Bond Selloff Drives Dow Down 21.24 : Market Overview
Highlights of Tuesday’s market activity, compiled from Times staff and wire reports:
* A continuing bond glut and renewed inflation worries sent the yield on the Treasury’s key 30-year bond up to 7.98% from 7.90% Friday. It was the highest level for the 30-year bond since November.
* The stock market pulled back as interest rates jumped. The Dow industrials fell 21.24 points to 3,224.73, and broader indexes suffered steeper losses.
Stocks
Stocks opened on a relatively firm note as traders returned from a long holiday weekend. But the session was choppy, with prices swinging within a wide band.
Around mid-day the market spiked higher after the Federal Reserve said it will reduce the amount of money banks must hold in reserve, a move designed to increase the availability of money for borrowing.
The Dow was up about 26 points following the announcement, as many investors viewed the Fed move as another step toward an economic recovery. But those same expectations of recovery sparked a selloff in bonds, as investors bet on higher interest rates ahead. Bonds’ weakness--plus a slump in oil stocks--pulled the Dow and broader indexes lower late in the day.
At the close, declining issues outnumbered advancing ones by about 10 to 7 on the New York Stock Exchange. Big Board volume came to 234.34 million shares, up from Friday’s 221.04 million.
The NASDAQ index of smaller stocks also suffered, falling 10.02 points, or 1.6%, to 626.41.
Despite the market’s poor showing overall, analysts noted that many investors still see opportunities to make money in selected stocks this year, assuming that the economy is in fact recovering.
What’s taking place in the market is a shift toward industrial stocks that would benefit from a recovery, experts say.
At the same time, investors are selling the safe health care and food stocks that have been favorites for three years. Many such growth stocks now are viewed as too expensive, and their profit gains are seen lagging the industrial firms’ growth this year if the economy indeed expands.
Among the market highlights:
* Health care issues, which have been hammered for weeks, suffered another major drop as investors bailed out in search of better stock ideas. Abbott Labs lost 1 7/8 to 63 1/8, National Medical Enterprises gave up 7/8 to 14 1/2, U.S. Surgical sank 8 3/4 to 103 and U.S. Healthcare fell 4 1/4 to 49.
Biotech stocks also were hard hit. Gensia Pharmaceuticals plunged 6 3/4 to 44, Amgen sank 3 to 62 1/4, Alza lost 2 to 40 7/8 and California Biotech lost 1 3/8 to 17 3/4.
* Food stocks were big losers. Coca-Cola fell 1 1/8 to 75 7/8, Wrigley lost 2 to 71, General Mills gave up 2 3/8 to 66 3/8 and Kellogg fell 1 to 55.
* Oil stocks fell as OPEC voted for only nominal cuts in production, which seems sure to keep oil prices down. Texaco sank 2 3/4 to 57 3/4, Mobil was down 2 to 51 7/8 and Chevron lost 2 1/8 to 61 5/8.
* The bearish outlook on oil helped airlines, which are big fuel users. AMR, parent of American, was up 2 at 76. Delta jumped 1 3/4 to 70 and Southwest rose 1 1/8 to 39 5/8.
* Expectations of economic recovery also buoyed many industrial stocks. Alcoa rose 2 3/4 to 70 1/2, Cummins Engine added 3/4 to 60 5/8, chemical firm W.R. Grace was up 1 to 42 and Reynolds Metals rose 1 5/8 to 58 1/2. Van Nuys-based auto-parts firm Superior Industries gained 3/4 to 41 7/8 after reporting strong quarterly earnings.
* Some bank and S&L; stocks were helped by the Fed’s move to help spur lending. Chase Manhattan rose 1 to 24 and Citicorp added 1/2 to 16 1/2.
* Southland S&L; CalFed jumped 3/4 to 3 1/2. Analysts said some investors may be betting that the federal government will step in to help some struggling S&Ls; get back on their feet, rather than continue merging them.
Overseas, the Tokyo market gave back Monday’s gains, as the Nikkei average fell 452.95 points to 20,872.03.
In London, the Financial Times-Stock Exchange index added 14.9 points to finish at 2,555.9. In Frankfurt, the DAX 30 index rose 13.92 points to 1,694.99.
Credit
The bond market had another in a string of bad days, as long-term yields continued to climb toward the 8% mark.
Not only did the 30-year Treasury bond yield surge, but yields on shorter-term bonds also were sharply higher. The 10-year Treasury note yield, for example, closed at 7.48%, up from 7.41% on Friday.
William Veronda, analyst at Financial Funds, a Denver-based money manager, said the underlying pessimism among bond traders stemmed from the Treasury’s auction of $36-billion worth of new notes and bonds last week.
The heavy supply of new debt was coupled with unexpectedly weak demand, and that makes the bonds more difficult for dealers to unload. That means that they will have to offer higher yields to lure buyers.
“We had a poorly distributed auction,” Veronda said. “It only worsened the problem. Now the dealers have to get up there and sell this stuff.”
Many bond investors also are convinced that the economy is recovering, and they believe that can only mean higher inflation--and higher interest rates--down the road. So these investors are bidding yields up now rather than be stuck with sub-par returns later.
The federal funds rate, the rate on overnight loans among banks, was 4.25%, up from 3.94% Friday.
Currency
The dollar moved higher amid the growing perception that the U.S. economy is getting stronger.
The dollar, like all currencies, tends to rise along with interest rates. Higher yields make U.S. investments more attractive to foreigners, who must buy dollars to make their purchases.
The dollar closed at 128.00 yen in New York, up from 127.80 Friday, the last U.S. trading day before the Presidents’ Day holiday. The dollar also surged to 1.649 German marks from 1.627 Friday.
Commodities
Coffee prices tumbled amid indications from an International Coffee Organization convention in Florida that the United States would not support a return to limits on coffee exports to support prices.
Coffee for March delivery sank 2.40 cents to 66.70 a pound on New York’s Coffee, Sugar & Cocoa Exchange. It was the lowest daily settlement of a near-term coffee contract since the summer of 1975.
Among metals, silver led gold lower on New York’s Comex. The March silver contract fell 10 cents to $4.06 an ounce in a selloff inspired mostly by technical factors unrelated to supply-demand news. Meanwhile, February gold futures slipped 30 cents to $353.40.
Market Roundup, D8
