NEW YORK (CNNfn) - Words of warning from Alan Greenspan sent a shiver through Wall Street Tuesday, causing a tumble in blue chip stocks and ending a nine-day record streak for the Nasdaq Composite.
In his semi-annual Humphrey-Hawkins testimony to the Senate Banking Committee on U.S. growth and financial markets, the Federal Reserve chairman sounded a hawkish note, warning of potential inflationary pressures and saying current values in the stock market may be "difficult to sustain."
The Dow Jones industrial average tumbled 105.56 points, or 1.14 percent, to close at 9,190.19. On the New York Stock Exchange, losers outnumbered advancing stocks 2,087 to 896 on trading volume of 665 million shares.
After nine straight days of records for the Nasdaq Composite, investors decided it was time to cash in on some of the gains and took the technology-weighted index down 35.11, or 1.74 percent, to 1,979.14. The S&P 500 index lost 19.03, or 1.61 percent, to 1,165.07.
"It's clear that the Fed's next policy move is a tightening," said Mitchell Held, economist at Salomon Smith Barney. (212K WAV) or (212K AIFF)
The bond market initially fell after Greenspan said domestic concerns outweigh any considerations about Asia and warned that tighter interest rates may be needed unless the "impressive" U.S. economy fails to slow down by itself. But prices soon recovered as investors shifted money into bonds from the sliding stock market. The benchmark 30-year Treasury bond rose 23/32 of a point price, taking the yield down to 5.66 percent.
The dollar reacted positively to Greenspan's remarks and headed higher against the German mark and the Japanese yen.
Russia failed to pass all austerity measures needed to secure a multibillion dollar international aid package, prompting the International Monetary Fund to cut the first tranche of the loan to $4.8 billion instead of the expected $5.6 billion.
Meanwhile, former foreign minister Keizo Obuchi appeared to emerge as the leading candidate to be Japan's next prime minister. Obuchi, however, is seen as less reform-minded than his rival, ex-chief cabinet secretary Seiroku Kajiyama.
Strong earnings season
In the stock market, investors focused on blue chips and technology issues after several heavyweights reported their latest earnings. Greenspan's words of caution threw some cold water on the market, triggering selling that picked up speed as the trading session wore on.
Among the day's big gainers, IBM (IBM), the bluest of all blue chips, soared 6-1/16 to 128-1/16 after beating expectations by a penny a share. Late Monday, Big Blue said it earned $1.50 per share in the second quarter, despite weaker demand for personal computers and the ongoing Asian economic crisis. Following the news, Prudential Securities, Merrill Lynch and Morgan Stanley upgraded the stock.
Fellow Dow component Merck (MRK), however, fell a penny short of expectations in its second-quarter earnings, and investors were quick to pummel the stock. Shares of Merck tumbled 9-13/16 to 128-9/16. The drug giant said strong sales of its cholesterol-lowering drug Zocor and aggressive cost cutting measures contributed to a 14 percent growth in net income in the latest quarter.
Interest-rate sensitive banking stocks also headed south after Greenspan's testimony reached the market, despite a batch of stronger-than-expected earnings.
Chase Manhattan (CMB) fell 3-1/2 to 71-1/2 even after the company reported a second-quarter profit that beat market expectations by a penny. And Citicorp (CCI) lost 8-7/8 to 172, also after reporting earnings per share that were a penny more than Wall Street had predicted. Dow component J.P. Morgan (JPM) fell 3-1/2 to 129-1/8.
Major technology issues also ended their winning streak, with Microsoft (MSFT) shedding 4-3/16 to 112-13/16, Dell (DELL) losing 5-1/8 to 110-7/8 and Intel (INTC) falling 1/8 to 81-5/8.
After the bell, another Dow component, Hewlett-Packard Co., (HWP) warned it may fall short of Wall Street's third quarter earnings estimates. HP said fiscal third quarter profits are likely to be flat to moderately below the year ago level of 58 cents a share. Analysts were expecting HP to earn 63 cents.
In the day's other news, shares of Lucent (LU) built on Monday's strong gains and rose 1-1/4 to 103-1/2 on news the company secured order contracts that could amount to $3.2 billion over five years.
Elsewhere, shares of Internet retailer Amazon.com (AMZN) rallied in the morning, then fell 5-7/16 to 132-1/16 after the company announced an extension to its exclusive deal with Intuit (INTU). Amazon will continue to be the exclusive book seller on Intuit's Quicken.com Web site. Amazon is expected to report its latest quarterly results Wednesday. Wall Street anticipates the company to have a loss of 44 cents a share.
Finally, shares of Equant (ENT) premiered on the market with a boom. The world's largest data network operator saw its shares soar to 43-13/16 after pricing at 27 during their initial public offering.
(Look here for today's CNNfn market movers.)
-- by staff writer Malina Poshtova Zang