Stocks End Quarter on a Down Note

Weak readings on consumer confidence and manufacturing hurt the broader market, while disappointing news from Sun Microsystems helped push the Nasdaq down 2%

Stocks ended the third quarter on a sour note as investors remain defensive after a dose of negative economic data. A disappointing outlook from Sun Microsystems (SUNW ) also pressured the market.

The Dow Jones industrial average fell 105.18 points, or 1.12%, to 9,275.06. The broader Standard & Poor's 500 index was down 10.61 points, or 1.05%, to 995.97. The tech-heavy Nasdaq composite declined 37.62 points, or 2.06%, to 1,786.94.

For the third quarter, though, the major indexes all posted solid gains. The Dow was up 3.2% and the S&P 500 higher by 2.2%. The Nasdaq was the clear winner for the quarter, with a gain of 10%.

The major averages got hit hard in early trading after economic data came in weaker than expected. In the afternoon, the major indexes came off the worst levels of the day, helped by news that the U.S. dollar rebounded on rumors that the Federal Reserve intervened to support the greenback vs. the yen. The Bank of Japan was also reportedly selling yen to support the U.S. currency. But sellers emerged again in the last hour of trading.

The key economic data coming Wednesday is the September ISM national manufacturing survey. MMS International sees the index moderating to 54.0 from August's 54.7, as growth subsides to a more sustainable, but still solid level following the robust strength over the summer. Also being released is U.S. construction spending.

On Tuesday, the Conference Board's consumer confidence index dropped to 76.8 in September from a revised 81.7 in August (initially 81.3). This is the lowest reading since March. Expectations fell back to 88.4 from a revised 94.9 (previously 94.4). The present situation component fell to 59.5 from a revised 62.0 (61.6 previously). The report was weaker than expected.

The Chicago PMI, a regional manufacturing survey, sank to 51.2 in September from 58.9 in August, well below median forecasts of a 57 result. New orders declined to 53.2 from 60.5, employment idled to 45.3 from 51.2, while prices paid eased to 51.8 from 52.4.

The report, combined with the drop in consumer confidence, supported bonds at the expense of stocks and the dollar, says MMS International.

Among stocks on the move Tuesday, shares of Sun Microsystems fell in heavy trading. After the market close Monday, the company said it expects a fiscal first-quarter GAAP loss per share of approximately 7 cents to 10 cents, including a tax provision of approximately $34 million, or approximately 1 cent per share. That's wider than analysts' average forecast of a loss of 2 cents per share for the quarter. In a press release, the company stated the loss "reflects a particularly difficult quarter for the company due in part to intense market and competitive dynamics."

In addition, Sun announced that it will record a $1.051 billion non-cash charge in its fourth quarter of fiscal 2003 to increase a valuation allowance for its net deferred tax assets. As a result of this charge, Sun's revised net loss for the fourth quarter of fiscal 2003 is $1.039 billion, or 32 cents per share.

Enterasys Networks (ETS ) shares fell after the company says it expects an 8% to 13% sequential third-quarter revenue decline. The company cited customer's delay in purchasing decisions. CE Unterberg downgraded the stock.

ArvinMeritor (ARM ) shares fell after the company said it sees fourth-quarter EPS of 48 cents to 51 cents, resulting in $2.00 to $2.03 in fiscal year 2004 EPS (before cumulative effect of change in accounting principal). The company cited higher costs for product launches and steel-related interruptions in its LVS business.

Alliance Capital Management (AC ) shares slumped after the company announced it suspended two staffers, including a fund manager, after an internal investigation uncovered evidence that the pair aided the market-timing of the firm's funds.

On the plus side, shares of homebuilders rose, benefiting from the continued decline in interest rates. The 10-year Treasury note yield fell below the 4% mark, to 3.93%.

Emmis Communications (EMMS ) shares rose after the media company posted 14 cents second-quarter earnings per share, vs. a 13 cents loss, on a 7% net revenue rise. Emmis sees $157.8 million to $160.2 million third-quarter net revenue, and $593.1 million to $598 million in fiscal 2004.

In deal news, Air France and KLM Royal Dutch Airlines (KLM ) agreed to merge to become the world's third-biggest airline operator. The proposed Air France-KLM deal is valued at $908.1 million.

Treasury Market

Treasuries posted strong gains across the board as a Bank of Japan inspired rebound in the dollar added to bullish momentum from weaker than expected data, struggling equities, and month-end/quarter-end demand, says MMS International. Bonds benefitted from asset allocation trades out of equities after disappointing news from Sun Microsystems. "But the real buying burst came from much weaker than expected Chicago PMI and consumer confidence data for September, which revived fears that third-quarter economic strength would not be sustained," says MMS International.

World Markets

European stock markets finished lower after the dollar sank against the euro and the yen. London's Financial Times-Stock Exchange 100 index fell 51.4 points, or 1.24%, to 4,091.3. In Paris, the CAC 40 lost 53.72 points, or 1.68%, to 3,134.99. Germany's DAX index declined 66.6 points, or 2%, to 3,256.78.

Asian markets finished mixed Tuesday. In Japan, the Nikkei 225 index fell 10.52 points, or 0.1%, to close at 10,219.05. The market opened higher, partly encouraged by the apparent yen selling intervention by the Ministry of Finance and Bank of Japan. The U.S. dollar to yen rose to around 112.10. However, the impact was short-lived, and the dollar-yen dipped to below 111 by late afternoon. The late afternoon plunge was mainly due to technical selling on certain shares to be excluded from the Nikkei in the coming index reshuffle, says Standard & Poor's MarketScope.

In Hong Kong, the Hang Seng index gained 88.59 points, or 0.8%, to close at 11,229.87.

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