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Stocks Routed Yet Again

Stocks Friday were brutalized yet again as lingering concerns over corporate governance, profit health and geopolitical conflicts prompted yet another round of heavy losses. The downturn came amid the latest bad news about Dow components Merck (MRK), IBM (IBM) and other companies.

On Friday, the Dow Jones industrial average lost 177.98 points, or 1.89%, to 9,253.79. The Nasdaq composite index was lower by 23.83 points, or 1.63%, to 1,440.92. The Standard & Poor's 500 index shed 17.16 points, or 1.71%, to 989.13.

Next week investors will continue to fight ongoing bad news, analysts say. Worries including the escalating violence in the Middle East, the uncertain health of corporate earnings and more recently, the tumbling U.S. dollar will keep undermining confidence in stocks.

The coming week is also the last week of the quarter and Phil Orlando, chief investment officer at Value Line Asset Management suspects that fund managers will be busily "window dressing" or selling stocks that didn't work over the quarter and adding those that might look better. "As a result, there will be more pressure on technology and telecom, which have been underperforming areas," Orlando says.

Fear is winning a difficult tug-of-war between "the concrete fundamentals of the economy and corporate earnings cycle and the issues of this domestic crisis of confidence," Orlando says. Markets will likely experience more of the same next week.

Prudential Securites senior vice president of sales Larry Wachtel predicts that the stock market will stay under pressure until the second quarter earnings season, which begins in the second week of July. "In terms of a sustainable move, there are two elements: guidance from second quarter earnings and after Labor Day, possibly the return of capital spending. Saving that, I don't see much for catalysts."

"Instead of buying on weakness, investors are shying away," Wachtel says. He does, however, expect a one-day pop some time next week, much like the strong gains seen this past Monday.

The state of corporate governace was dealth another blow Friday. Venerable drug company Merck came under a cloud. Losses in the shares pulled the blue-chip Dow average lower after a press report that its pharmacy benefits manager subsidiary Merck-Medco inflated its revenue by recording co-payments from patients to pharmacies. "If Merck gets clouded so do all the drugmakers," Wachtel says.

IBM, another Dow member, was hit after SoundView lowered its estimates for the technology giant, citing ongoing weakness in IT spending. SoundView cut its 2002 revenue and EPS estimates to $82.9 billion in sales and $4.21 in EPS from $83.9 billion and $4.28 EPS. The firm cut its 2003 estimates for Big Blue to revenues of $90.3 billion and EPS of $5.14, from $91.4 billion and $5.20, respectively.

Home-products retailer Bed, Bath & Beyond (BBBY) beat earnings expectations of $0.13 per share. It reported net earnings of $46.3 million, or $0.15 per share in the fiscal first quarter ended June 1 compared with $30.0 million, or $0.10 per share last year. Sales jumped to $776.8 million, up 34.9% from 2001.

Wireless technology company Qualcomm (QCOM) said it expects to at least hit its earlier earnings guidance for the current quarter as demand for its products picks up. Qualcomm said it expected $0.21 to $0.23 in earnings per share for fiscal third quarter ending June 30. This EPS figure excludes its Qualcomm Strategic Initiatives business.

Financial software maker Intuit (INTU) lowered its fiscal 2002 guidance but raised 2003 guidance. The company also said it will sell its Quicken loans unit.

More bad news for the tech sector came in the form of an analyst downgrade. Shares of Cisco Systems (CSCO), Ciena (CIEN), ONI Systems (ONIS) and Juniper Networks (JNPR) were under pressure after Banc of America lowered its ratings on the stocks to "buy" from "strong buy." The firm also lowered its rating on Lucent Technologies (LU) and Nortel (NT), due to their balance sheet health. The firm also turned more negative on Motorola (MOT), Ericsson (ERICY) and Qualcomm (QCOM).

Treasury Market

U.S. Treasuries finished higher in price in thin trade as stocks sank. Economists at Standard & Poor's MMS estimate that the statement coming from next week's meeting of the Federal Open Market Committee, the Federal Reserve's rate-setting arm, could be more on the upbeat side in keeping with recent data. This would contrast reports this week that the Fed could be poised to ease. Though it obviously does not directly target stocks, the Fed is likely mindful of the disconnect between sour equities and improving economic conditions.

Expecations for any interest rate tightenings by the Fed have been significantly scaled back due to ongoing weakness in the stock market, softer-than-expected economic data, and news on productivity and inflation, MMS says. The market does not expect any action to be taken over the two-day FOMC meeting held June 25 and 26 -- and many observers believe that the Fed will not act before November. But given Federal Reserve Chief Alan Greenspan's dovish tendencies, MMS suspects the FOMC may wait until 2003 to switch its policy course.

World Markets

European markets finished mostly lower as U.S. stocks lost ground. In London, the Financial Times-Stock Exchange 100 index ended up 25.00 points, or 0.55%, to 4,605.30. In France, the CAC 40 finished down 32.54 points, or 0.85%, to 3,799.53. And in Germany, the DAX Index fell 13.28 points, or 0.31%, to 4,232.40.

Asia markets logged sharp losses. In Japan, the Nikkei 225 index finished down 258.63 points, or 2.44%, to close at 10,354.35. Tokyo stocks stumbled Friday as tech concern Sony led a broad-based retreat on the heels of a weak U.S. stock market finish.

In Hong Kong, the benchmark Hang Seng index ended down 162.55 points, or 1.51%, to close at 10,590.86.

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