Stock Market Recovers; Dollar Hit Hard
By Ianthe Jeanne Dugan
Washington Post Staff Writer
Friday, October 9, 1998; Page G01
NEW YORK, Oct. 8—The Dow Jones
industrial average staged a powerful rally
late today, wiping out much of a 275-point
drop, but the blue-chip recovery masked a
tumultuous day in bond and currency
markets roiled by panic selling.
The dollar fell sharply against the Japanese yen, extending a two-day drop
that marked the worst plunge in the dollar's value in a quarter-century. U.S.
Treasury bills posted their biggest gain in six years while longer-term
30-year bonds fell sharply after a historic rally earlier in the week. Investors
snapped up the one-year bills, two-year Treasury notes and other short-term
government securities, believing they will rise more in price if the Federal
Reserve cuts interest rates further.
Yields on the one-year Treasury bills plunged to 4.14 percent, from 4.22
percent late Wednesday. The price of the Treasury's main 30-year bond fell
$21.88 per $1,000 in face value. Its yield, which moves in the opposite
direction, rose to 5.01 percent, from 4.87 percent late Wednesday.
The reasons for the market turmoil are complex, but traders said a
confluence of events is forcing financial markets to move sharply and often
in contradictory ways. This in turn has placed pressure on hedge funds --
large, unregulated investment vehicles for the wealthy -- which often make
bets that pay off when prices move according to historical patterns. In the
wake of the near collapse of Long-Term Capital Management L.P. last
month, these funds and other investment houses face increased scrutiny by
lenders.
The result is a rush to unwind trades and sell securities, bonds and
currencies.
"I've never seen so much fear in 22 years," said Laurence Fink, chief
executive of BlackRock Inc., a New York investment bank. "CEOs are
saying: If you're a trader, if your positions are larger today than yesterday,
you're fired."
The selling panic swept blue-chip stocks early in the day, pulling the Dow
Jones industrial average down 274 points -- beyond the point where market
watchers declare a bear market -- before the course was sharply reversed
by bargain hunters. By the end of the day, the index of 30 stocks closed at
7731.91, down just 9.78 points, or 0.1 percent, as 1.3 billion shares changed
hands on the New York Stock Exchange, the third-heaviest composite
trading day ever.
Five shares fell for every one that rose on the Big Board.
The word on the Street today was liquidity. To Wall Street traders, that
means being able to sell securities easily at a market price. Without liquidity,
markets begin to gridlock -- and prices fall until someone is willing to buy.
"People are having problems with liquidity and are running scared from
anything they can't turn into cash quickly," said Steve Slifer, an economist
with Lehman Brothers Holdings Inc. "Liquidity is drying up in foreign
markets, in particular, exaggerating all these moves."
The markets' wild course was driven largely by hedge funds making a
massive push to unload their most risky positions. These funds have been
faced with a severe credit crunch that began when Russia's economy
collapsed over the summer and accelerated when 14 major investment
banks collectively pumped $3.6 billion to save Long-Term Capital, once
called the Rolls-Royce of hedge funds.
"Some broker-dealers have cut back credit lines on positions that four
weeks earlier they held credit on," said one hedge-fund manager. "It's like
having a mortgage approved and then losing your job and they want your
house back. And you have no choice but to file for bankruptcy."
Hedge funds have made a practice of borrowing in Japan at historically low
rates, using the proceeds to buy U.S. Treasuries, on the assumption that the
dollar will appreciate against the yen. Many then sold those yen and
invested in other higher-yielding markets.
Since Sunday night, the dollar fell 17 percent, creating the largest dollar-yen
move since 1973. Investors have been forced to reverse many of their
trades to cover losses in volatile emerging markets.
"Everybody ran for the the doors at the same time," said Mike Englund,
chief economist of Standard & Poor's MMS, a financial consulting firm.
Several hedge-fund managers said the so-called deleveraging began two
weeks ago and will likely last for another week or two.
"For the yen to drop so quickly in such a disorderly way and the long-bond
rate to move up is a sure symptom of positions unwinding," said Jim
Glassman of Chase Securities. "I wouldn't be surprised if people are cutting
back because lenders are telling them to."
U.S. Treasury bills posted the biggest gain in more than six years, as
investors sought the safest investments amid losses in stocks, longer-term
government bonds and corporate debt. Selling fever raged from blue-chip
investment banks to relatively modest investment funds, in a flight that
began slowly yesterday and then escalated this morning.
"We've had real-estate investment trusts in here saying, sell. Sell all you
can," said Richard Cripps, chief market strategist at Legg Mason Wood
Walker Inc. in Baltimore. "There are orders we can't get done. These are
conditions we've never seen before."
The sell-off was fueled by increasing evidence that economic problems
sweeping the world are hurting U.S. profits. Goldman Sachs & Co.
economist Abby Joseph Cohen, Wall Street's most watched bull, today cut
her earnings estimates for Standard & Poor's 500 companies from $50.50 to
$49 per share. She cited "the unusual developments in 1998," including the
General Motors strike and bank losses, along with a "more subdued outlook
for the global economy in 1999."
She was joined by fellow one-time bull Ralph Acampora of Prudential
Securities, who predicted the Dow could sink as low as 6500, well below
the 7400 he predicted earlier. Acampora turned bearish in August.
Several analysts said the earnings forecasts are largely already reflected in
stock prices. "This is as much psychology as it is fundamentals," Cripps
said. "You're seeing irrationality in terms of risk avoidance."
At its low point today, the Dow was off from its July 17 peak by 20 percent,
the literal definition of a bear market. But with more than 90 percent of
stocks already 20 percent of their peaks, some might argue that all the Dow
is doing is hiding a bear market that already exists.
Though most companies are off their peaks, said Byron Wien of Morgan
Stanley, "there were a tremendous amount of stocks that hadn't gone down
yet. People are still trying to get out."
Many analysts were tongue-tied trying to explain the day. "Weird," said
Mitchell Held of Salomon Smith Barney. "There's no other word for it." |
