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Wall Street: Corporate warnings dominate

Sep 21, 2002

The bourses in the US saw selling dominate for all the days of the week except Friday. The buying on the last day was due to bargain hunters moving in after four days on consecutive selling. A positive sales outlook from Qualcomm, a wireless firm, from the beleaguered technology sector, further aided the buying. Consequently, the Dow closed up by 44 points, while the technology index Nasdaq gained 5 points on Friday. The week began with major brokerages forecasting a bleak outlook for semiconductor industry. Consequently, the Philadelphia Semiconductor index declined to its four year low. The pessimism was further aggravated by the possibility of war with Iraq and its impact on the US economy. The US Govt. has already run up a high fiscal deficit, and investors feel that war with Iraq could widen the gap.

It was on Tuesday that the stock markets took a severe beating. Firstly, fast food giant, MacDonald’s came out with a profit warning. However, it was the weak industrial production growth number that did more damage. According to the Federal Reserve, industrial production declined by 0.3%. The markets were expecting a rise in industry activity. Thus, uncertainty about the economy once again dominated the concerns and investors sold.

From the technology sector, Oracle’s revenues were marginally below expectations. Markets were also disheartened by the company’s earnings outlook. During the day J.P. Morgan also lowered its earnings outlook. The bad news for the technology sector continued with, IT services major, EDS issuing a profit warning late Wednesday. On Thursday, the Dow fell by 230 point and fell below the 8,000 for the first time since July.

Thus, during the week flurry of corporate warnings took a toll on the bourses. The reason for concern is the fact that the warnings were not only from the technology sector. Other sectors such as FMCG and financials also witnessed profit warnings. The economic numbers that came out during the week continued to point to an uncertain environment going forward. While Iraq gave in to demands for UN inspection of its weapons facilities, the threat of a war looms as large as the Bush administration is still very skeptic of the Iraqi move.

Infy gains
(Price in US$) 14-Sep-02 21-Sep-02 Change
Wipro 27.3 27.1 -0.9%
Satyam Infoway 0.6 0.5 -23.3%
Dr. Reddy's 18.1 16.7 -8.0%
ICICI Bank 6.3 5.8 -8.7%
Infosys 57.3 57.5 0.3%
VSNL 4.8 4.6 -3.5%
HDFC Bank 14.6 15.0 2.7%
Satyam 10.1 9.7 -4.3%
MTNL 4.7 4.7 0.4%
Rediff 0.4 0.4 -2.5%
Silverline 0.9 0.8 -11.1%

Most of the Indian ADR’s closed in the red. Only Infosys, HDFC Bank and MTNL managed to close the week with gains. Most of the technology stocks were beaten due to the profit warnings by technology majors like EDS and Oracle. However, the case in favour of Indian software companies is that they provide more of integration, development and migration services, while the global technology majors provide new technology. In wake of the economic slowdown the corporate spending is directed towards getting more from existing systems in place rather buying new technology. This could be fueling the buying in Indian IT services firms. Last week it was Wipro that had gained.

The major losers were Satyam Infoway and Silverline. Dr. Reddy’s and ICICI Bank also witnessed significant decline during the week. There have been reports from an American brokerage that the FDA (Food and Drugs Administration) in the US had raised concerns over clinical trails of the generic version of Norvasc, a successful hypertension during from Pfizer, that Dr. Reddy’s is trying to replicate. However, the company has stated that there is no truth in the reports and it was on course.

Nikkei bucks global trend
Indices 14-Sep-02 21-Sep-02 Change
Nikkei 9,242 9,481 2.6%
NASDAQ 1,291 1,221 -5.4%
Hang Seng 9,651 9,328 -3.3%
BSE 3,099 3,024 -2.4%
Dow 8,313 7,986 -3.9%
FTSE 4,008 3,860 -3.7%
Dax 3,361 3,065 -8.8%

Nikkei for the second week in running bucked global trends and managed to gain. However, the other far eastern market Hang Seng closed in the red. The growth engine of the world, the US economy is sending out mixed signals and therefore, investors globally are keeping away from equities.

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