Talk of Tax Cut Sinks Bonds; Dow Falls 16.77

Market Overview

Highlights of Monday’s market activity, compiled from Times staff and wire reports:

* Treasury bond yields jumped sharply on inflation worries and on news that President Bush is considering a tax cut for the middle class. The 30-year T-bond yield soared over 8% again.

* The Dow Jones industrial average, which surged nearly 94 points last week and closed at a record high on Friday, slipped 16.77 points to 3,060.38.

Stocks

Stocks opened on a weak note and declined steadily for much of the session, hurt by the jump in interest rates.

But the Dow climbed back from a loss of more than 25 points at midday. Volume on the floor of the New York Stock Exchange came to 154.16 million shares, down from Friday’s 205.26 million; declining issues outnumbered winners by about 5 to 3.

The bond market was roiled by news that the White House is considering a middle-income tax cut to help revive the economy. Bond investors’ fear is that a tax cut could spur inflationary pressures by fueling a brisk recovery and by adding to the already huge federal budget deficit.

Many stock investors have been counting on a further decline in interest rates to revive the economy. But if the federal government enacts tax cuts, the need for lower rates could evaporate--and in fact, the Federal Reserve might balk at lowering rates again if it believes that tax cuts are inevitable.

Still, Wall Street’s decline was mild Monday, and analysts noted that stocks were overdue for profit taking after last week’s surge. “Last week was very strong. It’s a tough act to follow,” Shearson Lehman analyst Newton Zinder said.

Also, if a tax cut were to help the economy, that would be positive for many companies’ profits. So investors may be willing to look askance at higher interest rates if better profits appear to be on deck.

Despite the broad market’s loss, 100 stocks hit new highs on the NYSE; only 26 hit new lows. On the NASDAQ market, 118 issues hit new highs, and 15 hit new lows.

Among the market highlights:

* Food and drug stocks were hit hard by profit-takers. Kellogg lost 2 to 107, Borden fell 1 3/8 to 32 1/4, Dole slid 1 1/4 to 34 3/4, Sara Lee dropped 1 1/2 to 41 3/8, Johnson & Johnson gave up 2 1/8 to 88 7/8, and Bristol-Myers fell 1 5/8 to 80 5/8.

* Medical stocks still attracting substantial new buying interest included U.S. Surgical, up 5 1/8 to 91 on expectations that a surgical conference this week will focus attention on the company’s products; and occupational health services firm TriCare, up 1 5/8 to a new 1991 high of 24.

* Industrial issues generally remained strong on growing hopes for an economic rebound. Deere gained 1 to 55 3/4, Tenneco rose 1 1/2 to 39 1/4, Eaton added 1 1/4 to 63 1/2, and Cummins Engine was up 2 1/8 to 42 1/4. Cummins reported a smaller-than-expected third-quarter loss, citing better demand for its diesel engines and ongoing cost-cutting.

Meanwhile, Owens-Corning Fiberglas, which tumbled 7 7/8 Friday after saying it would have to boost 1992 reserves for asbestos court cases, lost another 4 1/2 to 20 1/4.

* Tech issues were mostly lower. Sun Microsystems lost 2 3/4 to 24. Analysts at Dean Witter and Smith Barney repeated negative views on the stock ahead of the company’s first-quarter results.

El Segundo-based International Rectifier plunged 5 to 13 1/4. The semiconductor company said it expects first-quarter earnings of 10 cents to 15 cents a share, down from estimates of 25 cents.

* TV network stocks continued to weaken on bleak ad prospects. CBS lost 1 3/4 to 151 and traded as low as 150 1/4, which is its 1991 low. Cap Cities/ABC fell 5 1/4 to 414 3/4, nearing its 1991 low of 400.

* Lockheed rose 1 7/8 to 43 1/4 after brokerage Kidder Peabody upgraded the stock to buy, citing expectations of a new stock-buyback program by the firm. McDonnell Douglas also continued to climb, adding 3/8 to 71 7/8.

* Mattel added 1/2 to 33 1/2. The toy company reported a 16% rise in quarterly earnings, declared a 5-for-4 stock split and raised its dividend 25% post-split. The company also authorized the buyback of up to 1 million shares, or 2% of the outstanding stock.

