Markets braced for more turmoil:Friday's eight-month low is just the start

Electronic Telegraph ^ | June 9, 2002 | Edward Simpkins

[sarcasm]

Equity strategists at banks and fund managers are preparing themselves for further falls in stock markets around the world as investors' concerns about over-valued companies and hidden liabilities threaten to spread from technology and telecoms stocks to more traditional companies.

On Friday the FTSE 100 fell to an eight-month low. In New York the Dow Jones dropped more than 150 points before rallying to close down 34.97, while in France the CAC 40 fell to its lowest level since October last year. The DAX in Frankfurt was also down.

Michael Hartnett, head of European equity strategy and economics at Merrill Lynch, said: "We are seeing the deleveraging of the virtual economy. Equity markets across Europe will be vulnerable to technology, media and telecoms stocks. The sector is still 30 to 40 per cent overvalued and it is very vulnerable to bad news like Intel."

The sell-off was sparked by warnings from several US technology companies led by Intel, the world's largest chipmaker, which said its trading outlook was poor because of weak European demand. FR Micro Devices and Biogen, a biotechnology group, also put out warnings.

Hartnett said: "The weakness has been particularly worrying as it has involved stocks other than technology, media and telecoms".

John Hatherley, head of global analysis at M&G, said: "Investors seem to be losing their confidence and turning away, especially in the US where markets were highly priced.

"Look at the valuation of the S&P 500 at 30 times earnings. That is priced for a rapid recovery in corporate earnings. In May the economic indicators were not bad, but that has not been translated into corporate profits picking up."

He says that the wave of corporate scandals led by Enron, alongside the threat of terrorism following September 11 and the prospect of war in Kashmir, worried investors.

Hartnett warned that borrowing costs for companies could rise "if the problems of the new economy spread into the old economy". He said if the cost of credit to companies goes up, that would worsen the slump in capital investment by companies.

"Capital spending is the missing link in the economic recovery," he said. "Consumer spending is strong and so is government spending, but companies haven't got the money to invest."

Shares in Tyco, the industrial conglomerate, dropped sharply after it said it had started an inquiry into the use of funds by former chief executive Dennis Kozlowski, who faces charges of tax evasion.

Three former stars of the dotcom boom - Marconi, Psion and Telewest - face the ultimate humiliation of relegation to the FTSE SmallCap index as part of the quarterly review of the benchmark indices.

Last September Marconi was a proud member of the FTSE 100, but its fall from grace will be confirmed this week when it is almost certain to be relegated to the SmallCap index, home of the penny share.

Marconi shares have fallen from a high of 1241p in 2000 to close as low as 6.25p this year.

[Marianne]

Dear goodness! There isn't one bright note in the whole article.

[cajungirl]

enough to give one the agony of heartburn, reflux, cystitis, migraine isn't it??

[porte des morts]

"Consumer spending is strong and so is government spending, but companies haven't got the money to invest."

If this is the case,things will only go downhill.

[patriciaruth]

There are a couple of huge problems in the market.

One is that the companies are not trusted to give straight information to investors (thanks to Arthur Anderson, etc.) and the stock analysts were all lying to the public, too, in order to generate sales and commissions and boost companies they were in bed with. So DISTRUST is the number one problem. It will take a while for the dust and investigations and lawsuits to settle here.

FEAR is the second problem due to the War on Terror, and the uncertainty about whether the U.S. is going to suffer another major terrorist attack or is going to go to war with Iraq and lately whether Pakistan and India are going to lose their minds. This has caused a lot of foreign capital to be pulled out of the U.S. economy, with the value of the dollar dropping. We probably won't see a reverse of this until after we take out Saddam.