Yes, Virginia, there is sometimes too much of a "good" thing. Last Wednesday, the arrest of the Rigas family members was credited by many as a catalyst for the market's recovery and subsequent rally. Similarly, Monday's advance was attributed by some to anticipation of the president's signing of the corporate fraud bill, which occurred yesterday. Today, however, the arrests of two former WorldCom executives did little to buoy stocks, which sagged under the weight of another round of disappointing economic data, particularly a much weaker-than-expected Institute of Supply Management manufacturing report. The Dow Jones Industrial Average fell 2.6% to 8506.62 while the S&P 500 shed 3% to 884.66; the Nasdaq Composite tumbled 3.6% to 1280.16. Reflecting on the recent batch of economic reports , William Sullivan, senior economist at Morgan Stanley, suggested the economy's slide is a result -- in no small part -- of business planners becoming more risk-averse in light of rising antibusiness sentiment in Washington. "Executive leadership's attention is diverted" by the looming Aug. 14 deadline for corporate executives to sign off on financial statements, Sullivan said. "People are focusing on regulatory considerations and the economy is suffering. I'm not saying it's inappropriate but we have escalated the awareness of corporate malfeasance and the Federal government is getting more involved, there's more intrusion. A lot of things have changed" just since June 1. Notably, there were rumors today that Cisco ( CSCO) CEO John Chambers and/or CFO Larry Carter would resign before the Aug. 14 deadline. Cisco denied that report but its shares still fell 8.3%. TSC's Scott Moritz wrote how the Street reaction probably was overdone. In a separate but related development, Citigroup ( C) slid 3.7% amid rumors its Chief Executive Officer Sandy Weill would resign amid concerns about what he knew vis a vis Jack Grubman's recommendations on AT&T ( T), among others. Of course, it's entirely possible the Rigas-family arrests and Sarbanes bill had little, or no impact, on recent trading. Furthermore, the hand-wringing today among some pundits aside, stocks were expected to retreat near-term after a very solid and near week-long advance, as reported Monday. Other issues weighing on stocks today included disappointing earnings by Exxon Mobil ( XOM) and last night's warning by Adobe Systems ( ADBE). Notably, 1.66 billion shares traded on the New York Stock Exchange, down considerably from levels seen last week, when more than 2 billion shares traded on four consecutive days. A lower volume retrenchment is precisely what many technicians expect after big gains. For example, the Dow gained about 1200 points from its intraday low of 7532 on July 24 to yesterday's intraday high of 8736. A 50% retracement of that gain would put the Dow back to around 8135, a level to watch for in the coming days.
Dogfight at the Not-So-OK Corral
Technicals and technicalities aside, stocks suffered in tandem with the dollar today, which fell to 119.31 yen vs. 119.86 yesterday while the euro rose to $0.9843 vs. $0.9771 yesterday. The Dollar Index fell 0.45 to 107.26. Many skeptics believe the recent increases in the dollar and equities were merely countertrend moves within larger patterns that remained intact, as noted earlier this week. In concert with the stock market's reversal, the dollar rose about 3% each vs. the yen and euro last week, after hitting a 17-month low vs. the former and reaching parity with the latter for the first time in 2.5 years. I wanted to follow up today because the dollar's vulnerability is something few investors seem worried about, perhaps because of all the press reports about how "good" a weaker greenback is for multinationals and U.S. manufacturing (today's ISM data notwithstanding, I guess). "Without a fundamental improvement in the U.S. earnings outlook, there is no real reason to support the current stock rally, which makes further dollar gains unlikely," MG Financial Group commented earlier this week. "Moreover, barring a substantial rise in foreign capital flows to the U.S., the dollar remains at risk over the medium term due to the rising current account deficit." Treasury data released this week showed net foreign purchases of U.S. assets rose to $43 billion in May from $37.6 billion in April. However, that trend is expected to reverse when June and July data are released. Also, the average monthly net foreign purchases of U.S. financial assets were $37 billion in 2002 through May vs. the monthly average of $44.9 billion last year. Notably, MG Financial's comments were made before the latest round of mainly weak economic data, notably yesterday's downward revision to GDP and today's disappointing data. Today, Ashraf Laidi, chief currency analyst at the firm, said the "enormity and intensity" of traders' reaction to the July ISM data was that its fall to 50.5 from 56.2 was the steepest drop since October. Coincidentally, the ISM fell below its comparable Eurozone manufacturing index for the first time since October; the E-12 manufacturing index fell to 51.6 from 51.8. The U.K. Purchasing Managers Index dropped below 50 for the first time in six months -- to 48.9 from 50.6 -- and the greenback finished higher vs. the pound sterling, despite its broader weakness, he noted. "The play today was mainly the ISM number" and related overseas manufacturing data, Laidi said. "Today's data showed a downturn in the U.S. and this is the main fundamental argument to currency and stock markets." Fixed-income markets also closely followed the data stream, as they are wont to do. The price of the benchmark 10-year Treasury note rose 17/32 to 103 23/32, its yield falling to 4.39%. Hard-core bears anticipate a time when the weakening dollar also will weigh on Treasuries. That day has yet to arrive, although it may not be so far off if current trends continue.