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Marlboro Price Cut Burns Dow : Markets: News of Philip Morris price cuts hurts stocks, as worries also mount about an end to investors' 'honeymoon' with Clinton.

April 03, 1993|TOM PETRUNO | TIMES STAFF WRITER

Wall Street suffered one of its worst days since before the November election on Friday, as the Dow industrials tumbled 68.63 points, and long-term bond yields leaped over the key 7% level.

Analysts blamed the stock and bond selloffs largely on two events--consumer-products giant Philip Morris' sudden troubles and split interpretations of the government's March employment report.

But some also warned of a more onerous trend: The end of investors' "honeymoon" with President Clinton, as the Administration's drive to re-regulate industry sparks fears that the corporate profit recovery will be aborted.

In the stock market Friday, Philip Morris shares' 23% plunge accounted for nearly half of the Dow index's 2% drop, to 3,370.81. But the broad market suffered as well, as losers outnumbered winners by a severe 16 to 4 margin on the New York Stock Exchange.

Meanwhile, investors also bailed out of bonds, sending the yield on the closely watched 30-year Treasury bond to 7.06% from 6.96% on Thursday--the first time that yield has been above 7% in six weeks.

Apart from Philip Morris, most traders were focused on the March employment report, which showed unemployment holding steady at 7%. But digging deeper into the report, stock and bond investors had two disparate interpretations of the data--both bearish for their respective markets:

* Stock investors were upset by the loss of 22,000 jobs in March, another sign that the economy has slowed. With stock prices near record levels, Wall Street has been counting on strong first-quarter earnings to justify its bullishness. But earnings estimates have been coming down with each additional sign of economic weakness.

* Bond investors, already spooked by rising commodity prices in the first quarter, saw new signs of inflation in the otherwise downbeat March employment report.

"You saw the average hourly wage rate tick up in March," said William Dodge, investment strategist at Dean Witter Reynolds in New York. "Combined with commodity price indexes rising, it suggests a core inflation problem."

Entering 1993, investors flocked to bonds on the assumption that inflation would remain about 3% annualized this year. And in February, bond buyers appeared sure that President Clinton's deficit-reduction program would assure a steady decline in long-term interest rates.

The result, said investment strategist Richard Eakle of Eakle Associates, was "a bond market pumped up as if on steroids"--until mid-March, when signs of rising inflation became more than the market could bear. Since hitting a low of 6.66% in early March, the 30-year bond yield has risen almost nonstop.

On Friday, yields on shorter-term bonds also rose sharply, as the urge to sell bonds spread. Higher inflation erodes the fixed returns on bonds, which leads investors to demand higher yields to compensate.

Gary Schlossberg, economist at Wells Fargo in San Francisco, believes that inflation worries have become overblown, given the backdrop of the weak economy. In theory, price increases should slow as the still-sluggish economy forces businesses to discount--not unlike Philip Morris' decision to discount its cigarettes.

But Schlossberg noted that some investors may be assuming that they'll face the worst possible world: A return to the "stagflation" of the late 1970s, when inflation rose while the economy stagnated.

Some analysts, however, say the real explanation for stock and bond investors' angst is a growing uneasiness with the Clinton Administration's attacks on business. While both stock and bond markets embraced Clinton early in the year, money managers' fears of what they call misguided Administration policies have ballooned in recent weeks.

The worries began with Administration talk of price controls on the health care industry. And on Thursday, some analysts were shocked when the Federal Communications Commission ordered rollbacks of cable TV rate hikes.

"The honeymoon period is coming to an end," Dodge said. Clinton "is now becoming an uncertain commodity (for markets), in an unfriendly way."

Eakle was more blunt about Wall Street's change of heart toward Clinton. Investors' perception, he said, is that "you've got some real amateurs down in Washington" and that they may be a growing threat to American industries' ability to generate decent profits in the years ahead.

Among the market highlights:

* Among broad indexes, the NYSE composite index fell 4.55 points, or 1.8%, to 244.19, while the NASDAQ composite index plunged 16.81 points, or 2.5%, to 669.83.

Volume on the Big Board rose with the accelerated selling, to 325.25 million shares from 234.53 million on Thursday.

* The drop in Philip Morris shares, off 14 5/8 to 49 1/2, dragged down every other tobacco stock, and also seemed to hurt other consumer products issues. Some analysts have argued for the last two years that consumer-brand franchises that were stars of the '80s have lost their allure in the '90s, as competition rises.

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