Wall Street on Thursday quit worrying about the dollar, soybean prices and other extraneous issues and turned to what really matters-corporate earnings. It didn’t like what it saw.
The Dow Jones industrial average fell 25.68 points to 3699.09 in moderate trading on the New York Stock Exchange. Broader market indicators fell as losing stocks outnumbered winners by 2-to-1 among NYSE-listed issues.
The heaviest damage was on the Nasdaq system, where a rout in computer-networking stocks pulled the Nasdaq composite index down 11.89 points to 700.85-the lowest close since July 1993.
Computer-related stocks, many of which trade on the Nasdaq system, have been under pressure for months. Things got worse late Monday when software developer Lotus Development said its second-quarter earnings would be a major disappointment.
Thursday, an investment downgrade of computer-networking designer Cisco Systems, considered a premiere company in its field, by Soundview Financial sparked another selloff in the sector. Cisco lost $2.50 to $21 as 14.6 million shares changed hands.
What’s going on?
What does the well-publicized financial trauma at investment firm Kidder Peabody, a subsidiary of General Electric, have to do with the price of oil and Cisco Systems?
The answer, according to Donald Coxe, president of Harris Investment Management in Chicago, a unit of Harris Bancorp, indicates that conventional wisdom about the financial markets lately has been misguided.
Coxe, who in April correctly predicted the slump in the dollar and the rise in the price of oil, said a liquidity crisis-that is, not enough money to support economic growth-is looming in the industrialized world. That’s quite different from the fear of inflation, popularly defined as too much money chasing too few goods.
Higher oil prices are sopping up economic liquidity around the world. Increasing demand for capital from global economies, which for once seem to be expanding in sync, is running up against tight monetary policies.
Meanwhile, many investors are sour on bonds and stocks, including former stars like Cisco Systems. That means, in theory, that central banks have trouble lowering interest rates and supplying capital to their growing economies because bearish investors would rather hold cash instead of stocks and bonds. Economists call this circumstance a “liquidity trap.”
General Electric’s recent moves to pump capital into Kidder Peabody, which has been beset by major bond losses, and to pull out of the bidding for Kemper, are symptoms of the liquidity trap. And Coxe doesn’t believe Kidder is an isolated problem.
“I don’t think all the others who are under stress have a General Electric behind them” he added.
The worst thing that could happen, which happened several times this spring, would be a boost in short-term interest rates by the Federal Reserve trying to support the dollar, followed by more selling of dollars.
“I think this (higher rates) would be an extremely dangerous thing to do right now,” Coxe said. “Then you’ve used your last bullet.”
Cisco symptoms
David Klaskin, Chicago-based money manager at Oak Ridge Investments, likes to take a long-term view of high-growth stocks he buys, including Cisco Systems. Right now, all he and his fellow growth stock managers can do is watch them slide.
“The (upward) momentum is almost completely out of these stocks,” he said.
“We’re about to put up just a disastrous quarter,” he said. Klaskin has been one of Chicago’s top-performing stock managers, but he’s expecting to be down 20 percent in the first half of the year.
Ironically, Klaskin believes the problem with Cisco Systems is too much demand for its computer-networking systems.
“Ninety percent of their orders are from existing customers,” he said. “They don’t have enough ability to market.”
