FINANCIAL MARKETS : STOCKS : Profit Taking Snuffs Rally; Dow Off 2.72
The stock market closed lower Tuesday as profit taking and nagging concern about corporate earnings erased strong gains sparked by President Bush’s decision to yield on the issue of raising taxes to cut the budget deficit.
The Dow Jones index of 30 industrials, which fell 12.13 on Monday, finished down 2.72 to 2,842.33.
Declining issues outnumbered advances slightly on the New York Stock Exchange, with 752 down, 706 up and 529 unchanged.
Big Board volume totaled 141.42 million shares, up from Monday’s 133.10 million.
Analysts said Bush’s statement on measures to trim the deficit was welcome at the Federal Reserve Board, which has been reluctant to cut interest rates because of a lack of action on the budget.
“It helped bonds more than stocks. We are looking more at things like second-quarter earnings and the strength of the economy,” one stock trader said.
In a departure from his earlier position, Bush said “tax revenue increases” would have to be part of any budget deficit reduction package.
The statement sent the Dow 30 up 30.69, with stock traders taking their lead from the rapidly rising bond market.
Hopes that a budget deficit reduction would result in lower interest rates initially buoyed stocks.
But Bush later declined to say specifically whether he had abandoned his campaign pledge against higher taxes, and the ambiguity surrounding the issue turned stock investors wary, analysts said.
“Talk is cheap, particularly among politicians. I think cold reality is coming in,” said Alfred Goldman, director of technical research at A. G. Edwards & Sons. “People realize you can’t cure problems with a few words, so it’s back to the short-term trend, which is down.”
Andrew Riley, a portfolio strategist at Yamaichi International, said: “It does seem like a concession, and it’s a serious long-term positive; but it’s so long-term that the trader mentality just gave up on it.”
Caterpillar lost 6 on top of Monday’s 5-point decline, falling to 52 1/2 in heavy trading. Caterpillar said Monday that it was expecting sharply lower earnings.
IBM was up 1/8 to 116 3/4, after launching a home computer to sell for $999 in mainstream retail stores.
Among other actively traded stocks, Philip Morris was up 1/4 to 46 7/8, General Motors was down 7/8 to 46 7/8 and American Express was down 1/8 to 30 3/8.
UAL Corp. dropped 5 to 147 in light trading, after falling 3 3/8 on Monday. There has been concern that employee unions trying to buy the airline company will not obtain financing by an August deadline.
In over-the-counter trading, International Lease Finance Corp. was up 3 7/8 to 31. Late Monday, the aircraft leasing company said it had agreed to a $1.3-billion buyout by American International Group Inc., the nation’s largest commercial and industrial insurance underwriter. AIG was down 2 5/8 to 94 on the NYSE.
Tokyo stocks closed sharply higher on bargain hunting after two days of declines. The key 225-share Nikkei index ended up 447.58 at 31,571.77.
Share prices ended mixed on the London Stock Exchange, as an early rally faltered. The Financial Times 100-share index was up 1.3 to 2,399.8 at the close.
In Frankfurt, West Germany, share prices closed lower as investors took profits after seven straight days of gains. The 30-share DAX index closed 5.85 points lower at 1,890.36.
CREDIT: Bonds Get Lift From Tax Remark
Bond prices rallied after President Bush indicated that he may consider tax hikes as part of a package to reduce the budget deficit.
The rally helped some long-term bonds regain some of the ground lost Monday in a slump sparked by concerns about the volume of new issues coming to market.
The bellwether 30-year Treasury bond rose 17/32 point, or nearly $5.25 per $1,000 face amount, after losing $8.75 on Monday. It had been up more than $6 for every $1,000 in face amount earlier in the session.
Its yield fell to 8.51% from 8.55% late Monday.
Bond prices moved higher after the reports that Bush had said “tax revenue increases” must be included along with spending cuts in any deficit reduction package the White House works out with congressional negotiators.
The federal funds rate, the interest rate banks charge each other on overnight loans, was quoted at 8.313%, unchanged from Monday.
CURRENCY: Dollar Sinks on Budget Concerns
The dollar declined against all major currencies after the markets became pessimistic about Congress reaching a budget accord, traders said.
Foreign exchange dealers said the dollar rose earlier in the day on reports that President Bush might be ready to ease his opposition to raising taxes to gain a compromise on reducing the federal budget deficit.
But the dollar fell when the market learned later that Bush’s comments were vague, said Walter Simon, a vice president at Bank Julius Baer & Co. in New York.
“What appeared to first be positive turned out negative,” he said.
Simon said the major movement in the currency markets was toward the West German mark, which gained on a statement by the West German central bank that it would accept higher domestic interest rates. Higher rates tend to make a currency more valuable relative to other currencies.
COMMODITIES: Weather Cools Price of Corn, Soybeans
Prices of corn and soybean futures fell modestly on the Chicago Board of Trade, giving up some of the previous session’s sharp gains as fears of an extended Midwestern heat wave faded.
Wheat futures advanced slightly.
On other commodity markets, cocoa futures surged; energy futures retreated; livestock and meat futures were mixed, and precious metals were mixed.
Soybean futures settled 4.25 to 6.50 cents lower in Chicago, with July at $6.08 a bushel; corn was unchanged to 1.25 cents lower, with July at $2.8575 a bushel; wheat futures were 0.50 cent to 3.50 cents higher, with July at $3.34 a bushel, and oats were 1.25 cents lower to 0.50 cent higher, with July at $1.37 a bushel.
Traders took their cues largely from the National Weather Service’s latest six- to 10-day outlook, which predicts normal temperatures and above-average rain in Midwestern growing regions during the first half of next week.
Those conditions would be ideal for crop development after farmers complete their soybean planting in the hot, dry weather forecast for the rest of this week, analysts said.
Selling in the corn and soybean markets also reflected profit taking after Monday’s steep gains, said Victor Lespinasse, an assistant vice president in the grain trading division of Dean Witter Reynolds Inc.