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Dow Regains 102 Points in Another Wild Day

By David A. Vise
Washington Post Staff Writer
Wednesday, October 21, 1987; Page A01

The fear that gripped financial markets Monday turned into confusion yesterday as the Dow Jones industrial average swung wildly before finishing with a gain of 102 points in trading so heavy that it surpassed Monday's record.

Although the increase in the Dow average was the highest point gain ever, it erased only a fifth of the 508-point loss that stunned the market Monday.

Traders who returned to Wall Street with trepidation yesterday were taken on a roller-coaster ride as the Dow rapidly climbed 200 points in the morning, dropped about 230 points by midday, and closed with a gain of 102.27, at 1841.01 points.

"Up and down, up and down, what can you say? It is minute to minute," said Joe Grundfest, a commissioner of the Securities and Exchange Commission.

The market was bolstered by an unprecedented wave of stock buy-back programs announced by such major corporations as Merrill Lynch, Ford Motor Co. and Hilton Hotels Corp. to take advantage of the huge drop in prices Monday.

However, the Dow industrials' advance was not matched by indexes from other major markets, including the American Stock Exchange and the over-the-counter-market, where stock prices plunged. The American index fell 24.34 to 258.16, a drop of 9.4 percent, and the Nasdaq index dropped 32.42 to 327.79, a fall of 9.9 percent -- both on heavy volume.

The Dow's value as a barometer of overall market performance was also suspect on the New York Stock Exchange, where 537 stocks advanced, 1,398 declined and 131 were unchanged.

A record 610 million shares changed hands on the Big Board, up from 604 million on Monday.

Trading yesterday began on an upbeat note, following announcements by Chemical Bank and Marine Midland Bank that they had cut their prime lending rate from 9.75 percent to 9.25 percent. Recent increases in interest rates were among the factors that led to the decline in stock prices.

In another bit of encouraging news early yesterday, the Federal Reserve Board issued a one-sentence announcement that it would make cash available to banks if needed to support the nation's economy. The pledge was in sharp contrast to events nearly 60 years ago, when the Fed's decision to restrict credit contributed to the Great Depression.

Despite that favorable news and the Dow's 200-point rise in the first two hours of trading, there was chaos on financial markets during much of the day.

"I think there is a great deal of uncertainty," said Allen Sinai, chief economist of Shearson Lehman Bros. "{On Monday} there was panic and fear and concern about a snowballing effect. {Now} there is enough relief to give a rebound in the stock market."

"Investors are looking at things with a cooler head," said Merrill Lynch market analyst Walter Murphy. "I think it is a case of waiting for the other shoe to drop."

While takeover targets, such as Dayton Hudson, remained depressed, other blue-chip stocks rebounded yesterday. Dayton Hudson closed at $28.75, down $1.25; IBM closed at $115, up $11.75; Ford closed at $83.50, up $14.50; and General Motors closed at $59.75, up $9.75.

Meanwhile, there was continued controversy yesterday about the impact that computer-driven program trading and portfolio insurance programs were having on the prices of stocks. New York Stock Exchange Chairman John Phelan and others had blamed some of Monday's 22.6 percent decline -- nearly double the 12.8 percent drop in 1929 that touched off the Great Depression -- on the programmed sale of stocks in New York and the simultaneous purchase of stock index futures in Chicago.

Before trading began yesterday morning, Phelan urged securities firms not to send orders to the exchange for program trading. He has been an outspoken critic of the technique, saying it poses a risk to the stability of stock prices and the future viability of the nation's capital markets.

The combination of his request to securities firms and the difficulty in executing programs because of trading halts in individual stocks is believed to have minimized the impact that program trading had on the stock market yesterday. Trading in stock index options and futures was suspended at various times yesterday by the Chicago Board Options Exchange and the Chicago Mercantile Exchange.

Congress plans to hold a hearing Thursday on the question of whether program trading ought to be restricted. Some traders pointed to the 200-point drop between 10:30 a.m. and 12:30 p.m. yesterday as an example of the volatility caused by computer-driven trading and a related stock-selling strategy known as portfolio insurance.

The emergency hearing will be held by the House securities subcommittee headed by Rep. Ed Markey (D-Mass.) The chairmen of the Federal Reserve Board, the New York Stock Exchange, the SEC and the Commodity Futures Trading Commission have been asked to appear.

While experts in Washington debated the policy implications of the stock market crisis, there were signs that some small and medium-sized investment firms will not survive. In addition, persistent rumors that E.F. Hutton was in trouble prompted the firm to issue an internal statement saying it is having "no operational or financial difficulty despite the extraordinary events of the past few days."

