Wednesday March 21, 2:42 pm Eastern Time Investors yank record cash from stock funds (UPDATE: Recasts; adds byline, details throughout)

By Cal Mankowski

NEW YORK, March 21 (Reuters) - As stocks skidded toward two-year lows in February, investors yanked a record amount of money out of U.S. stock mutual funds, with many seeking refuge in safer money market funds, research firm Lipper Inc. said on Wednesday.

Investors pulled $11.4 billion from stock funds in February, as the technology-heavy Nasdaq composite index (^IXIC - news) posted its third-worst month ever, down more than 22 percent. Investors fled to safe havens, like money market funds, which took in a net $45.8 billion in February, Lipper said.

Outflows from stock funds are rare. February was only the fourth month since the summer of 1989 that investors yanked out more money than they put into stock funds. Some industry analysts are calculating that March will also see net outflows as stocks continue to sink -- as much as $17 billion, according to some estimates.

The February outflows from stock funds were the first since August 1998, when a Russian debt default spurred a global financial crisis. The latest outflows topped the previous record of about $8 billion in October 1987, Lipper said.

The 12-month decline in stock prices is testing the resolve of investors.

``The buy-and-hold approach remains largely unshaken,'' said Don Cassidy, senior analyst at Lipper. ``But on the margin, we are seeing rising evidence of fund investors buying in rising markets and selling in falling ones.''

The picture is not as grim as during the 1987 market crash, Cassidy said. The February outflows represented only about 0.3 percent of $4 trillion in stock fund assets, whereas in October 1987, redemptions accounted for about 5 percent of fund assets.

While the February outflows were small on a percentage basis, they delivered yet another blow to investor psychology, which has been battered by a year-long slide in stock prices and repeated reductions in the outlook for corporate profits.

The Dow Jones industrial average (^DJI - news) fell about 3.6 percent in February, while the Standard & Poor's 500 Index (^SPX - news) retreated by more than 9 percent. The declines, which have continued into March, followed a disappointing 2000, during which all the major indices fell for the first time since 1990.

The Dow industrials fell 80 points to 9,641 on Wednesday, while the Nasdaq and S&P indexes were little changed.

``Obviously, it's made things difficult for the (fund) industry,'' said Eli Suarez, vice president for institutional services at U.S. Global Investors in San Antonio. When portfolio managers first experience redemptions they sell stocks they were thinking of dumping anyway. But as outflows continue, they have to sell holdings they were intent on keeping, he said.

The U.S. Global Investors stock funds, which total about $400 million in assets, have experienced redemptions in some funds but not every one. Redemptions were worse in the fourth quarter of 2000, Suarez said. The firm's money market and other fixed income funds, which are larger than the stock funds, have benefited from investors' new-found conservatism, he said.

Investor caution has to spread to other sectors. Value funds, which invest in companies that are inexpensive based on financial ratios such as the price-to-earnings ratio, book value or return on equity, were the only type of diversified domestic stock fund to take in new cash: $7.7 billion. Balance funds, which hold both bonds and stocks, also saw a $500 million inflow.

Growth funds, which invest in fast-growing companies, had outflows of $4.2 billion, including $2.5 billion in outflows at growth funds that invest in the largest companies by market value. That's notable because these funds were investor favorites during the late-1990s stock market boom, Lipper said.

Lipper, a unit of Reuters Group Plc (quote from Yahoo! UK & Ireland: RTR.L) (NasdaqNM:RTRSY - news), said that once-hot sector funds that invest in specific industries, suffered net outflows of nearly $2.0 billion, including $1.6 billion from science and technology funds.

Fixed income funds, other than money market funds, had net inflows of $1.5 billion. High yield funds had inflows of more than $800 million, which was 80 percent less than the strong January total, reflecting increased concerns about defaults, Lipper said.

A year ago, flows into stock funds were booming. The Investment Company Institute, a trade group for the industry, reported net flows to stock funds set a record at $53.68 billion in February 2000.

The picture is different now. TrimTabs.com, a Santa Rosa, Calif.-based data service, calculated that as of March 16, the current month would see an outflow of $17 billion from stock funds, assuming the trend through midmonth continued.

Investors appeared to be waiting for the stock market to stabilize, said Carl Wittnebert, research director at TrimTabs.com. People used to buy stocks when the market declined, he said, but ``they're not buying the dips when the market is in free fall.''

