Blue-Chips Cope With Bad News

Wednesday's blockbuster rally proved vulnerable to some weaker-than-expected economic data, more concerns about corporate malfeasance and Taiwan Semiconductors' (TSM Quote) capital expenditure cuts. But blue-chip stocks ultimately proved resilient to any number of concerns although tech shares sagged.

After trading as high as 8309.39 midday, the Dow Jones Industrial Average slumped Thursday afternoon to as low as 7945.95 before closing off 0.1%, to 8186.31. The S&P 500 shed 0.6%, to 838.69 vs. its earlier low of 816.07. Meanwhile, the Nasdaq Composite tumbled 3.9%, to 1289.72, giving up about 80% of Wednesday's point gain.

About 2.4 billion shares traded in Big Board activity, a record fifth-consecutive day of more than 2 billion shares.

The market's intraday lows occurred in concert with a Bloomberg report, citing anonymous sources, that J.P. Morgan (JPM Quote) and Citigroup (C Quote) are being investigated by the Securities and Exchange Commission related to their role in the Enron debacle.

As a rule, the SEC doesn't comment on such matters. A J.P. Morgan spokesman declined to comment but Citigroup issued a statement saying there was "nothing new" in the Bloomberg report. "As previously disclosed, we have received inquiries from regulatory agencies and Congressional committees, with which we are fully cooperating," the statement said.

Indeed, both firms have previously discussed SEC inquiries into the Enron matter. Citi's statement calmed the market and coincided with the Dow's afternoon rally, which took the index briefly into positive territory.

Citigroup, which also accelerated its buyback and further separated investment banking and research, closed up 0.2%, to $29.65, after trading as low as $27.10. J.P. Morgan, however, dipped 4.1%, to $22.35 vs. its intraday low of 21; Moody's cut its long-term outlook on the firm to negative from stable.

Broader market averages also suffered from confirmation of an SEC inquiry into accounting at AOL Time Warner (AOL Quote), which fell 15.4%, and rumors Tyco (TYC Quote) has hired a bankruptcy adviser; the company refuted the scuttlebutt but its shares fell 14.9%, to $8.51.

The Comp's relative underperformance came despite a strong performance by biotech, led by strength in biotech shares, paced by Amgen (AMGN Quote), which rallied 13.1%; the Amex Biotech Index rose 1.7%. The Comp was undone by a 7.4% decline in shares of Microsoft (MSFT Quote) and Taiwan Semi's cut of up to 20% of its capex, which took a big bite out of the entire sector. Taiwan Semi fell 18.5% and the Philadelphia Stock Exchange Semiconductor Index lost 10.1%.

Semiconductor shares were also hit by the 3.9% drop in spending on computers and electronics in the June durable goods report, which was a source of angst for the broader market as well.

Wrong-Way Corrigan

Overall, orders for durable goods fell 3.8% last month vs. expectations for a 0.5% rise. Capital goods orders fell 6.2% and capital goods excluding defense fell 8.5%, indicating a continued lack of spending by private industry.

"The June data-set is terrible. It's an all-around crappy report," said James Padinha, economic strategist at Arnhold and S. Bleichroeder. "The question is, is this the beginning of a new downturn or just a one-month thing."

Padinha believes the latter: "My contention is we need to see another number like this one before talking seriously about a new down leg," he said.

Certainly, the majority of economists believe the rebound is going to accelerate in the second half of this year, and note that the durable goods number is notoriously volatile. But the durable goods report brings us back to the oft-discussed issue of why the stock market was seemingly "disconnected" from the economy.

In the 1990s, the stock market was touted as a great leading indicator of the economy. Now that equities are floundering, there's a lot of earnest discussion about why it's not following the perceived strong economic data. I think the only "disconnect" between the stock market and the economy is in the media.

Could it be that the stock market's recent swoon is telling us what's coming for the economy?

For insight on this (and other issues) I turned to Anirvan Banerji, director of research for the Economic Cycle Research Institute and a contributor to RealMoney.com.

First, Banerji agreed durable goods is a "very noisy number" and cautioned against reading too much into it. ECRI's leading indexes continue to forecast no recession this year, he noted, prompting him to quip: "I hate to be part of consensus but that's what the indicators are telling us."

However, the economist did observe a disconnect between what economists' foresee and the outlook of business leaders.

"CEOs haven't been convinced there's a recovery in progress or ahead," Banerji said, citing the "three C's," confidence, cash and capacity utilization.

CEOs lack the first because of all the scandals and because "we've just had the biggest decline in corporate profitability in six decades," he said. That decline is also straining firms' cash position at a time when it's harder to raise money in the capital markets. As for capacity utilization, Banerji noted that "broadly speaking," roughly one-quarter of the nation's production capacity is still idle. "So what's the big rush to go buy equipment to build [new] capacity?"

Tune in Friday for Banerji's views on the implications of this, as well as the inability of many market participants to let go of the "new era" mentality.

P.S.

Speaking of tuning in, I'll be back on WABC radio's "Batchelor & Alexander" show Thursday night around 9:05 p.m. PDT/12:05 a.m. EDT. The segment airs live Thursday night in New York (simultaneously webcast at wabcradio.com) and will be rebroadcast on Saturday on WABC in New York, WMAL in Washington, WRKO in Boston, and WBT in Charlotte, N.C.