ORANGE COUNTY IN BANKRUPTCY : Bond Jitters Ease but Stocks Get Slammed : Markets: The Dow index plunges 50 points in heavy trading while selling of muni bonds slows.
Investors’ jitters about municipal bonds abated significantly on Thursday, but the bond market’s gains were no help to the stock market, where prices plunged in a brutal selloff.
Borrowing some of the bond market’s anguish over Orange County’s shocking bankruptcy, the Dow Jones industrial average tumbled 49.79 points to 3,685.73 in extremely heavy trading.
While the county’s financial ills don’t have a direct effect on the broad stock market, analysts said the bankruptcy raised fears about widespread financial losses among other municipal investment funds nationwide, which in turn could have implications for the U.S. economy.
“It’s like a radiation cloud over the market,” said Alan Ackerman, investment strategist at Reich & Co. in New York.
In the muni bond market, traders said the theoretical prices of Orange County bonds improved sharply on Thursday from Wednesday, when a few bidders were offering 50 cents to 60 cents on the dollar for the bonds.
Traders said bids on Orange County and related bonds were in the range of 80 cents to 85 cents on the dollar Thursday as interested investors stepped up, though they said few bond owners were actually selling even at those improved prices.
But some analysts fear that potential buyers will again lower their bids today, in the wake of news late Thursday that the county officially defaulted on two series of taxable pension obligation bonds.
Despite the bankruptcy filing, many analysts have been hopeful that the county would continue to make timely interest and principal payments on its bonds, as some other bankrupt municipalities have done in the past.
One bond trader said the pension-bond default “shows a willingness on the part of the county to walk away” from its obligations, which he said won’t be well-received in the market.
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Elsewhere, traders said bid prices for San Diego County bonds plummeted on Thursday amid mounting worries about losses suffered in its investment fund.
Prices of most California muni bonds, however, were only slightly lower on Thursday, which was reflected in minor losses among California muni bond mutual funds--following sharp price declines on Wednesday.
Most mutual fund companies that manage California muni bond or money-market funds continued to insist that relatively few individual investors are bailing out.
The Vanguard Group said shareholders pulled about 1% of the assets from the firm’s $1-billion California tax-exempt muni money-market fund on Thursday. The Benham Group and Franklin Resources both said they were experiencing net outflows from their California bond and money-market funds on Thursday but that the amounts were small.
A Franklin spokeswoman said that although many investors are calling to ask about their muni funds’ ownership of Orange County bonds, “once we explain how low our exposure is, they feel better.” Franklin and most other fund firms say their muni funds have less than 1% of assets in direct, uninsured obligations of Orange County.
Even so, to calm investors Franklin said its holding company Thursday purchased $7.1 million in Orange County notes from two of the firm’s money market funds, thus removing any threat of shareholder loss on those notes.
In the Treasury bond market on Thursday, yields were mixed, reflecting fallout from the Orange County mess. Yields on shorter-term Treasury securities, meaning those maturing in six months to five years, rose as major brokerages dumped similar-maturity U.S. government agency bonds held as collateral for loans they had made to Orange County.
The six-month T-bill yield jumped to 6.47% from 6.38% on Wednesday, while the five-year T-note rose to 7.74% from 7.71%.
But longer-term bond yields continued to ease. The yield on the 30-year T-bond dipped to 7.87% from 7.89% on Wednesday.
Long-term yields’ continuing slide was no tonic for the stock market, however, as share prices plunged across the board.
The market opened mostly lower and could not regain its footing. The Dow, off 1.3%, masked an even deeper decline in many market sectors. Falling stocks swamped rising stocks by 18 to 5 on the NYSE as volume soared to 363 million shares.
Transportation stocks were particularly hammered, with the Dow transports index tumbling 38.19 points to 1,377.48, as investors bailed out of airline stocks on worries about earnings prospects.
The Nasdaq composite index of mostly smaller stocks plummeted 15.15 points, or 2.1%, to 719.12, hurt by a selloff in tech issues.
Analysts said many investors appeared to be throwing in the towel on stocks, responding in part to the surge in short-term interest rates in recent months that has made bank CDs and other savings vehicles more attractive than at any time since 1991. What’s more, Federal Reserve Chairman Alan Greenspan hinted Wednesday that the central bank may push short-term rates even higher to restrain the strong economy.
Some Wall Streeters also said the Orange County debacle is providing a convenient excuse for investors who have wanted to sell stocks anyway but needed a push.
“When you get something like Orange County happening, the people who have been thinking about selling do it right away, while the people who have been thinking about buying put it off,” said Michael Burke, analyst at research firm Investors Intelligence in New Rochelle, N.Y.
In one measure of investors’ deteriorating view of the market, Investors Intelligence’s weekly survey of investment newsletter writers shows 59.1% now bearish on stocks--the highest percentage since March, 1982, Burke said.
* HOW O.C. ISSUES FARED
Orange County’s financial debacle produced a mixed bag of winners and losers on Wall Street. D3
