Market Update: Doubts About Honeywell-GE Deal Hurting Stocks
(Updated from 12:34 p.m.)
With a selection of good economic news and bad corporate news to chose from, the market was focusing on the negative.
Stocks were falling under the weight of headlines saying that European regulators are unlikely to approve
General Electric's
(GE) - Get Report
acquisition of
Honeywell
(HON) - Get Report
.
The two companies, which had proposed a merger last October, submitted their final proposal this morning to win approval from the
European Commission
. But they acknowledged that the offer was
far short of what regulators wanted. The companies offered to divest $2.2 billion in revenues in Honeywell's aerospace business, but the overseas regulators wanted more. In recent trading, Honeywell was down 8.2% to $38.80, while GE was rising 2.9% to $49.25.
The
Dow Jones Industrial Average, which counts GE and Honeywell among its 30 components, was lately down 133 points, or 1.2%, to about 10,739. The
Nasdaq Composite Index was recently behind 48.7 points, or 2.3%, to 2073. The
S&P 500, which tracks the broader market, was off 13.4 points to 1227. The small-cap tracking
Russell 2000 index was off 7.4 points, or 1.5%, to about 498.
Producer Prices Rose Less Than Expected
In economic news, the May
Producer Price Index, released this morning, came in better than expected -- and seemingly confirmed Fed governors' recent statements that
inflation is contained. The PPI, which looks at wholesale prices and is a key inflation gauge, rose 0.1%. It was expected to climb 0.3%.
The data raise hopes the
Federal Reserve will cut interest rates when it meets on June 26 and 27. So far this year, the central bank has cut rates five times, lowering short-term rates by 2.5% to their lowest level since May 1994. Currently, the
fed fund futures -- a good proxy for the bond market's expectations of monetary policy -- are pricing in a 100% chance the Fed will cut rates another 25 basis points and pricing in 25% odds for a 50 basis-point cut.
While the news assuaged the market on the inflation front, additional corporate headlines did little to reassure investors about corporate earnings. Telecommunications company
Corning
(GLW) - Get Report
was hit by a downgrade to neutral from accumulate at
Merrill Lynch
. In a note entitled Nuclear Winter, the firm wrote that its "recent field checks" lead it to believe that results for the next few quarters in GLW's high-margin fiber business would be below its "worst case scenario. Corning, whose stock ticker is GLW, lately was falling 5% to $16.51.
It's Raining Warnings
The gush of earnings news that has rained down on Wall Street over the past two weeks has been mostly negative. Investors sent stocks soaring from late March through early May based on hopes of an economic and profits recovery in the second half of this year. But as a growing number of companies warn that earnings will fall short of targets, the chance of a real improvement before 2002 have started to look slimmer.
"There is a growing perception that the earnings turnaround might not happen as soon as people want," said Jim Volk, co-head of institutional trading at
D.A. Davidson
.
A reminder came yesterday after the close when a couple of second tier companies issued earnings warnings.
Silicon Storage Technology
(SSTI) - Get Report
, which designs a range of flash memory devices, said its second-quarter earnings would fall below targets. And though it didn't provide any specific financial guidance, software company
Micromuse's
(MUSE)
CEO reportedly described business conditions as "very, very hard." Micromuse was getting socked, lately off 23.97% to $26.78.
And there was more trouble for telecommunications-equipment maker
Lucent
(LU)
. The company's bid to sell two plants to
Flextronics
(FLEX) - Get Report
fell through, hindering its efforts to raise cash,
The Wall Street Journal
reported today. Lucent is trying to raise $2 billion by Sept. 30 in order to meet the terms of a $4 billion revolving credit line with its banks. If it can't, it won't be able to complete the split off of
Agere Systems
microelectronics unit. Lucent took the business public in March, but still holds a 58% stake. It was recently down 7.5% to $6.70. Agere was off 3.9% to $6.15.
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