Wall St. investors sound retreat


Internet equipment maker Cisco Systems is back on the acquisition trail

By Alexandra Twin
CNN/Money Staff Writer

NEW YORK (CNN/Money) -- U.S. stocks closed sharply lower Tuesday as investors retreated from the previous session's strong rally on a variety of deals and downgrades in telecom and media.

The Dow Jones industrial average lost 118.72, or 1.32 percent, to 8,872.07; the Dow rose more than 200 points Monday.

The Nasdaq composite fell 17.95, or 1.29 percent, to 1,376.59, while the Standard & Poor's 500 index gave back 13.27, or 1.40 percent, to close the day at 937.43.

"We're going to see more of the same for the next few weeks, unless something comes in that indicates a pick-up in activity in the economy or on the corporate level," said Ned Riley, chief investment strategist at State Street Global Advisors.

"But after all the corporate governance issues, there's a tendency now of erring on the side of ultra-conservatism in terms of what companies say about future quarters and that's going to continue."

There is no economic news and few quarterly reports expected Wednesday.

After stocks moved 15 percent off their lows of July 24, including a strong rally Monday, a pullback on Tuesday was unsurprising, said a number of market watchers.

Dead cat bounce

One particular item affecting the telecom sector was a Wall Street Journal story saying Deutsche Telekom (DT: up $0.01 to $11.52) has approached Cingular Wireless, offering to sell VoiceStream, its U.S.-based wireless unit. But the paper said the talks are at an early stage and any deal is uncertain.

A deal would be valued at between $10 billion and $15 billion and would threaten the dominance of Verizon Wireless, the industry-leading venture of Verizon Communications and Vodafone.

However, regulatory hurdles and the potential opposition of Cingular's co-owners, SBC Communications (SBC: down $2.19 to $27.68) and BellSouth (BLS: down $1.21 to $25.50), could pose problems. Following the news, UBS Warburg downgraded Verizon, SBC and BellSouth.

In a move to cut its debt load, troubled telecom Qwest Communications (Q: up $0.71 to $2.95) is selling its QwestDex phone book publishing unit to two private equity firms for $7.05 billion. The first stage of the deal should close in the fourth quarter and the second stage in 2003. Legg Mason upgraded the stock Tuesday.

"The telecom group is so beaten up," said Matt Ruane, director of listed trading at Gerard Klauer Mattison. "There are going to be a few that survive and others that won't. Qwest still has considerable debt concerns. The stock is seeing a dead-cat bounce today [Tuesday].

AOL considering $9B AT&T deal?

AOL Time Warner (AOL: up $0.03 to $13.36) is about to announce a $9 billion cash and stock deal for AT&T's stake in their Time Warner Entertainment venture, sources say.

The deal would give CNN/Money parent AOL complete control of Warner Bros. studios, and the HBO, Comedy Central and Court TV cable networks, and could be announced as soon as Tuesday.

Following the news, J.P. Morgan Chase upgraded AT&T (T: up $0.42 to $11.18) to "buy" from "long-term buy," saying the company is least exposed to a potential consumer spending slowdown of all the big carriers, that the company is undervalued and that there is an improved industry structure due to the demise of WorldCom.

In addition, Cisco Systems (CSCO: up $0.01 to $14.73), the No. 1 maker of equipment that directs Internet traffic, said it will buy privately held Andiamo Systems, a switch product maker, for as much as $2.5 billion -- although the final price will not be determined until shortly before closing. The move expands Cisco's exposure to the storage switch market, the company said.

Home improvement retailer and Dow component Home Depot (HD: up $1.22 to $30.25) reported second-quarter earnings of 50 cents a share, 3 cents better than expected and an improvement over the 39 cents earned a year earlier.

Trade balance declines

"You're seeing some profit taking across the board after yesterday's [Monday's] bounce. You've got a little shift back into bonds, but basically trading is calm. It's kind of the standard summer doldrums," said Gerard Klauer Mattison's Ruane.

"On the upside, you're seeing some money go into some high-risk areas ... which tells you something about how the psychology is changing from a month ago."

In the day's economic news, the government said the trade balance declined in June to $37.2 billion from a revised $37.9 billion in May. Economists surveyed by Briefing.com expected to see a gap of $37.5 billion.

Treasury prices rallied, sending the 10-year note yield down to 4.14 percent.

"This is sort-of the real dead period for the quarter and it's also the summer, and a lot of people are on vacation," said State Street's Riley.

"But it's also a dangerous period. There isn't a lot of news and the volume is low, so the market is going to move more on rumor than on fact."