A 4% collapse of the markets today pushed the DJIA under 11,000 for the second time in two weeks. The market sentiment now is such that the index may be under that benchmark for a long time. The trouble with the broader market has been compounded by the stupidity of the managements of several large companies and unexpectedly poor earnings.
The DJIA was down 3.7% to 10,991. The NASDAQ was off 5.2% to 2,380. The S&P 500 fell 4.6% to 1,141. The downward pressure began early because of concerns about the health of European banks. Jobless claims caused further trouble, and add to that a surprising weakness in the Philly Fed’s economic outlook index. These pieces of news were followed almost immediately by data which show existing home sales fell 3.5% in July–and eight month low.
The first reaction of many analysts was to say that the current economic trouble and market drops are unlike the events that triggered the massive market drop in 2008 and 2009. That is not true. The collapse of a major French bank could have the ripple effect that the failure of Lehman Bros did. No one knows for certain, but who is to say if the crash of Société Générale would not roil the financial markets as Lehman did?
Some signs of struggle at large companies emerged during the day. Results from Walmart (NYSE: WMT) had already begun a new wave of worry about retail sales. Sears (NASDAQ: SHLD), which never seems to recover from the disastrous merger which created it, announced another awful quarter. The management at the company is barely competent
The large global tech company that worries many investors the most is Hewlett-Packard (NYSE: HPQ). Its new CEO Leo Apotheker rearranged the company without explanation. HP will probably spin off its PC operation. It bought Autonomy, a UK business analytics software company, for $10.24 billion in cash. That is a 64% premium to the current value of the British firm. HP said that the transaction would “will squarely position H-P in software and information to create the next-generation information platform.” Apotheker neglected to say why that new strategy makes sense.
Finally, Google (NASDAQ: GOOG) sold down another 6% and is off over 10% since it said it would buy crippled handset maker Motorola Mobility (NYSE: MMI) for $12.5 billion. Proponents of the deal said Motorola has valuable patents. That may be true, but it is a weak operation which now has to navigate its way through a likely drop in consumer and business spending.
It isn’t the Apocalypse; it only looks that way
Douglas A. McIntyre