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Dow Drops 249 on New Woes

September 11, 1998|THOMAS S. MULLIGAN | TIMES STAFF WRITER

NEW YORK — The stock market Thursday took back what remained of the gains from Tuesday's record rally--and then some--as a crumbling financial picture in Brazil joined President Clinton on the list of worries daunting investors.

The Dow Jones industrial average fell 249.48 points, or 3.2%, to 7,615.54--nearly 25 points below where it started the week, in spite of the 380-point run-up Tuesday.

And in a mirror image of the slumping stock market, bond prices surged for a second straight day Thursday, with yields on 30-year Treasury securities falling to a record low of 5.20%.

Analysts said the strength of the rally means bond buyers are expecting not just a modest interest rate cut by the Federal Reserve Board, but multiple cuts in the months ahead.

If history is a guide, no such move would occur unless the Fed thought it was facing real economic weakness. Pressure has been building for a cut at the next meeting of the board's policymaking Federal Open Market Committee on Sept. 29.

Bond investors are "extrapolating from the current financial contagion [in overseas markets] into a global recession next year," said David D. Hale, chief economist for Scudder Kemper Investments in Chicago.

Since the Dow hit its high in mid-July, bonds have been trading in the opposite direction from stocks on a nearly day-by-day basis, which is highly unusual.

Typically, what's good for stocks--falling interest rates--is also good for bonds, and the two markets trade if not in tandem than in roughly parallel fashion.

Such "decoupling" of stock and bond prices tends to occur only when widespread deflation is on the horizon--as many experts believe is the case today.

Commodity prices generally have been falling, but gold soared Thursday, and shares of gold-mining companies gained, in contrast to the rest of the stock market.

The Comex December gold contract jumped $6.40 to $293.80 an ounce, its biggest gain in six months.

Analysts took gold's rise as a sign that foreign investors are using it as a haven from economic and political turmoil.

Meanwhile, the dollar fell sharply against major foreign currencies.

The extreme volatility in the stock market, where 100-point up or down days for the Dow have become more common than not in recent weeks, is seen as a measure of doubt and fear among investors.

Said Arthur Micheletti, chief investment strategist at Bailard Biehl & Kaiser in San Mateo: "Iran and Afghanistan are saber-rattling, India and Pakistan are feuding with nuclear weapons, Clinton's troubles are very worrying--there's no shortage of scary stories out there. Maybe the real surprise is the markets aren't down further."

Indeed, compared with the havoc in overseas markets, Wall Street's slide has been modest.

Brazil's Bovespa stock index fell as much as 15.9% on Thursday to the lowest level in 2 1/2 years amid fears that the government's credit rating would be lowered and it will be forced to devalue the currency--an action that would spread shock waves throughout the Americas.

The index has lost more than half its value just since the end of July.

Thursday's plunge triggered two halts in trading on the Sao Paulo exchange--the first time that ever happened. Shares of Telecomunicacoes Brasileira, or Telebras, the huge telephone holding company traded on the New York Stock Exchange, fell $10, or 17%, to a 52-week low of $49.75.

Markets throughout Latin America were rocked by Brazil's troubles. Mexico's Bolsa index dropped nearly 10%, and indexes in Argentina and Chile were down 13% and 7% respectively.

While most U.S. banks do limited business with Asia, their vulnerability to a Latin American crisis is far greater--and it showed on Wall Street on Thursday.

Almost without exception, shares of the biggest U.S. banks sank to new lows for the year on worries about Latin American loan losses.

Citicorp, for example, closed at $88.25 on the NYSE, down $4.81 for the day and down an astounding $92.50 from its July 20 peak.

It was the same story for BankAmerica, down $3.75 to $55.50, eight weeks after hitting a high of $100.13.

Brokerage stocks also were battered. Bellwether Merrill Lynch lost $3.75 to $55.50.

The Nasdaq composite index fell 39.22 points, or 2.4%, to 1,585.33, as technology shares held up slightly better than other sectors.

Across Europe, stock prices were down even more sharply than in the United States.

The benchmark indexes of Germany and France both fell about 4.5%, Spain's was down 7% and Italy's 5.5%.

Some experts say foreign investors worry more about Clinton's problems than Wall Street does.

U.S. investors--particularly hard-nosed bond buyers--are mainly concerned that the government stick to its current budgetary and monetary policies, said Tony Crescenzi, chief bond market strategist for Miller, Tabak, Hirsch & Co. in New York.

And in that arena, "the key players"--Fed Chairman Alan Greenspan and Treasury Secretary Robert Rubin--will still be in place even if their boss resigns or is removed from office, Crescenzi said.

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