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-- Carl Jenkins (somewherepress@aol.com), March 21, 2001

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Wednesday March 21 4:45 PM ET Stocks Pounded Again, Dow Drops to New 2-Year Low

By Denise Duclaux

NEW YORK (Reuters) - Stocks sank on Wednesday, pushing the blue-chip Dow to its lowest close since March 1999, after a surprise uptick in inflation damped hopes for a near-term interest-rate cut to kick-start the economy.

Wall Street also was suffering from a hangover one day after the U.S. Federal Reserve (news - web sites) fired off a rate cut that many felt was disappointingly small. Investors also are loath to place cash into a stock market routinely pummeled by fears over slowing corporate earnings in the sluggish economy.

``There are people who think if only the Fed would cut rates enough, everything would be OK. But there may be more people coming to the conclusion that short rates are not really what the market's problem is,'' said Jay Mueller, economist and portfolio manager at Strong Capital Management Inc., which oversees about $45 billion. ``The problem is earnings. That's what we need to have turn around and it takes time.''

The Dow Jones Industrial Average tumbled 233.76 points, or 2.40 percent, to 9,487, spiraling down to its lowest close since early March 1999. The Dow now is only 112 points away from bear territory, defined as a 20 percent drop from its peak of 11,722.98 on Jan. 14, 2000.

Procter & Gamble Co. weighed on the Dow with a $2.70 drop to $63.20 on some executives' expectations the maker of Tide laundry detergent and Crest toothpaste will make large staff cuts in the flagging economy.

The technology-dominated Nasdaq Composite Index slumped 27.22 points, or 1.47 percent, to 1,830.22, after rallying earlier in the day by more than 2 percent. The broad Standard & Poor's 500 Index fell 20.49 points, or 1.79 percent, to 1,122.13. Both the Nasdaq and the S&P are deep in bear territory.

The strength of February's Consumer Price Index (news - web sites), the government's main inflation gauge, chilled Wall Street's mood. Boosted by rising costs for clothing, medical care and airline tickets, the CPI rose a higher-than-expected 0.3 percent in February, the Labor Department (news - web sites) said. The ``core'' CPI, which strips out volatile food and energy costs, also rose 0.3 percent.

Most economists said they did not see signs of a broad inflation threat, but many investors felt the figures would keep the Fed from cutting interest rates in between its regularly scheduled meetings.

``It's a number that is not likely to cause the Fed to alter the course, but it's certainly not a number to encourage the Fed to work interest rates lower in the immediate term,'' said Alan Ackerman, chief market strategist at Fahnestock & Co.

Bear Stearns chief economist Wayne Angell told clients that the statement that accompanied the Fed's cut on Tuesday strongly suggested Chairman Alan Greenspan (news - web sites) is considering a further reduction between meetings. Earlier this month, Angell, a former Fed governor, said the central bank was likely to move ahead of its March 20 meeting -- something the Fed failed to do.

Stocks sank on Tuesday after the Fed announced the third interest-rate reduction this year. That rate cut of 50 basis points, or half a percentage point, disappointed investors who had been hoping for a 75-basis-point reduction in borrowing costs to rejuvenate the economy.

Many U.S. corporate icons need a stronger economy to keep profits up.

Networking equipment maker 3Com Corp. reported a worse-than-expected loss, blaming a downturn in the telecom sector and decreased profit margins. 3Com, which also said it was cutting jobs, shed 7/32 to $6.

Deere & Co. dropped $2.16 to $38.17 after the heavy equipment maker said it will scale back production, leading to lower second-quarter earnings, because the slowing economy and adverse weather have hurt orders.

But chip leader Intel Corp. rose 15/16 to $25-9/16 after its Chief Executive Craig Barrett said he continues to hope for a recovery in demand for personal computers in the second half of 2001, despite the industry's slump.

Jabil Circuit Inc. rose $1.64 to $19.76, after the leading contract electronics manufacturer posted quarterly earnings that beat Street estimates. The company also announced job cuts as it lowered its outlook for the next two quarters due to weaker demand.

``You can't define cheapness because there is no confidence in the earnings,'' said Dick Schmaltz, director of investment at J. & W. Seligman Inc., which oversees about $34 billion. ``It looks to me as though we are slightly below average value. I don't think people think things are cheap, but they are decent. It's not a screaming buy.''

-- Rachel Gibson (rgibson@hotmail.com), March 21, 2001.