STOCKS : Early Market Rally Fizzles; Dow Drops 12

Stock prices slipped Monday, adding to Friday’s steep loss on selling that was inspired by a sharp drop in the Treasury bond market.

The Dow Jones index of 30 industrials dropped 12.13 points to 2,845.05, extending last week’s 78.71-point decline.

In the broader market, declining issues outnumbered advancing ones by more than two to one in nationwide trading of New York Stock Exchange-listed stocks, with 1,049 down, 496 up and 460 unchanged.

Leading the decline was Caterpillar Inc.’s report of sharply lower earnings projections for the second quarter. That raised fears that broader corporate earnings prospects overall might be weaker than anticipated. Caterpillar plunged 5 to 58 1/2.

Some analysts said the drop in Caterpillar may have been an overreaction since the agricultural equipment company said more than half its second-quarter earnings drop was due to problems in Brazil. Still, Tenneco, a competitor, fell 1 1/2 to 65 5/8.

Analysts said stocks rose early, with buyers attracted by Friday’s steep drop of 44.55 points in the Dow. However, the rally stalled against the background of a weak bond market, and stock traders lost their taste for bargains.

The benchmark 30-year Treasury bond was down nearly a full point. Concern that the Federal Reserve may not ease credit soon kept the bond market under pressure.

Traders said they detected a resumption of profit taking and some computer-driven program selling in stocks.

One trader noted that buying was selective, particularly as the end of the second quarter approached. “They want IBM, and Philip Morris,” he said, ticking off blue chips that were firmer.

Share prices started the day higher, but the gains evaporated by midday. Stocks meandered in a narrow range for much of the afternoon, tailing lower on late-afternoon program selling.

The early advance “was artificial, just as Friday’s trading between 3 and 4 (o’clock) was artificial,” said George Pirrone, senior trader at Dreyfus Corp. “The bond market turned sour, and consequently, stocks turned sour.”

Rao Chalasani, market strategist at Prescott Ball & Turben, said he believes that the recent string of big losses in stocks has a lot to do with overbuilt expectations about corporate earnings and interest rates. “The market was expecting too much, and now it’s paying a price.”

J. C. Penney said its sales for June were off last year’s pace, and an investment bank downgraded the company’s earnings estimates for 1991 and 1992, indicating weakness in the retail economy.

J. C. Penney was off 2 7/8 to 59 7/8, Woolworth fell 7/8 to 32 7/8 and K mart was off 3/8 to 35.

Foxboro jumped 12 7/8 to 51. The British company Siebe PLC agreed to acquire the company for $52 a share.

Big Board volume retreated to 133.1 million shares from 172.57 million on Friday.

In foreign trading, stocks in Tokyo posted their biggest one-day point fall in more than two months. The 225-share Nikkei index was down 570.38 points to close at 31,124.19.

Stock prices ended higher on the London Stock Exchange, boosted by a healthy start on Wall Street. The Financial Times 100-share index closed up 20.0 points at 2,398.5.

Foreign buying interest and optimism that West German interest rates will not jump after German monetary union on July 1 lifted the 30-share DAX index 23.29 points to 1,896.21.

CREDIT: Bond Prices Fall on Fears of Glut In the credit markets, bond prices tumbled and interest rates rose as dealers cited worries about a sizable slate of Treasury securities sales.

The Treasury’s key 30-year bond dropped 7/8 point, or $8.75 per $1,000 in face amount. Its yield climbed to 8.55% from 8.47% late Friday.

Trading was described as moderate.

“The decline . . . was mostly because of upcoming supply,” said Elliott Platt, director of fixed-income research at Donaldson Lufkin & Jenrette Securities Corp. “People are setting up for the auctions.”

Those auctions got under way Monday with the Treasury’s sale of $17.2 billion of new three-month and six-month bills at the highest rates in a month.

The sales continue this week as the Treasury is selling $11.25 billion of two-year notes today, $8.25 billion of four-year notes Wednesday and $10.52 billion of one-year bills Thursday.

The federal funds rate, the interest rate banks charge each other on overnight loans, was quoted at 8.313%, up from 8.188% late Friday.

CURRENCY: Dollar Ends Mixed as Interest Shifts The dollar turned in a mixed performance as dealers directed their attention to trading other major currencies.

Much of the movement in the dollar came as a byproduct of trades involving the West German mark against the Japanese yen and Swiss franc. Renewed buying of Canadian dollars after a recent slide was another feature of foreign exchange trading.

The absence of significant economic reports being released this week and the onset of month-end investment maneuvers were expected to mute activity in the currency markets, dealers said.

The start of the European holiday season also was expected to restrain currency trading.

Continuing uncertainty over the economic consequences of German unification put pressure on the mark. Concerns have resurfaced as the day of German monetary union approaches on July 2.

The Canadian dollar rebounded modestly from a selloff sparked by the failure of the Meech Lake accord, a plan designed to preserve the country’s unity by recognizing French-speaking Quebec as a “distinct society.”

COMMODITIES: Corn, Soybeans Rise on Weather Report Forecasts for a Midwestern heat wave helped push corn and soybean futures prices up sharply on the Chicago Board of Trade amid fears that an extended dry spell could harm tender young sprouts.

Wheat futures closed narrowly mixed, reflecting perceptions that hot, dry weather would benefit the maturing winter wheat crop.

On other commodity markets, precious metals advanced; copper fell; energy futures were mixed; livestock futures were mixed, and pork bellies declined the daily limit for the third straight day.

On the Chicago Board of Trade, wheat futures settled 3 cents lower to 0.50 cent higher, with the contract for delivery in July at $3.335 a bushel; corn was 2.50 cents to 8 cents higher, with July at $2.87 a bushel; oats were 3.75 to 4.50 cents higher, with July at $1.3825 a bushel; soybeans were 12 to 19 cents higher, with July at $6.12 3/4 a bushel.

A high pressure system featuring temperatures in the 90s is expected to edge into the western Corn Belt from the Southwest by Wednesday.

If the expected heat lasts beyond five days, young plants could be damaged, and traders will “start pushing the panic button,” Karlin said.

“It’s not uncommon for these high-pressure systems to become entrenched in an area for a fairly long while, eight to 10 days,” he said.

“At that point, you would have dried out the topsoil to an undesirable degree.”