Gloom Thickens on Wall Street As Stocks Slide

By Cal Mankowski

NEW YORK (Reuters) - The gloom that has descended on Wall Street deepened as the Nasdaq stock market plunged to a 21-month low amid growing concerns that the U.S. economy could be heading into a recession and as companies queued up to warn about earnings shortfalls.

"We're seeing decimation here, particularly among the Nasdaq stocks,'' said Robert Stovall, senior vice president and market strategist at Prudential Securities. "I think a lot of damage has been done to the outlook for IPOs (initial public offerings), corporate finance and mergers and acquisitions."

A combination of slowing growth in consumer demand, higher energy prices and the impact on company investments of a slide in stock prices is already damaging corporate America's profitability and threatening worse to come.

A common factor in the background is the slowing in the U.S. economy to a 2.4 percent annual growth rate in the third quarter, down from a 5.6 percent annualized pace in the second quarter, analysts and fund managers said.

"It's no different than going from three percent growth to negative one or two,'' said Martin Schulz, manager of the Armada International Fund. ``It's that rate of change that impacts, and the other issue is that inventories definitely look like they're heading upward in the U.S."

Stovall likened it to driving an automobile down an expressway at 70 miles per hour and then all of a sudden slowing to 30 mph. He said the motorist is still moving but it does not feel the same.

So far in the fourth quarter, 411 companies have warned that their results would be worse than previously expected, up 84 percent from 223 companies at the same time a year ago, according to figures up to noon New York time on Wednesday from First Call/Thomson Financial.

The figures do not include the latest major companies to issue warnings after the market closed on Wednesday. They included long distance telecommunications and cable television giant AT&T Corp., and auto and defense systems manufacturer TRW Inc.

And there is likely to be worse to come, cautioned Chuck Hill, research director at First Call/Thomson Financial. Financial. He points out that a year ago, 43 percent of the fourth-quarter earnings warnings were issued after Jan. 1, 2000.

"I am expecting we will see a lot more pain and suffering to come," he said. "It is mainly the slowing economy and higher energy prices that are doing it."

Charles Biderman, president of TrimTabs.com, said end-of-year tax selling and the effect of margin calls on over-extended investors were taking a toll and adding to the dark mood.

"For whatever reason a lot of institutional types who have been getting killed in technology stocks have been throwing in the towel," he said.

Wednesday's sharp sell-off saw the Dow industrials decline 265.44 points or 2.51 percent to 10,318.93. The Nasdaq composite tumbled 178.94 points or 7.12 percent to 2,332.77. The decline left the Nasdaq at its lowest close since March, 1999 and 53.8 percent below its peak in March 2000.

"You're probably getting closer to the moment of truth on Nasdaq," said Bill Raftery, technical analyst at Salomon Smith Barney. He said some investors shrugged off the Fed's ratcheting up of interest rates early in 2000 and pushed the Nasdaq over 5,000. The lesson, he said, was "you don't fight the Fed in the stock market." But he said the Fed looks like it is going to be friendlier in 2001.

Biderman, who heads a data service that tracks mutual fund flows and other data, said he expected tax selling to abate right after Christmas. Specifically, he said that he would be in the market Dec. 26 buying Ericsson, Nokia AB and Oracle Corp. . "They're quality companies, doing well. They've all been hammered."

"It's bad (earnings) news coupled with tax selling," said a Wall Street trader who declined to be identified. He said when people see their profits going up in smoke they are quicker on the trigger and unload the stock, as opposed to times when they are sitting on losses. In the latter situation, he said, people are more willing to be patient and wait for a rebound.