Stocks Sink on More Accounting Woes

News that Qwest is the subject of a criminal probe slammed the markets. Wall Street also had to deal with a reshuffling of the S&P 500

Hit by another accounting scandal, this time from local telephone company Qwest Communications (Q ), and a reshuffling of the S&P 500 that booted several companies from the benchmark index, stocks plummeted on Wednesday – with the broader market finishing at its lowest level in more than four years.

"The market is continuing to focus on corporate scandals," says chief strategist Peter Cardillo of Global Partners Securities Inc. "The market is gripped with fear," he added.

Chief among the stocks in the news, federal prosecutors have begun a criminal investigation into Qwest, the company said. While details of the investigation remain unspecified, the announcement further hampers the telecommunications sector's credibility after WorldCom's $3.85 billion accounting scandal surfaced in late June. Qwest stock finished under $2 a share.

In addition to ongoing accounting jitters, Wall Street had to contend with big changes to a key market gauge. Standard & Poor's late Tuesday announced it would remove several foreign companies from its 500-stock index and replace them with U.S.-based counterparts. The changes will occur after the close of trading on July 19.

Stocks removed from the S&P 500 were lower Wednesday, including oil giant Royal Dutch Petroleum (RD ), which lost more than 9%. Meanwhile, seven U.S. concerns were added to the index. They are: United Parcel Service (UPS ), Electronic Arts (ERTS ), Ebay (EBAY ), Goldman Sachs Group (GS ), Prudential Financial (PRU ), Principal Financial Group (PFG ) and SunGard Data Systems (SDS ). All those stocks posted gains Wednesday.

The only thing that may stop the bleeding on Wall Street is positive earnings results, says Cardillo of Global Partners Securities. With reporting season under way for second-quarter results, United Parcel Service reaffirmed its earnings outlook, but said it was seeing some of its package business going to competitors.

After the close of trading Wednesday, Internet media company Yahoo! (YHOO ) posted a second-quarter profit of $0.03, above the $0.02 First Call estimate. Moreover, notes S&P MMS, this was the first profit the company has posted in over six quarters -- and the $21.4 mmillion net profit compares favorably with the $48.5 million loss in the preceding quarter.

The Standard & Poor's 500-stock index lost 32.36 points in Wednesday's session, or 3.40%, to 920.47, on course to reach lows not seen since October, 1997, according to news reports.

The Dow Jones industrial average tumbled 282.59 points, or 3.11%, to 8,813.50. Among the biggest losers were 3M (MMM ) and General Motors (GM ). Pharmaceuticals also took a hit, including Johnson & Johnson (JNJ ).and Merck (MRK ). Meanwhile, the tech-heavy Nasdaq composite index shed 35.10 points, or 2.54%, to 1,346.02.

In a predominant sea of red, a rare bright spot was Cisco Systems (CSCO ), which gained 2% after Merrill Lynch raised its investment rating to strong buy from buy, citing a turnaround in the network equipment sector.

Treasury Market

U.S. Treasuries ended higher in a flight to safety, as equities tumbled. The yield on the 10-year fell 10 basis points to 4.62%.

In economic news, the government said U.S. import prices fell for the first time in six months in June as falling petroleum prices helped restrain imported inflation pressures, according to news reports. The Labor Department said import prices fell 0.6% in June after gaining a modest 0.1% during the previous month. Plus, the Commerce Department said wholesale inventories in May rose 0.1% to $281.4 billion after a revised 0.9% drop in April. The gain in May was boosted by rising stocks of cars, computers and non-durable goods.

World Markets

European markets closed lower. In London, the Financial Times-Stock Exchange 100 index was off 122.80 points, or 2.70%, to 4,420.10. In France, the CAC 40 lost 162.63 points, or 4.26%, to 3,656.38. And in Germany, the DAX Index shed 179.54 points, or 4.11%, to 4,190.22.

In Asia, the markets finished with losses. The Nikkei plunged 207.59 points, or 1.89%, to 10,752.66. Exporter shares sent the Tokyo market lower in the wake of the Japanese yen's appreciation. In Hong Kong, the market slipped 55.61 points, or 0.51%, to 10,787.54.

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