was overshadowed by the United bankruptcy, which is already showing signs of a ripple effect on the economy. Troubled computer services company Electronic Data Systems (EDS
), for instance, said Monday it cut its fourth-quarter earnings forecast by 10%, citing the bankruptcy of leasing partner United Airlines.
Investors also kept an eye on the chess game between Iraq and the U.S., which looks as though it could turn into a war early next year. Iraqi officials have submitted a document detailing their country's claim that it lacks weapons of mass destruction as well as the capability to make them. Bureaucrats are poring over those documents, while inspectors continue to search for weapons. It is possible that Bush will charge Iraq with violating U.N. weapons covenants, and then push the button for a U.S.-led attack on Iraq in January.
Bush's other big problem is the economy at home. The resignation of two key U.S. economic advisers on Friday morning suggests that the Bush Administration has in mind a different course for fiscal policy next year. Secretary of the Treasury Paul O'Neill will be replaced by CSX Corp. Chairman John W. Snow.
Economic adviser Lawrence Lindsey also announced his resignation last week. Stephen Friedman, a former co-chairman of the investment firm Goldman Sachs, is Bush's choice to replace Lindsey but his appointment wasn't expected Monday, officials said. "President Bush is trying to avoid the fate of his father, who lost his reelection bid because of economic difficulties," says Augustine Faucher, senior economist for Economy.com.
These events will overshadow Tuesday's meeting of the Federal Open Market Committee (FOMC). For now, the Fed is not expected to shift its stance on interest rates just yet, but if the employment picture failed to rebound, the Fed may have to lower interest rates again, economists say. Says MMS International: "Tomorrow's FOMC meeting has almost been lost in the shuffle between Iraq, the Cabinet resignations and the speculation of the new appointees, especially since no one expects any rate action from the Fed."
In financial news, the supermarket chain Albertson's (ABS
), which met its earnings target even though it had been revised downward by the company six weeks ago.
) will provide a mid-quarter update Tuesday, while Kimberly-Clarke (KMB
) will hold a conference call Wednesday. Ciena (CIEN
) and HJ Heinz (HNZ
) will report earnings Thursday.
In the retailing sector, Wal-Mart Stores (WMT
) said last week's snow storm hurt sales for the week ending Dec. 7, but it still expects December sales growth at stores open at least a year to be within the 3% to 5% range.
Separately, J.C. Penney Co. (JCP
) said its same-store sales were running ahead of its December plan for a percentage increase in the low single digits after a strong showing last week.
) was down 3.5% as the U.S. Senate investigates the bank's ties to scandals behind failed energy conglomerate Enron.
Tyco International (TYC
) sued its former Chief Executive Officer Dennis Kozlowski and ex-Chief Financial Officer Mark Swartz, seeking to recover $40 million in their ``short-swing'' trading profits on company stock. Tyco says in its lawsuit, which was filed Friday in Manhattan federal court, that Kozlowski and Swartz violated a federal rule that requires insiders who buy and later sell company stock within a six-month period to relinquish their trading profits.
Kozlowski and Swartz are already battling state criminal charges in New York that they engaged in a $600 million theft and fraud scheme.
U.S. Treasury prices rose Monday on the heels of Friday's worse-than-anticipated unemployment data. The Bank Credit Analyst notes that corporate bond issuance has plunged, and that further slashing of operating expenses and capital expenditures will continue in 2003. "The corporate sector's financing requirements should remain low as capital expenditures lag the upturn in cash flow. The result will be a gradual acceleration in corporate bond issuance in 2003, but compared to the past few years, it will be low," BCA says.
European markets were lower Monday. In London, the Financial Times-Stock Exchange 100 index finished down 79.6 points, or 1.98%, to 3,933.90. In Germany, the DAX lost 136.81 points, or 4.27%, to 3,070.72 on increasing worries about economic growth. In France, the CAC 40 Index fell 70.14 points, or 2.2%, to 3,115.63.
Asia markets finished down. In Japan, the Nikkei 225 index finished down 35.21 points, or 0.40%, to close at 8,828.05. In Hong Kong, the benchmark Hang Seng index fell 105.27 points, or 1.06%, to close at 9,868.48.