U.S. Stocks' Steep Slide Worsened By 'Buyers Strike'

By TOM PETRUNO

Oct. 28, 1997 12 AM PT

TIMES STAFF WRITER

Was it really a selling panic in stocks Monday--or simply a “strike” by potential buyers who refused to put in any bids, hoping for a fast downward spiral in prices?

And were the sellers dominated by U.S. mutual fund companies looking at a tax-related selling deadline this week--or foreign investors trying to raise cash?

As analysts tried to assign blame for the stunning decline in U.S. share prices Monday, which slashed 7.2% off the Dow Jones industrial average, to 7,161.15, many said the sell-off had a distinctly weird feel to it.

Frank Baxter, head of institutional trading firm Jefferies & Co. in Los Angeles, questioned whether the word “panic” really applied.

“Our trading room is relatively calm,” Baxter said.

Others noted that trading volume on the New York Stock Exchange, while a record at 685 million shares, wasn’t much above Friday’s volume.

Still, the overall desire to exit stocks was clear: On the NYSE, only 182 stocks rose, while 2,987 fell in price.

Analysts said some institutional investors, unnerved by a barrage of bad news in recent weeks that had fouled the “nirvana” market atmosphere of spring and summer, simply decided it was time to try to take some of their spectacular profits from this year’s market surge.

That bad news has included a German interest rate hike, stronger-than-expected U.S. economic data, some weak corporate earnings reports and, of course, the market and economic debacle in Asia.

“The institutional investor, much more than the individual investor, was locking in 1997 gains” on Monday, said Dennis Jarrett, head of Jarrett Investment Research in Westport, Conn.

The motivation to lock in profits may have been acute among some mutual funds, analysts said. That’s because this Friday marks a tax deadline of sorts for funds: Under federal rules, the funds will calculate their year-end capital gains payments to shareholders based on the gains they have realized for the year through Friday.

That may have encouraged some fund managers to try to lock in gains on some stocks they’ve been considering trimming anyway.

That selling pressure from funds could keep up all week, some traders warned.

Meanwhile, Baxter and other traders said they noticed selling at the outset Monday by foreign investors, some of whom appeared to be dumping their U.S. stock holdings in favor of U.S. bonds.

But perhaps the biggest culprit in Monday’s decline was the simple absence of buyers. Many institutional investors went on a classic buyers strike, analysts said, yanking all bids for stocks as the market careened lower.

In effect, many investors were willing to let the market find its own level--however low that might be--rather than even start nibbling at stocks.

“There were not a lot of bids out there,” said Robert Bissell, head of Wells Capital Management in Los Angeles.

His firm was among those that decided it was too early to try and bargain-hunt, he said.

Unlike in the 1987 market crash, when computerized “portfolio insurance” tactics involving stocks and stock index futures caused a cascade of selling, Monday’s computerized program trading was largely related to short-term arbitrage, traders said.

In other words, as stocks and stock index futures diverged sharply in value during the day, arbitrage programs kicked in to profit from the divergences.

That activity accounted for the heavy selling of some blue-chip stocks that otherwise weren’t logical sales candidates if investors were worried about an Asia-induced global economic slowdown, analysts said.

Drug giant Merck, for example, slumped $8.38 to $85, a 9% loss. Yet Merck’s business is more resistant to recession than many companies’.

In any case, by the time trading ended early--stopped by the NYSE’s trading-halt mechanism that suspends trading for one hour when the Dow falls 550 points--more than $600 billion in wealth had been slashed from the Wilshire 5,000 index of stocks, leaving it at $8.5 trillion.

Meanwhile, money seeking safe haven poured into the bond market, sending long-term yields to 20-month lows.

Short-term yields also sank, with the yield on two-year Treasury notes falling to 5.54% from 5.75% on Friday.

But some bond pros questioned how much more yields can fall. The two-year T-note yield now is the same as the “federal funds” rate, the Federal Reserve Board-engineered overnight money rate among banks.

Unless the bond market senses a Fed rate cut coming--which would require a pronounced economic slowdown--”I don’t think the bond market can do that much more” rallying in the near term, said William Gross, bond chief at Pimco in Newport Beach.

If that’s true, then investors--if still eager to sell stocks--may have to decide that the best place for their money is cash, such as money market accounts.

But how long they’d be willing to sit in cash also is a big question.

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How Bad Is It?

The U.S. stock market’s dive Monday, while the worst one-day loss in point and percentage terms this decade, erased only part of this year’s stunning gains--after stellar years also in 1995 and 1996 as well. Meanwhile, as money exits stocks, it is pouring into bonds as a “safe haven”--driving market interest rates sharply lower, which could ultimately be good for stocks.

DOW

The Dow’s 7.2% drop Monday took it back to its level in early May, leaving it up 11.1% for the year.

Monday close: 7,161.15, down 554.26 for the day, up 712.88 since Dec. 31.

NASDAQ

The Nasdaq composite index, heavy with battered tech stocks, fell 7% on Monday but is still up 18.9% year-to-date.

Monday close: 1,539.09, down 115.83 for the day, up 244.06 since Dec. 31.

30-YEAR TREASURY BOND

Some investors who are dumping stocks are buying bonds instead--which drove the yield on the 30-year Treasury bond to a 20-month low Monday.

Monday close: 6.12%

Sources: TradeLine, Bloomberg News

More Markets Coverage

* Stocks suffered their worst drop since the October 1987 crash. A1