Dow Leaps Ahead 20.12 as Bond Yields Plunge

Market Overview

* The Federal Reserve’s surprise full-point cut in its key lending rate sent yields on Treasury securities plunging. Yields on three-month T-bills tumbled below 4% to their lowest levels in nearly 20 years. The 30-year T-bond yield also plummeted.

* Stocks jumped on the Fed move, though trading was skewed by the quarterly expiration of key stock index futures. The Dow Jones industrials rose 20.12 points to 2,934.48. That also was the exact point gain for the week.

* The dollar fell sharply, reacting both to falling U.S. interest rates and rising rates in Germany.

Stocks

The drop in the Fed’s discount rate to 3.5% from 4.5% brought the key rate to the lowest level since November, 1964.

The move was seen as the Fed’s strongest action yet to try and bolster the faltering economy by encouraging businesses and consumers to borrow and spend.

The Fed’s move prompted many of the nation’s banks to lower their prime lending rate to 6.5% from 7.5%.

The dramatic decline in rates was a tonic for many investors who’ve been waiting on the sidelines in recent weeks, uncertain whether to buy stocks. Companies that benefit most directly from lower rates--such as S&Ls;, home builders and electric utilities--led the market higher.

Still, some analysts cautioned that the market’s reaction to the Fed cut wasn’t nearly as strong as might have been expected. On the New York Stock Exchange, advancing issues outnumbered declines by 11 to 6--not an overwhelming margin.

Also, the Dow was up more than 30 points in the afternoon before falling back.

Big Board volume soared to 317.15 million shares from Thursday’s 199.33 million. But the volume was pumped up by technical trading strategies involving Friday’s quarterly expiration of stock index futures contracts.

Bearish analysts argue that investors are unlikely to take much more solace in another decline in interest rates, because the long slide in rates this year has yet to help the economy. That raises the risk of a steep market decline early in 1992 if the economy still shows no signs of life.

“It’s not going to jump-start the economy,” analyst Michael Metz at Oppenheimer & Co. said of the rate cut. “It caught the market off guard and muddies an already muddy picture.”

Among the market highlights:

* Small stocks had a surprisingly weak day. The NASDAQ composite index gained just 1.23 points to 535.76, a 0.2% rise compared to the Dow’s 0.7%.

* Lenders such as S&Ls; were strong on expectations that more people will borrow as rates drop. Among California S&Ls;, Coast Savings jumped 3/4 to 6 1/8, Glenfed added 3/8 to 4 1/8, and Golden West Financial was up 1/2 to 36 1/8.

Also, Federal Home Loan Mortgage soared 4 1/8 to 108 3/8, and Student Loan Marketing jumped 4 1/4 to 69 3/4. Federal Home Loan was added to the S&P; 500 index.

* Among home builders and suppliers of furnishings, Kaufman & Broad added 7/8 to 14 1/2, Centex gained 1 to 40, Whirlpool jumped 2 1/2 to 36, and carpet maker Shaw Industries leaped 2 7/8 to 28 1/2.

* Utilities, whose dividend yields become more attractive as interest rates fall, surged. Detroit Edison rose 7/8 to 33 3/8, Houston Industries added 1 1/8 to 42 7/8, San Diego G&E; rose 5/8 to 44 1/2, and Southern Co. gained 1 1/8 to 32 7/8.

* Investors flocked back to some industrial issues, betting again on an economic recovery. Alcoa rose 1 3/8 to 59 3/8, TRW added 1 3/8 to 39, ITT was up 1 3/8 to 51 7/8, and GE soared 1 5/8 to 69 3/4.

* Among Southland issues, Computer Sciences rocketed 3 1/2 to 71 1/2. It received a contract to supply a computer system to the Defense Department to manage weapons systems information. The contract is valued at $744 million over 12 years.

Oxnard-based Benton Oil rose 1/2 to 9 3/4. It said Russia’s finance ministry approved Benton’s planned oil venture with two Russian partners.

Thousand Oaks-based biotech firm Amgen gained 2 to 60 1/4. It was added to the S&P; 500 index. Elsewhere, Biogen tumbled 3 1/2 to 38 3/4. Traders said Goldman Sachs downgraded its rating on the stock.

* Sierra Tucson dropped 7 3/4 to 13 1/2. The drug and alcohol rehabilitation firm said it doesn’t expect to meet earnings estimates.

Overseas, markets had a much rougher session.

German shares fell to a four-month low after the central bank raised interest rates because of inflation worries. In Frankfurt, the 30-share DAX index tumbled 18.58 points to 1,543.19, its lowest close since Aug. 20.

In London, the Financial Times 100-share average plunged 33.5 points to 2,358.1, its lowest level since February, on the heels of the rise in German interest rates.

In Tokyo, stocks closed lower for the fourth consecutive day. The Nikkei average lost 214.07 points to 21,777.12.

Credit

Yields on short- and long-term notes and bonds plunged after the Fed’s interest-rate cut, as investors poured into the market to try to lock in decent returns.

Bond traders had expected a cut in the discount rate, but only half a point--not the full point the Fed gave the market.

“The bottom line is the economic fundamentals are very weak and inflation is improving--and these are the two cornerstones of lower interest rates,” said Ward McCarthy of Stone & McCarthy Research Associates in Princeton, N.J.

In rushing to buy bonds, investors were suggesting that they believe that rates will go even lower next year in a still-weak economy. If investors believed that this was the last of the rate cuts, they wouldn’t be interested in locking up their funds now, traders noted.

The yield on three-month T-bills tumbled to 3.80% from 4.13% Thursday. The yield now is the lowest since June, 1972.

Meanwhile, yields on 30-year T-bonds sank to 7.58%, down from 7.65% Thursday, as the price of the T-bond jumped $9 per $1,000 face value. That new yield is the lowest since March, 1987.

In addition to cutting its discount rate, the Fed also signaled a lower federal funds rate, which is the cost of loans when banks borrow from each other overnight. The rate was quoted at 3.875%, down from 4.5% Thursday.

Currency

The dollar dropped precipitously for a second day against the German mark, as traders bailed out of the U.S. currency.

It slid to 1.534 marks in New York from 1.556 marks Thursday. The dollar had been at 1.58 marks just a week ago.

The dollar suffered a double whammy: One day after the German Bundesbank raised interest rates, the Federal Reserve slashed rates here.

Rising German rates make German bonds more attractive, while lower rates in the United States make our bonds less so. Together, the two central bank moves were devastating for the dollar, because they encouraged investors to sell U.S. bonds (and thus sell dollars) to buy German bonds.

“The surprise was not so much the timing of the Fed move as the size,” said Ian Spence, trader at Manufacturers Hanover.

The dollar also fell to 127.55 Japanese yen from 128.15.

Commodities

Heating oil futures fell to a 17-month low on the New York Merc because of abundant supplies and slack demand due to unseasonably warm weather.

Crude oil prices also plunged, falling to 10-month lows. Light, sweet crude for February fell 60 cents to $18.52 a barrel.

Meanwhile, January platinum finished $4.30 lower at $339.60 an ounce on the New York Merc. December gold rose $1.40 to $358.60 an ounce on the Comex; December silver rose 1.2 cents to $3.84.