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Wall Street, California / SPECIAL REPORT: MARKET PLUNGE
| THE DAY'S ACTION

Sellers Slash Nasdaq

Tech-Heavy Index Leads Sell-Off as Global Woes Spread Panic

September 01, 1998|THOMAS S. MULLIGAN | TIMES STAFF WRITER

NEW YORK — The technological elite--the backbone of the computer and communications revolution and the biggest drivers of the nearly 8-year-old bull market--were thrashed by investors Monday in a wild day of selling.

The Nasdaq composite index, dominated by such names as Microsoft, Intel and Cisco Systems, suffered its worst day since the 1987 market crash, dropping 140.43 points, or 8.6%, to 1,499.25 and obliterating all of this year's gains.

By contrast, the Dow industrials fell 512.61 points, or 6.4%, to 7,539.07.

For Nasdaq, Monday's loss was the largest one-day point drop in history and the fourth-largest loss in percentage terms.

Three key technology barometers--the Philadelphia semiconductor index, the Amex computer hardware index and the Morgan Stanley high-tech index--posted drops of 12%, 11% and 10%, respectively.

The best and brightest got pummeled alongside the speculative fringe, as investors spooked by global financial turmoil seemed frantic to take profits where profits could still be had.

Traders also said some of the selling was fueled by "margin calls," meaning investors who had borrowed to buy stocks were being ordered by their lenders to ante up more cash as shares tumble. Still, most brokerages said margin debt isn't a big number relative to their clients' assets.

Whatever the reason, the tech selling was relentless.

Dell Computer, long the darling of Wall Street analysts, dropped $18.75 to $100. Cisco, another glamour name on Nasdaq, fell $12.81 to $81.88.

Until Monday, they and other blue-chip tech names had held up remarkably well while the rest of the market slid.

"These were the only stocks most people still had a clear profit in," said Ken Pasternak of Knight Securities, the biggest market maker in Nasdaq stocks. "Ninety-five percent of all investors in Cisco are still in the money, but on a day like this, they always sell the best stocks."

Monday's volume of 1 billion shares was the third-largest in Nasdaq history, but trading near the end of the day might have been the most intense ever seen. In just the last half-hour, 125 million shares changed hands--more than double the usual.

In a plunging market, Nasdaq market makers--the dealers whose job it is to act as buyer of last resort--can come under financial strain as they expend capital buying stocks they may be able to resell only at far lower prices.

Knight's Pasternak acknowledged the dangers, but said the average Nasdaq market maker is better capitalized today than at the time of the 1987 plunge.

Nasdaq officials, too, said market makers apparently held up well under the onslaught. Liquidity--the ability of investors to get trades executed--also seemed reasonably good, a Nasdaq spokesman said.

Analysts said much of Monday's selling was propelled by professional money managers, who decided to get defensive by shunning the most volatile stocks in their portfolios, which in many cases are tech issues.

"If the price behavior is saying there may be trouble ahead, the answer is shoot first and ask questions later," said Hugh Johnson, chief investment officer at First Albany Corp. "If you think it's a bear market, you want to be sure you get out of the most volatile stocks," he said, adding that he had done just that Monday, selling out positions in a number of tech names.

"I didn't bail out of IBM because I was patching holes in other dikes, but now I wish I had," he said.

IBM fell $9.94 to $112.63.

Another explanation for the blood bath in tech--especially Internet issues--was that investors suddenly lost confidence in the companies' ability to justify their sky-high prices relative to current earnings.

"The market has knocked some of the Internet fairy dust off of these stocks," said Jim Balderston, analyst at Zona Research. "And they're probably still overvalued."

After losing $13.13 on Friday, online bookseller Amazon.com plunged $22.13 to $83.75. Internet directory Yahoo tumbled $14.06 to $69, and Infoseek fell $4.19 to $17.

But money managers said the main change in the outlook for Internet stocks is not fundamental factors such as earnings, but investor psychology.

"All the negative things you could have said last week about Internet stocks when they were 25% higher you could say again today," said Richard Slinn, a money manager at San Francisco-based Levensohn Capital Management.

Some individual investors watching Monday's high-tech wipeout were less distraught over their own losses than bemused by the stampede mentality that seems to have overtaken the markets.

Chris Dudas, a producer at Virgin Interactive, a computer game company based in Irvine, said most of his investments are in general mutual funds that have not suffered enormously so far. But he still keeps an eye on such well-known tech names as Microsoft and Yahoo, monitoring their price moves over the Internet.

"I don't understand this at all," he fumed. "There's no way the Russian ruble could have this impact on Yahoo."

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