FINANCIAL MARKETS : Dow Ignores Price Report, Drops 8.94
Market Overview
* The stock market yawned at the best wholesale inflation report in two years, as the Dow industrials slipped. But smaller stocks closed just under their record highs.
* Long-term Treasury bond yields ended at another historic low, but short-term interest rates edged up despite the favorable inflation news.
* The dollar moved lower against most major currencies in relatively light trading.
Stocks
Blue chips failed to get excited about the 0.3% decline in the producer price index for June, even though the implications of low inflation are favorable for stocks.
The Dow industrials eased 8.94 points to 3,515.44 as Big Board trading volume remained moderate at 237 million shares.
However, advancing issues narrowly outnumbered declines on the New York Stock Exchange and on the NASDAQ market, continuing the broad underlying strength that has characterized the market in recent weeks.
In another sign of strength, the NASDAQ composite index of mostly smaller stocks rose 0.80 point to 708.47, leaving it just under the all-time high of 708.85 reached Feb. 4.
As on Monday, the first batch of second-quarter earnings reports were met with mixed reactions. Many analysts believe the market must see strong earnings overall for the second quarter if stock prices are to be sustained at current levels.
“The market is showing some signs of high-level exhaustion. The air is pretty thin up here without earnings growing very much so far,” said Robert Stovall, president of Stovall-Twenty-First Advisers.
David Shulman, market strategist at Salomon Bros., worries that the inflation report’s inability to spark a big rally bodes poorly for the market.
“They’re not going to get better than this. If the market is trading flattish in very good news, I would hate to see how it trades on bad news,” he said.
Among Tuesday’s highlights:
* Stocks losing ground on second-quarter earnings reports included International Paper, off 5/8 to 63 1/8; Intel, down 1 1/8 to 54 1/2; Hilton Hotels, off 1 1/4 to 44 3/4, and Merrill Lynch, which gave up 1 to 84 5/8.
But GE added 5/8 to an all-time high of 98 on its earnings report. Also gaining was Motorola, up 2 5/8 to a new high of 89 1/2, and insurance firm Unitrin, up 3/8 to 44 3/8.
* Home shopping stocks and cable TV stocks in general were higher, one day after the announced merger of QVC Networks and Home Shopping Network.
QVC jumped 3 3/4 to 71 1/2, HSN rose 1 1/8 to 14 3/4, Tele-Communications Inc. added 1/2 to 22 1/2, Liberty Media gained 3 to 26, Comcast shot up 1 1/8 to 23 7/8 and Viacom leaped 1 3/4 to 59 1/8.
* Technology stocks were generally strong, helping the NASDAQ market move higher. Cirrus Logic rose 1 1/2 to 17 5/8, Picturetel jumped 1 3/8 to 26 1/4, Lotus leaped 2 1/8 to 36 1/2 and AST Research added 1/2 to 16.
But Legent Corp., a mainframe computer software firm, plunged 10 1/8 to 17 3/4. It predicted disappointing third-quarter earnings.
* Procter & Gamble dropped 1 1/2 to 51 1/2 after announcing plans to lower prices on its liquid laundry detergents by between 3% and 15% effective Aug. 2. P&G; said the cuts will be paid for through more efficient manufacturing.
* Among new issues, Celestial Seasonings, the exotic tea maker, was quoted at 29 1/4 after an initial public offering of 1.9 million shares Monday at $20 per share.
* On the American Stock Exchange, Andrea Electronics continued its rise. A telephone refurbishing company will distribute an Andrea Electronics device that cuts background noise on pay telephones. The stock rose 3 1/2 to 42.
Overseas, Tokyo’s Nikkei index staged a strong rally, gaining 200.42 points to 20,180.42.
But in Frankfurt, the DAX index lost 11.01 points to 1,807.16 as the German market’s recent buying wave ran out of steam.
In London, the FTSE-100 index added 6.2 points to 2,837.1.
Credit
The producer price index report spurred moderate buying of the Treasury’s benchmark 30-year bond, driving its yield to yet another 16-year low. But yields on shorter-term securities moved up.
By day’s end, the 30-year bond yield fell to 6.61% from Monday’s 6.62%. The new yield was the lowest since the Treasury began regular auctions of 30-year securities in 1977.
Low inflation helps drive investors into long-term bonds because it raises the possibility of further declines in interest rates. Inflation is considered the greatest enemy of fixed-rate bonds because it erodes their return. Thus, the lack of inflation means investors are willing to accept lower yields.
But that thinking didn’t help shorter-term securities. The discount rate on one-year T-bills rose to 3.30% from 3.26% on Monday.
Traders said short-term securities were hurt by profit taking in the wake of the inflation news.
“There was really no further energy provided (to) the market,” said Dana Johnson, head of market analysis at First Chicago Capital Markets. “It was classic profit taking--sell-on-the-news type of reaction after having bought on the anticipation.”
The federal funds rate, the interest on overnight loans between banks, was 2.9%, down from 3.1% on Monday.
Other Markets
Currency traders said the release of the June producer price index had little effect on the dollar because the news was consistent with expectations.
“The data was digested very quickly and there was a lot more position squaring today than anything else,” said Jerry Egan, managing director of foreign exchange at MTB Bank of New York.
Egan said the market was anticipating today’s release of the consumer price index, which measures inflation at the retail level. Like the PPI, the CPI is expected to show little or no inflationary pressure in June.
Kevin Logan, economist at Swiss Bank Corp. in New York, summed up the dollar’s activity as “just a little profit taking after the run-up over the past few days.”
In New York, the dollar closed at 1.719 German marks and 108.13 Japanese yen, down from Monday’s 1.729 marks and 109.45 yen.
In commodities trading, gold prices eased slightly on New York’s Comex. Gold for current delivery closed at $394.00 an ounce, down 30 cents from Monday. Silver closed at $5.04 an ounce, down 2 cents.
But coffee prices jumped on fears that a crop-damaging Brazilian frost and lower Central American exports will tighten supplies.
The September coffee contract at New York’s Coffee, Sugar and Cocoa Exchange rose 4.05 cents to 73.60 cents per pound, but peaked during the session at 73.95, the highest level in eight months.
Elsewhere, crude oil futures inched up 3 cents to $18.13 a barrel on New York’s Merc. Prices continue to gyrate because of uncertainty over the oil sale talks between the United Nations and Iraq.
Market Roundup, D6
