Reagan Backs Off His Stand Against Increase in Taxes : Down Falls 77; Many Banks Cut Prime to 9%
The stock market dashed investor hopes for a quick and durable turnaround Thursday as the Dow Jones industrial average fell by 77.42 points, its sixth-largest point loss ever. The decline came after a two-day rally recovered more than half of Monday’s record 508-point loss in the Dow.
Although the level of trading activity abated somewhat from that of the last several days, the New York Stock Exchange said it is so overwhelmed with paper work that it will have to close two hours early today, Monday and Tuesday in order to catch up.
Thursday’s 3.8% decline in the Dow, to 1,950.43 on a trading volume of 392.6 million shares, occurred despite a continuing fall in interest rates. Many major banks rolled back their prime rates to 9% from 9.25%, canceling out an increase that was about two weeks old. Bond prices also continued to surge as money rushed out of stocks and into interest-bearing investments.
Analysts said they found little enthusiasm among investors for buying stocks. “There are not a lot of aggressive buyers here,” said Michael Metz, market strategist for the investment firm of Oppenheimer & Co.
One indicator of the scale in which investors have rolled their money out of the stock market was a flood into money market funds, where investors typically park cash they do not want to invest elsewhere. In the week ended Wednesday, money fund assets rose by a record $9.6 billion, to a record $256.84 billion.
On Thursday, the slump also began to show in one of the market’s most sensitive indicators: the price of a seat on the New York Stock Exchange, which is necessary for anyone wishing to trade stocks on the exchange.
Two seats changed hands Thursday for $760,000 and $750,000, down sharply from the record $1.1 million paid for a seat in January. The top bid for a seat now, exchange sources said, is $675,000. Seats on Chicago commodity exchanges, which trade stock-based futures and options contracts, are down even more sharply.
Index Fell, Then Recovered
Thursday’s stock trading bore most of the hallmarks of the last week’s panicky, uncertain activity, participants said. The familiar Dow index of 30 blue-chip stocks fell 140 points on extremely heavy volume in the first hour, then recovered about 60 points and hovered uncertainly for the rest of the day.
Traders and market analysts were divided over the reasons for the early nose dive. Many blamed a sell recommendation from market analyst Robert Prechter, whose exceptional success at predicting the market’s recent turns has given him a broad following. In a telephone hot line message to his clients Wednesday night, Prechter reportedly said the market would continue a slide to below the low point reached by the Dow average after Monday’s epochal 508-point collapse. Other influential forecasters also reportedly predicted new lows.
As important was another overnight slump in the London stock market, which closes around the time the New York Stock Exchange opens at 9:30 a.m. Eastern time.
“The first thing we did when we came in this morning was look at London, which was sharply lower,” said Gerald Simmons, a managing director on the institutional trading desk at Smith Barney & Co. “Then we started to have sell orders coming in for prices even below where the stocks had closed in London. So we could very quickly figure out where we were headed.”
In all, the market thoroughly reversed field from the strong rally it turned in Wednesday, when the Dow industrials rose a record 186.84 points and the blue-chips’ gains spilled over to the market as a whole. Thursday, while the Dow fell, broader measures of market performance again tailed along. On the Big Board, nine stocks fell in price for every two that rose.
The Standard & Poor’s index of 500 institutionally held stocks dropped 10.44 to close at 248.25, the New York Stock Exchange composite index was off 5.57 to close at 139.45, the American Stock Exchange index dropped 12.95 to 269.02, and the over-the-counter composite index fell 15.73 to 130.48.
If trading today in the U.S. stock market takes its cue from what happened in early Tokyo activity today, Thursday’s price decline will persist. Share prices plummeted in the morning trading session in Tokyo, with the Nikkei stock average of 225 selected shares falling 771.86 points, or 3.2%, to close at 23,632.59 at the end of the morning session.
The New York Stock Exchange’s decision to shut early for the next three trading days was just one indication of how it has been staggered by trading volume that has averaged three times its normal load since last Friday.
Additionally, all member brokerage firms will have staffs at work all day Saturday to begin the immense chore of finalizing the roughly 2 billion trades executed this week. Early indications are that “questioned trades”--those on which brokers are in dispute--are running about 3.5% of the total, up from a routine 2.5%.
Hours Cut Back
“But that’s just a function of doing 600 million shares a day,” remarked David V. Shields, a floor broker on the NYSE who works for several major investment houses.
The Chicago Mercantile Exchange and Chicago Board Options Exchange, which trade options and futures based on stock prices, said they would cut back their hours to match the Big Board’s, as did the American Stock Exchange.
Not since 1970 has the Big Board cut trading hours because of a paper work crunch. Before now, its most serious processing backlog came in 1968, long before it installed the sophisticated electronic equipment in use today, when it eliminated trading on Wednesdays from June 12 through Dec. 31 to catch up.
The immense order flow at Thursday’s opening forced the NYSE to call in its equivalent of military reinforcements: so-called registered competitive market makers. With sellers overpowering buyers, these brokers stepped in to restore order by buying heavily for their own account. The market makers were needed to help on more than 200 stocks Thursday morning, exchange sources said. The pace then slacked off, traders said.
To market professionals numbed by the extremes of the last week, Thursday felt almost like a milk run. “This market was down a mere 77 points, it didn’t even do 400 million shares--it’s hardly worth coming to work any more,” joked William M. LeFevre, senior vice president for market strategy at Advest Inc.
“If we make it to Friday, we’ll make it through,” said Robert Jacobson, a floor specialist, or broker responsible for supervising trading in specified stocks. Specialist firms--which are the backbone of the exchange’s method for trading stocks--have borne the brunt of the market’s violent activity this week. One such firm was so staggered by losses Monday that it was taken over by Merrill Lynch & Co.; according to floor traders, two others were forced to seek emergency loans from Spear, Leeds & Kellogg, a leading specialist firm.
Nevertheless, traders were gratified by a continuing absence of program traders from the scene. These large institutional traders’ computer-driven ability to send billions of dollars in orders to the exchange floor in the blink of an eye has become the popular villain for the market crash.
Program Trades Halted
On Thursday the NYSE, which all week has strived to bar program traders from its automated order-placing systems, went further by asking its member firms to refrain for now from executing any program trades at all. That step removed a potential $15 billion to $20 billion in trades from the system, professionals said.
On the other hand, almost no program traders have worked the stock market since Monday, when its slide overcame their ability to match stock trades with related futures contracts on Chicago commodity exchanges.
“Anyone who tried to do it is just being a cowboy,” said Robert Gordon, president of Twenty-First Securities, a New York firm that places program trades for clients. Because the extreme volume of this week has made stock and futures price quotes tardy and unreliable, he said, “there’s more risk than I’m authorized to take on for my clients.”
The near complete falloff in the futures trading associated with program trades was reflected in the desultory activity in the Chicago Mercantile Exchange’s S&P; 500 futures pit, where trading came to a near halt by midday. There were only 36 traders in the pit, most of them standing with their arms folded, compared to the usual complement of hundreds.
“This looks like the day before Christmas or Thanksgiving,” trader Jerry Schechtman said.
Many had been driven out of the pit by increased financial guarantees imposed by exchange clearing houses, which function as intermediaries in all trades. Clearing houses concerned that the disorderly trading this week had increased the traders’ risks were demanding minimum deposits of $200,000 cash--up from $50,000 on Monday.
Staff writer Larry Green contributed to this story from Chicago and Eileen V. Quigley contributed from New York.
