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MARKET BEAT / TOM PETRUNO

Converging Forces May Fuel a Wild Ride on Wall Street

March 28, 1994|TOM PETRUNO

Investors who aren't vacationing this week may wish they were by the time it's over.

Mounting pessimism on Wall Street could combine with traditional end-of-quarter portfolio shifts to produce wild turbulence in financial markets during this holiday-shortened week.

The only good news is that the markets' penchant for overreaction could present opportunities for buyers who can look ahead a few months.

Wall Street's tone turned sharply negative on Friday, when the bellwether 30-year Treasury bond yield jumped to 7.01% from 6.95% on Thursday, marking the bond's first close above 7% since last May.

The stock market crumbled as bond yields surged: The Dow industrials dropped 46.36 points to 3,774.73 on Friday, the lowest close since Jan. 3. The broader Standard & Poor's 500 stock index fell 3.77 points to 460.58, its lowest close since mid-November.

The problems suddenly ailing the markets are legion, of course. Inflation fears are rising despite the Federal Reserve Board's efforts to quash those worries by tightening credit. In fact, the Fed's latest quarter-point boost in short-term interest rates, last Wednesday, appeared to make investors feel worse instead of better about prospects for U.S. stocks and bonds.

Meanwhile, the Whitewater scandal is like a spreading oil spill within the Clinton Administration; the shining promise of Third World economic growth has been dimmed by the assassination of Mexico's leading presidential candidate and by the U.S.-China row over human rights, and North Korea may or may not decide to go to war with South Korea.

"The markets now see bogymen in every direction," laments William Dodge, chief investment strategist at Dean Witter Reynolds in New York.

It would be tempting to argue that Wall Street is already so negative that sentiment--and stock and bond prices--can't get much worse. But a convergence of special factors could produce a selloff of surprising magnitude this week, analysts warn:

* This will be a four-day week for most traders because most financial markets will be closed on Good Friday. The federal government, however, will be working Friday, and will report that day on March employment, the first major economic statistic for this month.

If bond investors fear the March gain in jobs will be above expectations--fueling new worries about the economy's strength and about higher interest rates--they will have to exit bonds before Friday because they won't be able to sell on the actual news. That could mean heavy dumping of bonds between today and Thursday.

*

It doesn't help that the 30-year T-bond broke through 7% on Friday, leading many bond pros to raise their forecasts for rate levels between now and the end of the year. John Lonski, economist at Moody's Investors Service in New York, said he now expects the T-bond yield to hit 7.3% by year's end. He had been forecasting 6.9%.

* The first quarter ends on Thursday, which means markets will be subject to the usual quarter-end window-dressing by institutional investors. Typically, many big investors seek to jettison losing investments at quarter's end, so clients don't see too many dogs on their quarterly statements.

End-of-quarter activity this time around may also involve a rush to raise cash, as a buffer against further market turmoil. A money manager can raise cash by selling his dogs, but late last week it began to look as if some institutions were cashing in their winners as well--stocks such as Chrysler, Deere, Motorola and other industrial and technology issues that have led the market this quarter.

* Another downward spiral in the dollar's value against key foreign currencies last week could translate into renewed selling of stocks and bonds by big "hedge funds," many of which invest worldwide and use heavy leverage.

The dollar's plunge in early February, when the United States and Japan entered their trade war of words, had tripped many hedge funds that had bet on a strengthening dollar this year. Because they use leverage, or margin, to up the ante in their trading, hedge funds can't afford to stay with a bet for long if markets turn against them.

The dollar finished at 1.666 German marks in New York on Friday, near a five-month low. The buck also closed at 104.80 Japanese yen, a drop from 106.10 a week earlier.

"Every one of these hits (to the dollar) is a margin call" for hedge funds, warns Dean Witter's Dodge.

* The mutual fund industry will report on February fund purchases later this week, but press reports will focus more on March purchase and redemption activity than on February results. The latest news isn't likely to be a confidence builder for the markets.

Fund companies have admitted in recent weeks that the tide of money flowing into stock and bond funds late last year has ebbed considerably since Feb. 1, as markets have turned ugly. In March, many funds have begun to see net outflows of cash as would-be investors hold off, and as nervous fund owners cash out rather than ride through market turbulence.

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