U.S. Stocks, Bonds, Dollar All Fall on Concerns Fed
Will Increase Rates
By Willy Morris
Friday's U.S. Markets: Stocks, Bonds, Dollar All Fall
New York, June 11 (Bloomberg) -- The Dow Jones Industrial
Average fell for a fourth day after economic reports left
investors concerned that the Federal Reserve will raise interest
rates later this month. Internet shares such as America Online
Inc. and CMGI Inc. slumped.
''If there was any question (the Fed) was going to tighten,
that's gone because of the extreme strength in the U.S.
economy,'' said David Mead, chief investment officer at Harris
Bank in Chicago, which oversees $25 billion. ''It's a given the
Fed will tighten, the question is if they tighten by a half, more
than a quarter point.''
The Dow average fell 130.76, or 1.2 percent, to 10,490.51,
extending its loss for the past four days to 456 points. The
Nasdaq Composite Index dropped 36.74, or 1.5 percent, to 2448.88,
pulled lower by Microsoft Corp. and CMGI. The Standard & Poor's
500 Index fell 9.18, or 0.7 percent, to 1293.64. Three stocks
fell for every two that rose on the New York Stock Exchange.
Yields on 30-year bonds rose 10 basis points to the highest
level in 19 months as prices fell 1 9/32, or $12.81 per $1,000
security, to 87 3/4. The benchmark bond has dropped more than $40
so far this month, sending its yield up about 32 basis points as
many investors concluded the Fed will raise its target for
overnight lending, now 4.75 percent, when it meets June 29-30.
The dollar fell to 117.89 yen from 118.96 late yesterday in
New York. The euro rose to $1.0529 from $1.0482.
Stocks
For the week, the Dow average lost 2.9 percent, its biggest
weekly loss since a 3.1 percent drop for the week ended Jan. 15.
The S&P 500 fell 2.6 percent, and the Nasdaq dropped 1.2 percent.
The Commerce Department said retail sales rose 1 percent in
May. Sales excluding autos rose 0.5 percent. Economists surveyed
by Bloomberg expected rises of 0.7 percent and 0.4 percent.
The report on producer prices matched expectations. Traders
said they were more concerned about retail sales, because the Fed
cited consumer demand when it warned last month that it was
leaning toward increasing interest rates.
The University of Michigan's preliminary index of June
consumer sentiment rose to 109 from 106.8, above economists'
expectations of 106.2. Gains and losses indicate Americans'
degree of comfort with their finances and the state of the
economy.
''The market is pulling apart trying to sort out whether the
Fed (will focus on) the stability of prices or the strengthening
of the economy.'' said Tracy Herrick, chief investment strategist
at Jefferies & Co. in Los Angeles.
The New York Stock Exchange imposed its ''downtick'' rule 20
minutes before the close as the Dow briefly fell 190 points. The
rule is meant to slow market declines by forcing traders to wait
until shares rise before executing orders involving groups of
stocks and equity index futures. It was the 15th time the rule
was imposed since Feb. 16, when the trigger was raised from a 50-
point move in the Dow industrials.
The decline in stocks and bonds came amid speculation about
the health of Tiger Management LLC, a hedge fund. A spokesman for
Tiger said the fund is able to handle redemptions by its
investors and isn't meeting with the Federal Reserve.
''Tiger is in a highly liquid position. It has enough cash
on hand to pay out its redemptions fourfold,'' the spokesman
said. He said talk the that the Fed was holding a special meeting
about the fund were ''absurd.''
A Fed spokesman declined to comment.
About 695 million shares traded on the NYSE, below the three-
month daily average of 802 million.
''It's Friday afternoon and there's light volume, so any
move in the market is exaggerated,'' said Bob Basel, chief listed
trader at Salomon Smith Barney. ''Stocks are falling because
people didn't like the fact that retail sales were higher.''
CMGI fell 11 3/4 to 89 3/4 after the Internet venture fund
said it posted a fiscal third-quarter loss, compared with a year-
ago profit, as its operating expenses almost doubled. CMGI posted
a loss of 30 cents a share in the quarter ended April 30, a wider
loss than the 13-cent average estimate of seven analysts surveyed
by First Call Corp.
EBay Inc., the Internet's leading auctioneer, fell 16 13/16
to 165 7/8, saying a computer-related problem forced it to
suspend its auction business since last night.
The Bloomberg U.S. Internet Index fell 5.7 percent, its
biggest drop since June 1. America Online Inc. fell 5 11/16 to 99
13/16, Charles Schwab Corp. fell 3 15/16 to 94 5/16, and
Amazon.com Inc. fell 9 15/16 to 106. Microsoft fell 1 3/4 to 78
1/8.
