Updated from 4:09 p.m. ESTDowngrades and a cautious Fed sent stocks reeling for a second day Tuesday as nervous investors bailed out of speculative names that ran up in the last quarter of 2004. In frantic volume, the tech-laden Nasdaq Composite index lost 44.29 points, or 2.06%, to 2107.86, dragged down by heavy selling in Amazon.com ( AMZN) and Sun Microsystems ( SUNW), both of which were downgraded Tuesday morning. The composite fell 23 points on Monday and is currently 3.8% below the high of 2191.6 it touched in Monday's first hour. Tuesday marked the worst single-day loss since July 21 of last year. "Sectors had tremendous runs during the fourth quarter," said Paul Nolte, director of investments with Hinsdale Associates. "Today everyone is taking out the best-performing sectors, like tech stocks; it's like first-to-worst. I think too you have a lot of investors with long-term capital gains. It's definitely profit-taking." The Dow Jones Industrial Average shed 98.65 points, or 0.92%, to 10,630.78, while the S&P 500 fell 14.03 points, or 1.17%, to 1188.05, its worst decline since Aug. 5. Selling intensified in all three major indices after the Federal Open Market Committee released minutes from its Dec. 14 meeting showing growing concern about speculation in asset markets. Some FOMC members voiced concern that low rates "might be contributing to signs of potentially excessive risk-taking in financial markets, evidenced by quite narrow credit spreads, a pickup in initial public offerings, an upturn in mergers and acquisition activity and anecdotal reports that speculative demands were becoming apparent in the markets for single-family homes and condominiums," the minutes read. "No one likes to see inflation put into print next to the Fed's name," said Art Hogan, chief market analyst with Jefferies. "What came out today was commentary from the Fed that rates were too low to keep inflation stable. The consensus is that the Fed will be in a tightening mode for the rest of 2005 and will raise the rate at each meeting, getting the rate up to 4%." The federal funds rate is now at 2.25% after five increases since the end of June. The Fed minutes hammered fixed-income markets. The 10-year Treasury note was recently down 21/32 in price with the yield at 4.29%, while the dollar was higher against the yen and euro. February crude closed up $1.79 to $43.91 a barrel. Volume on the NYSE was 1.72 billion shares, with decliners beating advancers by a ratio of 3-to-1. Volume on the Nasdaq was 2.69 billion shares, with decliners outpacing advancers by the same ratio.
For the second straight day, the Philadelphia Semiconductor Index dropped almost 3.3%, with all 19 components in the red. Among the market foci Tuesday morning was research, with negative calls driving both Amazon.com and Dell ( DELL) lower. Amazon was cut to sell from hold at Smith Barney on concerns about growing competition in the Internet retail space. The brokerage said Amazon will probably have to step up capital spending in the coming year, pressuring margins for a company whose stock still trades like a straight Internet play. Amazon slipped $2.38, or 5.3%, to $42.14. Sun fell more than 9% after Merrill Lynch predicted an "uninspiring quarter" when the computer company reports earnings next week. Merrill cited lackluster demand among Sun customers and warned that business might have tailed off toward the end of the quarter. Sun tumbled 48 cents to $4.63. Valuation was the reason for Raymond James' downgrade of Dell, one of the few technology stocks to post outsized gains in 2004. The brokerage cut Dell to outperform from strong buy and set a price target of $46 after Dell's 23% run-up last year. Dell fell $1.27, or 3%, to $40.52. And Genentech ( DNA), the biotech bellwether that trades on the NYSE, fell more than 2% after Deutsche Bank downgraded the shares to hold from buy on worries about competition for its Avastin colon cancer drug. The stock lost $1.17 to $51.75. In economic news, the Commerce Department said November factory orders rose 1.2%, the fastest increase since July. Economists had expected a 0.9% gain. Shipments rose 0.4% to a record $379 billion. New orders in October rose a revised 0.9%. Another widely held stock under pressure Tuesday is Tenet Healthcare ( THC), which was cut to underperform from market perform at Piper Jaffray. The brokerage said Tenet faces a difficult task rebuilding trust with doctors and patients after the past two years' scandals in an increasingly competitive market. The stock was off 10 cents, or 0.9%, to $10.61.
Yum! Brands ( YUM) said same-restaurant sales jumped 3% in December, spurred by strong results at Taco Bell. The company's fourth-quarter same-store sales rose 2%. Yum finished down 62 cents, or 1.3%, to $46.20. Rite Aid ( RAD) reported a December same-store sales decline of 2.7%, held back by both pharmacy and front-end results. Total drugstore sales dipped 3% to $1.43 billion in the month. Rite Aid dropped 15 cents, or 4.1%, to $3.50. Shares of Krispy Kreme ( KKD) fell Tuesday after a shareholder lawsuit accused the company of hiding declining sales for more than a year before the company reported its first quarterly loss. Krispy Kreme plummeted $1.83, or 14.9%, to $10.48. Rayovac ( ROV) said it will buy privately-held United Industries in a deal valued at approximately $1.2 billion. Rayovac will issue 13.75 million shares of its stock and assume $800 million in debt. Rayovac surged up $5.09, or 17.2%, to $34.65. Automakers released December sales and year-end figures Tuesday. General Motors ( GM) said that car sales, excluding trucks, fell 7.2% in December. Overall car sales for 2004 fell 3.8%. Meanwhile, DaimlerChrysler ( DCX) saw U.S. sales rise 11% in December while sales for 2004 were up 3%. Ford Motor ( F) said U.S. auto sales rose 0.7% in December and 4.4% for the full year. GM shares were off 41 cents, or 1%, to $39.89; DaimlerChrysler fell 26 cents, or 0.5%, to $47.42; and Ford lost 5 cents, or 0.3%, to $14.66. Adolor ( ADLR) said it signed an agreement to co-promote GlaxoSmithKline's ( GSK) Arixta, a blood-clot prevention drug, in the U.S. Shares fell 18 cents, or 1.8%, to $9.76. Although Walgreen ( WAG) said December same-store sales rose 4.2%, shares lost 29 cents, or 0.7%, to $40.09. Overseas markets were mostly higher, with London's FTSE 100 finishing up 0.7% to 4847 and Germany's Xetra DAX unchanged at 4290. In Asia, Japan's Nikkei rose 0.3% overnight while Hong Kong's Hang Seng fell 1.4% to 14,046.