Dow Down 50.98 as Bond Rates Rise on Wave of Rumors

The stock market posted its sharpest loss in nearly two months Friday, hurt by a jump in interest rates in a rumor-roiled bond market.

The Dow Jones industrial average slumped 50.98 points, or 1.7%, to 2,920.17. Shortly before the close, the Dow was off more than 61 points.

However, trading volume totaled just 172.73 million shares on the New York Stock Exchange, down from 180.21 million on Thursday. The continued moderate volume shows that investors overall are unable to make up their minds about the market’s near-term direction, traders said.

The sellers Friday seemed to be looking for an excuse to book profits after the Dow’s 40.25-point rise on Thursday, and trouble in the bond market provided that excuse, said David Holt, analyst at Wedbush Morgan Securities in Los Angeles.

The yield on 30-year Treasury bonds jumped to 8.31% from 8.22% on Thursday, as bond trading desks across the nation were hit with a barrage of rumors about impending bond sales by big investors.

One of the rumors was that California Insurance Commissioner John Garamendi had invalidated a decision by troubled Los Angeles-based insurer First Capital Holdings to purchase 30-year T-bonds. But Garamendi’s office said he has no jurisdiction over such transactions.

A spokesman for First Capital also denied rumors that the firm had been selling bonds from its $4.3-billion portfolio on Friday.

There were also rumors of a big sale of mortgage securities by a New England bank; that another large institution was moving out of bonds and into stocks, and that a major bank was about to fail.

Many bond traders discounted the rumors and said the market’s real problem was that the Treasury’s record auction of $37 billion in bonds this week saw mediocre demand--leaving a large overhang of bonds without buyers.

Bond dealers “tried to bull the market, but there wasn’t enough demand, and the Street (traders) didn’t want to carry a lot of long positions over the weekend,” said Pat Zlotin, bond portfolio manager at Massachusetts Financial Services in Boston. The result was that bond prices had to drop--and yields had to rise--to flush out some buyers.

Bond investors were also unhappy with the government’s April producer-price index report, out Friday, which showed a 0.2% rise. Many traders had been hoping for a better report. The index is a key inflation gauge.

The latest turmoil in both the stock and bond markets is just a continuation of their weak performance all spring, traders noted. A key problem is that investors seem unwilling to bet heavily for or against an expected economic recovery.

“There’s been a lot of ragged action, but no follow-through” on rallies, said Richard McCabe, stock analyst at Merrill Lynch & Co. in New York. The Dow has been stuck in a trading range of 2,850 to 3,000 since mid-March.

Wedbush’s Holt said stocks’ recent churning is typical of the consolidation phases that often follow sharp price gains. The Dow had rocketed nearly straight up in late January and early February.

The danger in consolidation phases is that investors often become frustrated by the market’s inaction, Holt said. “Frustration can breed totally irrational behavior,” he said. “These consolidations always last one day longer than you have patience for.”

The Dow’s loss Friday was the biggest since a 62.13-point drop on March 19. On the NYSE, declining stocks led advancers 1,125 to 469.

For the week, the Dow lost 18.69 points.

Among the market highlights Friday:

* Oil stocks were sharply lower, helping to drag the Dow index down. Oil futures prices tumbled as recent supply concerns eased, traders said. Chevron plunged 2 3/4 to 75 1/8, Exxon dropped 1 3/4 to 57 7/8, Mobil lost 2 1/4 to 67 1/2 and Unocal gave up 1 1/4 to 27.

* Other losers included GE, off 2 3/8 to 71 1/4; IBM, off 2 1/2 to 103 3/8, and Disney, down 2 3/8 to 120 7/8.

* Phone stocks plummeted in the wake of a Federal Communications Commission ruling that could mean increased competition for local phone firms. Pacific Telesis lost 1 1/8 to 39 1/4, BellSouth tumbled 1 7/8 to 47 7/8, GTE fell 1 1/4 to 29 3/8 and Ameritech fell 1 3/4 to 59 1/8. However, MCI rose 3/8 to 28 7/8.