Bonds
U.S. bonds ended their worst week in 3 1/2 months after the
larger-than-expected gain in retail sales heightened expectations
the Federal Reserve will raise interest rates.
''The numbers today confirm this economy continues to roar,
but the worry is that inflation is going to pick up,'' said Kirk
Hartman, who manages $75 billion as chief of fixed-income at
TradeStreet Investment Associates. ''I wouldn't be surprised if
the long bond goes to 6.25 percent.''
In another report today, the Labor Department said its index
of prices paid to factories, farmers and other producers rose 0.2
percent in May from April, in line with expectations. Excluding
volatile food and energy costs, prices rose 0.1 percent, as
expected.
Traders said that report, because it came in as expected,
may have contributed to a flurry of buying in the futures market
that briefly boosted Treasuries. Bond futures rallied for about
10 minutes, taking the September contract to about 115 1/2 from
114 30/32 yesterday. It fell to 113 26/32 in late afternoon
trading.
Investors, though, said the 1 1/2-year-high in yields hasn't
induced them to buy. The 30-year bond handed out an 11.8 percent
loss this year, and the hemorrhaging may not be over, they said.
''I don't think it's time to start buying heavily,'' said
Richard Waugh, who helps manage $24 billion of fixed-income
assets at Principal Capital Management in Des Moines, Iowa. ''We
feel the peak in 30-year yields likely may be between 6.25 and
6.50 percent.''
TradeStreet's Hartman said he won't consider buying 30-year
Treasuries until yields hit 6.25 percent, though he sees value in
2-year notes because he expects interest rates to fall later in
the year as the economy slows.
Yields on two-year Treasuries, among the securities most
sensitive to Fed policy expectations, are up more than 1
percentage point this year. They rose 3 basis points to 5.68
percent.
Dollar
The yen rose against the dollar, closing out its best week
in six months, amid optimism that Japan is emerging from an eight-
year slump.
Japanese Prime Minister Keizo Obuchi said he'll ''do what I
have to as soon as possible to inject life into'' the economy.
Yesterday, the government said the economy grew last quarter for
the first time in more than a year.
''I really like the yen,'' said Mark Gargano, the chief
trader at First Union Corp. in Charlotte, North Carolina. ''If
you get two strong quarters out of Japan, the dollar could go to
110 yen.'' The yen gained 3.5 percent this week.
The euro rose as French Prime Minister Lionel Jospin said
there will be no ''benign neglect'' of the euro's exchange rate,
suggesting France doesn't want to see the currency fall further.
The euro is down 9.7 percent since it was introduced in January.
''France will under no circumstances adopt an attitude of
benign neglect toward the euro's value,'' he said in remarks
delivered yesterday but made public today.
In Japan, stocks gained and bond yields climbed a day after
the nation reported its gross domestic product rose 1.9 percent
in the first quarter from the previous quarter. Higher yields and
stocks support the yen by boosting global investors' demand for
yen to buy those securities.
Traders said they weren't that impressed with Japanese
government plan to increase employment by 700,000 through new
government hiring and increased subsidies to companies.
''It seems encouraging, but I just haven't seen too many
specifics,'' said Lisa Finstrom, a currency analyst at Salomon
Smith Barney. ''It's along the lines of structural reform. But
there's plenty of uncertainty out there.''
Obuchi warned that the nation can't become complacent about
its economic prospects just because the economy returned to
growth.
The dollar dropped against the yen even after the Bank of
Japan yesterday sold yen to stem its gain. ''There's also some
skepticism about BOJ's resolve to defend the yen at about 117.50
yen,'' said Marc Chandler, a currency strategist at Mellon Bank.
The central bank bought an estimated $1 billion, traders
said. Too strong a yen can smother recovery by raising the price
of exports and reducing overseas revenue when brought home.
German economic reports this week gave mixed signals about
the region's biggest economy. Retail sales fell 7.8 percent in
April from March, squelching some of the enthusiasm generated by
the stronger-than-expected first-quarter German economic growth
report released Tuesday.
The euro also got support as Yugoslav troops began
retreating from Kosovo and allied peacekeeping forces prepared to
enter the province to secure it for the return of ethnic Albanian
refugees. Concern about the costs of the war gave investors an
additional reason to shun euros in recent weeks.
''With the peace negotiations resolved and some signs of
economic recovery in Europe, the euro is being lifted,'' said
Dieter Bluhm, a trader at Wells Fargo Bank in San Francisco.
''The Europeans like their currency again.''
For the week, the euro gained 1.2 percent against the
dollar. Earlier, it touched a two-week high of $1.0538.
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