Trade gap drives up rates, hurts stocks


November 20, 1993|By Bloomberg Business News

NEW YORK -- U.S. stocks declined yesterday for a third day as a wider trade deficit drove up interest rates, hurting telephone, retail, utility and bank shares.

The expiration of November stock options added to the day's volatility, which was aggravated by computer-generated orders to buy and sell stocks and a drop in computer stocks, traders said.

"The trade deficit was horrible again," raising concern that the economy's growth would push the Federal Reserve to raise interest rates sooner rather than later, said Jack Baker, head of equity trading at Furman Selz Inc.

The Dow Jones industrial average gained 8.67, to 3,694.01, after dropping as much as 28.22 during the session. Late gains in Minnesota Mining & Manufacturing Co., Aluminum Co. of America and Chevron Corp. offset losses in United Technologies Corp., Sears, Roebuck & Co. and International Business Machines Corp.

The average, which reached a record 3,710.77 on Tuesday, gained 9.5 points during the week.

Among broader market indexes, the Standard & Poor's 500 Index slipped 1.02, to 462.6.

The Nasdaq Combined Composite Index dropped 2.78, to 751.56, led by Intel Corp., Oracle Systems Corp., American Power Conversion Corp., Sun Microsystems Inc. and Price/Costco Inc. The American Stock Exchange Market Value Index fell 1.56, to 467.98.

About 11 common stocks declined for every seven that rose on the New York Stock Exchange, where volume fell to 303 million shares from 310 million Thursday.

Stocks declined early after the Commerce Department said the nation's merchandise trade deficit expanded 8.3 percent, to $10.9 billion, in September as imports climbed $1.65 billion from August and exports rose $816 million.

The wider deficit raised concern "about inflation in two or three quarters," Mr. Baker said. Bond investors "are starting to believe the underlying economy is much better than anticipated and will eventually force the Fed to bump up" interest rates, he said.

Higher rates make stocks less attractive relative to fixed-income securities and raise concern that mutual-fund investors would sell some stock market holdings. They also raise companies' cost of raising capital.

"The fact that the U.S. is sucking in a much greater level of imports is just another sign of the strength in the underlying economy," said James Solloway, director of research at Argus Research. "Since we had a rise in exports as well, this would suggest demand in other countries is also picking up a bit or at the very least that U.S. manufacturers remain very competitive."

In reaction to the latest trade figures, interest rates as reflected in the benchmark 30-year Treasury bond climbed as high as 6.35 percent before settling at 6.33 percent, up from 6.24 percent Thursday. The record low, 5.77 percent, occurred Oct. 15.

"This is just a normal correction in a bull market," said Anthony Dwyer, chief market strategist at Sherwood Securities. Although getting toward the later stages" of the market's three-year rally, "sentiment is so negative, and some stocks are just so oversold" that a rebound is likely, he said.

Talbots Inc., L. M. Ericsson Telephone Co., Intel Corp., Merck & Co. and Tiphook Plc were the most actively traded stocks on the U.S. composite list.

Telephone stocks, which often move in tandem with interest rates because of the high yields they pay investors, dropped.

"The emotional bloom is off the rose on some of the telecommunications stocks," many of which rallied after Bell Atlantic Corp. agreed to buy Tele-Communications Inc., said Mark Dierkes, portfolio manager at Protection Mutual Insurance of Park Ridge, Ill.

Southwestern Bell Corp. fell $1.125, to $40.75, and Pacific Telesis Group slid 75 cents, to $56.375.

United Technologies Corp. fell $1.75, to $62.875, amid concern about its Pratt & Whitney jet engine business. "They can't seem to cut costs fast enough to keep up with even more aggressive price-cutting in the product line," Mr. Dierkes said.

Personal computer stocks declined after the Wall Street Journal said companies were cutting prices on machines that use Intel Corp.'s latest chip, the Pentium, leading to concern about a price war in 1994.

International Business Machines Corp. dropped 87.5 cents, to $51.875; Apple Computer fell 50 cents, to $33; and Compaq Computer Corp. fell $1.375, to $67.50.

Tiphook Plc gained $1.375, to $3. The British ship-container company reached an agreement to sell its container arm for 830 million pounds ($1.25 billion) to Transamerica Corp.

Talbots Inc. surged $3.125, to $22.625. The women's apparel retailer raised $197 million in a sale of 11 million shares at $19.50 each in an initial public offering.

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