* Retailers were weak, coming off Thursday’s disappointing reports on April sales. Sears dropped 2 to 37 1/2, Home Depot fell 1 3/8 to 58 5/8 and Dillard Department Stores fell 2 5/8 to 118 3/8.

* Financial stocks fell as interest rates rose. Ahmanson dropped 7/8 to 17 1/8, Broad Inc. lost 3/4 to 9 7/8, BankAmerica gave up 1 1/8 to 38 3/4 and First Interstate fell 1 3/4 to 38.

* King World Productions fell 1 1/4 to 32 3/8. A group led by Roger and Michael King said it lowered its stake in the firm to 34%, or 13.1 million shares, after selling 558,000 shares on May 8 for 29 7/8 apiece.

* Among Southland issues, National Education jumped 1 3/8 to 6 1/4. Raymond James & Associates issued a “buy” recommendation, saying the technical-training company is on the verge of a turnaround after two years of troubles. Also, Craig Corp. added 1/4 to 17 3/4 after the holding company reported higher quarterly profits.

In overseas markets, London stocks gave ground, with the Financial Times 100-share index falling 17.5 points to 2,524.3. In Frankfurt, the DAX index rose 13.35 points to 1,620.63. In Tokyo, the Nikkei index slipped 164.21 points to 26,274.29.

Currency

The dollar closed mostly lower in quiet trading Friday, with action focused on German and Japanese interest rate policy.

“A lot of people were just trying to keep their heads down,” said Richard Vullo, senior marketing representative at Bank of Montreal in New York.

In New York, the dollar closed at 1.7230 German marks, down from Thursday’s finish of 1.7325 marks. But it rose against the Japanese yen, to 138.70 from 138.10 yen Thursday. The British pound rose $1.7245 from Thursday’s $1.7175.

Other late dollar rates in New York, compared to late Thursday’s rates, included: 1.4550 Swiss francs, down from 1.4630; 5.8280 French francs, down from 5.8585; 1,275.00 Italian lire, down from 1,280.25, and 1.1514 Canadian dollars, down from 1.1526.

Investors expect Japan to cut its discount rate soon, while Germany is seen maintaining steady interest rates. Higher German rates would boost the value of mark-denominated assets and draw investors to the currency.

Commodities

Wheat futures rose and corn and soybeans fell on the Chicago Board of Trade as traders reacted to predictions of dry weather and the government’s release of its crop forecast.

In other markets, pork bellies fell while livestock futures were mixed, and energy and precious metals futures declined.

Wheat settled 4 to 5.50 cents higher, with the May contract at $2.8775 a bushel; corn was 3.25 to 4 cents lower, with May at $2.385 a bushel; oats were 0.25 to 1 cent higher, with May at $1.27 a bushel, and soybeans were 9 to 11.50 cents lower, with May at $5.645 a bushel.

Energy prices retreated on the New York Mercantile Exchange, where supply concerns had taken them higher the previous two sessions. Light sweet crude oil for delivery in June settled at $21.27 per barrel, down 66 cents. That erased crude’s gain of 15 cents from the day before and left it 10 cents cheaper for the week.

Precious metals futures were lower at the Commodity Exchange in New York. Gold settled $1 to $1.10 lower, with the June contract at $358.30 an ounce, and silver was 2.6 to 2.8 cents lower, with May at $4.024 an ounce.

Pork belly futures suffered their sixth consecutive decline at the Chicago Mercantile Exchange as the market struggled to bring the price into line with the nation’s inventory. Considering the current hog slaughter and the frozen belly inventory, there’s an adequate supply heading into the summer, said Dale Durchholz, an analyst in Bloomington, Ill., with Agri-Visor Services Inc.

Although livestock futures declined slightly, pork bellies are the only really weak spot in these related markets, Durchholz said. The May contract has lost 6.22 cents, nearly 10% of its value, since May 3.

Hog futures received support from the spot market, where there are seasonal slaughter declines accompanied by high prices for the calendar year.

Market Roundup, D6