Investors Rush for the Exits

There was no place to hide from Friday's ugly sell-off. The markets may see little relief next week as more earnings updates hit

Stocks slid to another ugly close in Friday's session. This time tepid earnings outlooks from brand-name tech concerns like Ericsson (ERICY ) Sun Microsystems (SUNW ) and Microsoft (MSFT ) did much of the damage.

Meanwhile, healthcare giant Johnson & Johnson (JNJ ) was the main culprit for steep losses on the Dow Jones industrial average. The company confirmed that it is under criminal investigation of a factory in Puerto Rico that makes its anemia drug Eprex. There have been reports of side effects in patients in Europe and Canada who took the drug.

The Dow lost 400.41 points, or 4.76%, to 8,009.08. For the week, the Dow fell 7.7%.

The tech-heavy Nasdaq composite index declined 37.94 points, or 2.80%, to 1,319.01. Meanwhile, the broader Standard & Poor's 500-stock index was down 34.08 points, or 3.87%, to 847.48. The 500 shed 7.9% for the week. Stocks are now down to levels not seen since September, 1998.

There has been "virtually no place" to hide from the downdraft, says S&P chief technical analyst Mark Arbeter. "Stocks and industries that were performing relatively well have rolled over and for the most part, gotten crushed along with everything else."

Looking ahead to next week, investors will have to contend with the rebalancing of the broadly followed Standard & Poor's 500 index of stocks. The rebalance will take effect at the close of business Friday. Non-U.S. stocks will be deleted for 7 domestic ones: UPS (UPS ), Goldman Sachs (GS ), Prudential Financial (PRU ), eBay (EBAY ), SunGard Data Systems (SDS ), PrincipalFinancial Group (PFG ) and Electronic Arts (ERTS ).

Index funds are buying in to the new issues Friday, though arbitrage and hedge funds have already acted. The last time the S&P index was rebalanced was 1983, when seven Baby Bells were added. Some additional volatility is expected next week as fund managers make their adjustments.

Economic data next week will not offer much hope for stock market relief, says Standard & Poor's economic research unit MMS. Stock investors have been ignoring the recent positive signs on the macro-economic front. After a slow start to the week, the employment cost index, durable goods orders, new home sales and initial jobless claims will be released on Thursday. The wage numbers are expected to look benign, while durable goods orders and new home sales are expected to moderate and initial jobless claims should continue to trend of modest improvement.

Investors will have a pile of earnings updates to look at as second quarter earninsg reporting season rolls on. Companies expected to post results include Texas Instruments (TXN ), Avaya (AV ), Tyco International (TYC ), Colgate-Palmolive (CL ), Halliborton (HAL ), Wyeth (WYE ), Starbucks (SBUX ) and Viacom (VIA ).

Earnings outlooks from major tech concerns weighed on the Nasdaq Friday. Mobile-phone maker Ericsson warned Friday that industry-wide sales of mobile phones this year will fall more than 15% from 2001 levels, down from a previous forecast of a fall of more than 10%. Ericsson said its own sales should be in line with those of the industry. It also unveiled further cost-cutting measures.

Sun Microsystems after the closing bell Thursday reported fiscal fourth-quarter revenues of $3.4 billion, up 10% from third-quarter levels. Net income for the fourth quarter was $28 million. The company warned of weakness on the current quarter.

Microsoft, the world's No. 1 software concern, said sales grew 10% in its fourth quarter, but losses on cable investments hurt earnings and the firm lowered its profit and sales outlook for the current year. Pressure on Microsoft shares is adding to losses on the Dow index.

AOL Time Warner (AOL ) shares continued to fall after the news of a major management shakeup and resignation of COO Robert Pittman just three months after being given the task of overhauling the company's struggling online unit.

EBay, the top Internet auction site, provided a modest upgrade to its financial outlook. Meanwhile, it said second-quarter earnings more than doubled from last year.

Xilinx (XLNX ), a chipmaker, posted revenue that was less than analysts predicted. Xilinx said it had revenue rose slightly to $289.9 million but analysts expected $295.5 million.

Shares of natural gas supplier NICOR (GAS ) plunged after the company said the Interstate Commerce Commission was reviewing allegations it acted improperly in connection with its performance based ratemaking plan.

And shares of DaimlerChrysler (DCX ) fell on reports the automaker was being investigated by the U.S. Dept. of Justice for price fixing.

Treasury Market

Treasuries posted price gains as stocks tumbled.

The consumer price index and the core index, which strips out more volatile food and energy components, both rose 0.1% in June, in line with market expectations. The data, which gauge inflation at the consumer level, suggest that inflation remains subdued.

In other data, the U.S. trade deficit hit a record $37.64 billion in May from an upwardly revised deficit of $36.14 billion in April. Exports gained slightly, while imports surged. The data may worry the dollar and stocks slightly, but should not have much effect on bonds, says MMS.

World Markets

European stock markets finished with sharp losses amid disappointing earnings outlooks in the U.S. that renew concerns about the economic recovery. In London, the Financial Times-Stock Exchange 100 index finished down 199.00 points, or 4.63%, to 4,098.30. France's CAC 40 shed 189.67 points, or 5.40%, to 3,324.04. Germany's DAX index faltered 208.87 points, or 5.09%, to 3,891.88.

Asian markets ended lower. In Japan, the Nikkei 225 index fell 295.90 points or 2.82%, to 10,202.36. In Hong Kong, the benchmark Hang Seng index lost 127.09 points, or 1.22%, to close at 10,325.46.

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