Overseas, stocks closed lower on London’s Stock Exchange. The Financial Times 100-share average fell 25.4 points to 2,575.7.

German shares rose in quiet trading. In Frankfurt, the 30-share DAX average gained 9.43 points to 1,572.68.

Tokyo stocks strengthened. The 225-share Nikkei average closed up 121.99 points at 25,016.81 to close above 25,000 for the first time since June 14.

Early today in Taiwan, the weighted index of shares on the Taipei exchange plunged 231 points, or 5.4%, to 4,065.43, after the main opposition party vowed to escalate its challenge of the government.

Credit

The jump in bond yields showed that market’s continued high state of anxiety over the economy’s next move. Bond traders and investors don’t want to hear about federal tax cuts, because they don’t want a sharp economic upturn--they want a slow recovery at best.

The yield on the Treasury’s 30-year bond soared to 8.07% from 7.95% Friday. Yields also rose on shorter-term bonds, though much less than on the 30-year issue.

The White House said a tax-cut proposal is just one of “various options” that President Bush is studying to boost the economy.

Whether any such steps would do the trick is open for debate. Some economists believe that the economy will grow slowly at best in 1992 no matter what the government does, because high individual and corporate debt loads act as a drag on business activity.

“I think all of the proposals being kicked around at this point are just that, proposals,” said analyst Douglas Schindewolf of Smith Barney, Harris Upham. “I don’t think any of them will be implemented until fiscal 1993.”

Still, the bond market has grown increasingly nervous over any proposals that might boost inflation. Those worries are particularly strong now because the government last week reported that consumer prices rose 0.4% in September, double the rise that economists had expected.

When that news was reported last Thursday, the 30-year T-bond yield soared to 8.02% from 7.88%. Until last week, interest rates had been falling almost non-stop since mid-July.

The federal funds rate, the interest banks charge each other for overnight loans, was quoted at 5.25%, up from 5.063% late Friday.

Currency

The dollar rose against major currencies in slow trading dominated by dealers buying German marks and selling Japanese yen.

As the mark’s rally eventually lost steam, the dollar ended higher against both the German and Japanese currencies.

The dollar ended at 1.693 marks, up from 1.687 Friday, and at 130.80 yen, up from 129.65 Friday.

But the dollar yielded further to the Canadian currency, which rose to a 13-year high last week. The dollar ended at C$1.126, off from C$1.127 Friday.

The yen suffered from news that Japan’s M2 money supply rose a record low 2.2% in September from a year ago, traders said. M2 includes cash, checking and savings accounts, small denomination time deposits and money market accounts.

Slow money growth could make it easier for Japanese authorities to drop interest rates there, which would undermine the yen.

The British pound fell against the dollar, slipping to $1.717 in New York from Friday’s $1.727.

Commodities

Orange juice futures rose sharply for the fifth straight day on the New York Cotton Exchange as perceptions of a shrinking Florida orange crop underpinned a powerful rally.

Analysts warned, though, that the market has become “overbought,” meaning a sudden downturn is likely, even though prices are expected to rise further as colder weather approaches.

Wholesale frozen concentrated orange juice for November delivery rose 3.4 cents to $1.685 a pound, the highest settlement of a near-term contract since Aug. 28, 1990. Deferred deliveries rose 0.05 cent to 4.5 cents.

Orange juice futures have risen 32% since Oct. 10, when the Agriculture Department forecast a 1990-91 Florida orange crop of 136 million 90-pound boxes.

The forecast was 10% below last year’s harvest and 22% below market expectations.

Elsewhere, oil futures finished mixed in quiet trading on the New York Mercantile Exchange.

Traders said a drop in the November crude contract was partly due to technical factors linked to its expiration Tuesday.

Light, sweet crude oil for November delivery fell 10 cents to $24.04 per barrel, as oil continued to hover near its highest price levels since the Gulf War.

Gold led a modest really on New York’s Commodity Exchange, reflecting signs that inflation may be on the rise.

Gold for October delivery rose $1.60 to $363.80 an ounce; December silver rose 1 cent to $4.17.

Market Roundup, D14