No Speech Strong Enough for This Market

Actions speak louder than words, and sellers once again dominated trading today despite some tough talk by President Bush.

In a much anticipated speech, Bush called for a doubling of the maximum jail term for mail and wire fraud, and tougher sentencing guidelines for boardroom criminals. He said the Justice Department will create "a financial crimes SWAT team" to deal with corporate crimes. He also called for a "new ethic of responsibility" in corporate America and backed a series of proposals by the New York Stock Exchange, including that a majority of company directors -- and all members of audit, nominating and compensation committees -- have no material relationship with the company.

Major averages traded at session highs as the president's speech began but faltered soon thereafter and tumbled into and throughout the final hour of trading.

"I think a lot of investors were hoping the [president's] speech could turn the market, but it was more wishful thinking," said Gail Dudack, chief investment strategist at Sunguard Institutional Brokerage. "I think the concern around is that there's more problems out there and no speech can make that go away."

Indeed, the president addressed the potential for more instances of corporate malfeasance that have yet to be discovered: "More scandals are hiding in corporate America and we must find them and expose them now," Bush said.

At day's end, the Dow Jones Industrial Average was down 1.9% to 9096.09 after trading as high as 9318.10. The S&P 500 closed down 2.5% to 952.83, below its Sept. 21 closing low of 965.80 but above that day's intraday low of 944.75. The Nasdaq Composite Index lost 1.7% to 1381.14, below its Sept. 21 intraday low of 1387.06.

While less important than the Sept. 21 lows, today's losses wiped out the remainder of Friday's eagerly greeted gains, save for about 40 Dow points. Today was just the latest in a series of sessions in which stocks have fallen hard in the final hour of trading, which raises a troubling issue for those who believe the so-called "smart money" is most active in the last 60 minutes of the trading day.

Downside volume totaled over 80% of the 1.4 billion shares traded on the Big Board, on which 52-week lows bested new highs 87 to 39. Downside volume was about 75% of the 1.5 billion shares traded over the counter and new 52-week lows whipped new highs 139 to 41.

About the only technical salvation that could be found was that trading volumes weren't overwhelmingly high and market breadth favored losers by less than 2 to 1 margins in both Big Board and over-the-counter trading. Also, major averages remained above their closing low of July 2 and intraday lows of July 3. Then again, can a "retest" of those levels be far off, given how things are going?

A Stream of Events

Sunguard's Dudack correctly observed "the president's speech was just one of many things going on today." Other issues weighing on shares included:

Estimate cuts and lowered price targets on chip-equipment makers, by Deutsche Bank and Merrill Lynch. Among those hit by the cuts were Applied Materials (AMAT Quote), which fell 6.6% and KLA-Tencor (KLAC Quote), down 6%;

Salomon Smith Barney's estimate cut on Intel (INTC Quote), which fell 2.8%. The Philadelphia Stock Exchange Semiconductor Index shed 3.6%;

Profit warnings by Citrix Systems (CTXS Quote), which fell 15.5%, Retek (RETK Quote), which lost 62.7%, and Tiffany (TIF Quote), down 9.4%;

Wyeth (WYE Quote) tumbling 24.5% after a study found the firm's hormone replacement therapy in postmenopausal women caused an increased risk for breast cancer and heart disease. With other major drugmakers down in sympathy, the Amex Pharmaceutical Index fell 4.4% to a 52-week low of 284.15.

Myriad rumors about potential profit shortfalls at companies such as General Electric (GE Quote), which fell 3.8%, and IBM (IBM Quote), down 2.5%. Conversely, Microsoft (MSFT Quote) managed to rise 0.5% to $53.21, albeit well off its intraday high of $55.21, after Sanford Bernstein suggested the software giant might best expectations.

Renewed weakness in the dollar, which hit a nine-month low of 117.74 yen intraday while the euro traded as high as 99.52 cents vs. yesterday's close of 99.12 cents, despite weaker-than-expected reports on Germany's industrial output and employment. The dollar also touched a 28-month low vs. the British sterling at $1.5482 per pound.

There's a "continuing stream of events" hampering stocks, and "the market comes back to those problems" regardless of the political rhetoric from Bush and members of Congress, Dudack said.

Beyond today's stories, the oft-bearish strategist remains concerned about the fallout from the WorldCom (WCOME Quote) scandal. "The market's biggest problem is we don't have any sense what valuations are because we don't know what earnings are," she said. "WorldCom pointed out very clearly we don't know what companies had been earning, so how can we forecast what they will" earn going forward?

Dudack, who has "suspended" her economic and market forecasts due to uncertainties stemming from the WorldCom scandal, said a bankruptcy filing is "factored in" in terms of WorldCom's price. "But it does put the [already] sluggish recovery in some jeopardy," she said. "If there's going to be a trickle-down impact on employment because of WorldCom, then my assumption there's no double-dip is not necessarily a good one. A lot of issues must be reassessed, and there's no speech that can turn it around."

Dudack's long-held skepticism once made her the subject of jokes on Wall Street. Nobody is laughing anymore.