The first official casualty of Monday's $500 billion drop on Wall Street hit Main Street yesterday as a small brokerage firm based in Grand Rapids, Mich., called it quits.

H.B. Shaine & Co. Inc., a brokerage firm with about 92 employes and offices in Grand Rapids, Gary, Ind., and Aurora, Ill., was closed for "regulatory reasons," according to Hugh Makens, its outside counsel.

Although Makens declined to specify the precise reasons for the closing of the firm, it is likely that trading losses stripped Shaine of the minimum capital required to stay in business.

Makens said a decision on reopening the firm would be up to securities regulators. The SEC's Grundfest said no investors will suffer losses from the firm's closing because brokerage accounts are insured by an industry fund.

On Wall Street, the first firm to fall was a unit of W. Damm M. Frank & Co., an American Stock Exchange specialist firm that was absorbed yesterday by Bear, Stearns & Co. The specialist firm operated on the floor of the exchange to help maintain orderly trading in 30 stocks and three options. Its employes will join Bear Stearns, whose chairman, Alan C. (Ace) Greenberg, said he is looking for other investment opportunities.

Sources said that some New York Stock Exchange specialist firms received infusions of capital from other member firms at the direction of the exchange. The capital permitted these firms to continue buying stocks where purchasers were scarce.

One of the most fascinating aspects of stock market activity yesterday was the string of more than a dozen major stock buy-back announcements by major corporations. Although not all of the companies were aggressively buying their stocks yesterday, the announcement of their intentions gave a boost to investor confidence.

The companies included several local corporations, including Best Products Co. of Richmond, which said it plans to buy up to 2 million of its shares, and Alexandria-based Perpetual Savings Bank, which plans to buy back about 1.4 million shares, or 10 percent of its outstanding stock.

Silver Spring's Manor Care Inc. said it will buy about 10 percent of its outstanding stock, or up to four million shares. The nursing home chain's chief financial officer, James Radcliffe, said that following the one-third drop in Manor Care's stock, from $21.38 earlier this year to $14 a share yesterday, "we think it is a good price and a good buy."

Stanley C. Gault, chairman of Rubbermaid Inc., also found the price of his own stock attractive. "The good blue chips are at attractive prices," Gault said. "That is how people should view the market."

Gault added that the company is proceeding with plans to look for new plant sites and "if available, we'd buy one this afternoon."

One unusual element of trading yesterday that troubled investors was the delayed openings and halts in many stocks, including IBM and Eastman Kodak. On the NYSE, 95 stocks opened after delays and there were 183 trading halts. Nearly all of this activity was the result of a flood of sell orders at prices above buy orders, traders said.

These order imbalances were never corrected in some stocks. On the American Stock Exchange, where there were 153 halts and delays in trading, The Washington Post Co. has not traded since last Friday because of order imbalances.

On the NYSE floor, market specialists are generally required to keep shares trading by buying or selling stock when there are no matching orders from the public. However, when the spreads between buy and sell orders grow exceptionally wide, as they did repeatedly in IBM yesterday, the specialists are permitted to ask floor officials for permission to temporarily halt trading until the imbalance can be corrected.

Some corporate officers seemed perplexed by the stock market's gyrations and order imbalances.

"As far as Corning is concerned, nothing has changed except the price of our stock," said James B. Houghton, chairman of Corning Glass Works. "The fundamentals of this company are the same as they were last week, last month, last year."

While the Dow's 102-point gain broke the old one-day record of 75 points set on Sept. 22, it was far from a record increase on a percentage basis.

One of the most positive developments yesterday was the continued strength of the bond market, especially the market for U.S. government debt. There have been fears that if foreign investors lost confidence in the United States and abandoned this market, interest rates could skyrocket, touching off a severe recession.

"The good performance of the dollar and the flight {from stocks} to U.S. Treasury securities have pushed interest rates down significantly," Shearson's Sinai said. "That helps to relieve fears of a recession."

As far as where the stock market is likely to go from here, Merrill Lynch's Murphy said, "With the kinds of declines we have had, you need a sharp rally phase and then a testing phase."

The testing phase, Murphy predicted, will send the market down to Monday's lows. "The real proof of the pudding will be the next time we get some computer-programmed selling and we see how people handle the test of a new low territory. Then we will see what kind of mettle this market has."

Staff writer Cynthia L. Skrzycki contributed to this report.

© Copyright 1987 The Washington Post Company

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