Closing Market Report

Star-Bulletin news services

Tuesday, October 12, 1999

Rising rates send
Dow plunging 231

The blue-chip index suffers its
biggest point drop in 5 months

NEW YORK -- Tumbling bond prices and a weak outlook for Raytheon Co. deflated stocks today as traders, already anxious about interest rates, found themselves nervous about third-quarter earnings reports as well.

The Dow Jones industrial average was down 231.12, or 2.17 percent, at 10,417.06. It was the blue chip index's biggest point drop since May 27, when it fell 235.23 points.

Broader stock indicators were also lower. The Nasdaq composite index retreated 43.52 points to close at 2,872.43 after setting a record close of 2,915.95 yesterday. The Standard & Poor's 500 fell 22.17 to 1,313.04.

Decliners beat advancers by a 5-to-2 margin on the New York Stock Exchange, with 2,159 down, 847 up and 527 unchanged. NYSE volume totaled 772.44 million shares vs. 658.96 million yesterday. The NYSE composite index dropped 9.95 to 603.38; the American Stock Exchange composite index rose 2.09 to 792.11; and the Russell 2000 index of smaller companies fell 5.51 to 424.68.

A drop in bond prices initially depressed stocks today. Bond investors, nagged by persisting worries about interest rates, sold ahead of this week's government reports on wholesale prices and industrial production. The reports are expected to bring the latest signs of whether inflation is escalating in the U.S. economy

"There are still concerns out there about whether the Fed is going to raise rates again," said Barry Berman, head trader for Robert W. Baird & Co. in Milwaukee. "And given the strength of the market last week, that provides as good an opportunity as any for some profit-taking."

Stocks soared last week after the Federal Reserve held interest rates steady. But the Fed left open the possibility of another rate increase, which would be the third this year.

The drop in bond prices pushed the yield on the 30-year Treasury bond up to 6.23 percent today from 6.20 percent late Friday. The bond market was closed yesterday for the Columbus Day holiday.

Rising bond yields can present an attractive alternative to stocks by offering a fixed, guaranteed return. Financial services stocks, which are most vulnerable to rising rates, were among the Dow's worst performers today. American Express and J.P. Morgan fell.

Defense contractors fell following reports that Raytheon is behind schedule or over budget on some major Pentagon orders. While market officials maintained a trading halt on Raytheon shares, most of its rival contractors, including General Dynamics tumbled.

In the final hour of trading, Raytheon confirmed that its earnings for fiscal years 1999 and 2000 will come in sharply below analysts' expectations. The company's shares fell steeply once trading resumed.

But even strong earnings reports couldn't guarantee solid market performances today. Several Wall Street brokerages reported significant profit growth, yet failed to attract buyers for their stock. Merrill Lynch fell after reporting it earned $1.34 per share in the third quarter, beating analysts' estimates of $1.29 per share.

Paine Webber said its third-quarter profits rose to 86 cents a share from 51 cents a share in the same period of 1998. Analysts had expected Paine Webber to earn 83 cents per share. The brokerage's stock slipped.

Donaldson, Lufkin & Jenrette fared best, rising solidly after the firm reported third-quarter earnings of 85 cents a share, beating Wall Street's estimate of 76 cents per share.

Stocks were also held down by the dollar's weakness against the Japanese yen. In New York trading, the dollar bought 106.22 yen, down from 106.68 yen late Monday.

"The same old devil is hurting the market," said John H. Shaughnessy, chief investment strategist at Advest Inc. "Investors are worried about bonds and the dollar."

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