Dow Dives 62; Inflation, Profit Jitters Rock Market

Stock and bond prices were battered Tuesday by Wall Street’s equivalent of the one-two punch--bad news about corporate earnings and even worse news about interest rates.

International Business Machines Corp. shocked securities analysts Tuesday morning by announcing that its earnings will be far lower than most had predicted. That caused IBM’s shares to plunge 12 3/4 a share to 115 1/8 and eroded the value of other technology stocks as well.

Meanwhile, economic figures released Tuesday showed that the core rate of inflation remained high in February, while housing starts soared. Those statistics, which signal a heating economy, will make it increasingly difficult for the Federal Reserve to lower interest rates, experts said.

By the close of the day, the Dow Jones industrial average had plunged 62.13 points to 2,867.82--the steepest one-day decline since last October. Broader market indexes also saw sharp declines, leaving investors with more than $40 billion in paper losses, according to Wilshire Associates, a Los Angeles company that tracks the market value of all listed common stocks.

Other financial markets were also affected by the day’s news:

* Bond prices fell, with the Treasury’s benchmark 30-year bond slipping 25/32 point, or $7.81 per $1,000 in face amount, which boosted the yield to 8.40% from 8.32% on Monday.

* The dollar, bolstered by brightened prospects for the U.S. economy and decreasing chances of interest rate cuts, rose sharply against major European currencies.

* Gold prices inched up 80 cents an ounce to $363.80 in New York Commodities Exchange trading.

* Stock prices ebbed in foreign markets, too. The 225-share Nikkei average was down 140.25 points in Tokyo to 27,006.66. London’s Financial Times index fell 31.6 points to 2,459.0. And the 30-share DAX average in Frankfurt, Germany, slipped 6.32 points to 1,546.53.

The near-term prognosis for U.S. stock prices is bleak, analysts said.

“Two of the basic underpinnings of the bull market have been brought into question,” said Michael Metz, portfolio strategist at Oppenheimer & Co. Until Tuesday, investors had assumed that corporate earnings were on the upswing and that inflation had ceased to be a problem, he noted.

But when the government released consumer price figures early Tuesday morning, they revealed that core inflation--the rate after volatile energy and food prices are excluded--rocketed 0.7%, or more than twice what experts had expected.

Meanwhile, some considered IBM’s sorry earnings projections as an indication that corporate profits may be depressed for some time to come. Analysts had already expected IBM, a bellwether technology company, to post flat quarterly results, but the company said its earnings would actually be cut in half from year-ago levels.

Although about one-third of the Dow’s steep decline Tuesday could be blamed directly on IBM, some analysts said the inflation figures could have a more lasting negative effect on stock prices.

“A lot of people were really betting on the Fed easing (cutting interest rates),” said Richard Bernstein, manager of quantitative analysis at Merrill Lynch. Without further interest rate declines, the predicted economic recovery is likely to be weaker and slower than anticipated, he said. That’s a bad sign for stock prices.

Moreover, market psychology has been dealt a body blow.

“Many people who were desperate to hop onto a rising stock market are now beginning to have second thoughts,” Metz said. “I think that translates into further correction.”

However, some noted that Wall Street had been treading on thin ice for some time. Stock prices had soared with the onset of war in the Persian Gulf and continued to climb following the war’s end. But consistently poor economic news has made that rise increasingly tenuous, analysts said.

By Tuesday the market had reached a “dangerously weakened condition,” said Ralph Bloch, institutional technical analyst for Raymond James & Associates, who added: “A strong summer breeze would have knocked it over.”

Among the market highlights:

* Besides IBM, the big losers in the Dow industrials were International Paper, off 1 3/4 to 60 1/8; Procter & Gamble, off 3 to 83; Woolworth, down 1 1/8 to 31 1/4, and Merck, down 4 3/8 to 101 1/2. Drug stocks in general were hard hit by profit takers in the wake of their strong performance in recent months.

* Many computer stocks fell with IBM. Compaq gave up 3 5/8 to 61 1/4, Digital Equipment tumbled 5 1/4 to 71 3/8 and Data General dropped 7/8 to 11. But many smaller tech stocks were spared major hits, suggesting that investors aren’t yet ready to judge the entire group’s first-quarter outlook based on IBM’s situation.

Among smaller Southland tech issues, AST Research gained 5/8 to 24 1/4, Archive added 1/8 to 7 1/2 and Advanced Logic lost 1/4 to 16.

* Many oil stocks gained as investors looked for better places for their cash in an uncertain market. Arco jumped 1 1/8 to 130 7/8, Chevron gained 1 7/8 to 77 3/8 and Unocal added 5/8 to 28 1/2.

* Disney slumped 2 1/8 to 121 1/8 after warning that first-quarter earnings will be affected by the soft economy. However, the firm still raised its quarterly dividend 21%, to 17.5 cents a share.

In Tokyo, stocks closed moderately lower as the market digested Monday’s 300-point gain. The 225-share Nikkei average closed down 140.25 points at 27,006.66.

In London, the Financial Times-Stock Exchange index of 100 leading shares closed 31.6 points lower at 2,459.0.

In Frankfurt, German shares tumbled at the start of trade, but prices recovered late in the session. The 30-share DAX index ended just 6.32 points lower at 1,546.53.

Currency

The dollar displayed its newfound power in a rally that stunned foreign exchange traders, although the currency gave up some of its gains later on central bank intervention and profit taking.

After falling to a low of 1.6155 German marks in Europe, the dollar soared to 1.6740 marks, its highest level since June, in a wild rush of buying in New York. Central banks then peppered the market with selling just as the dollar was falling on profit taking.

“It’s unbelievable,” said Eugene Chang of BankAmerica in Los Angeles. “I haven’t seen the market like this in a long time.”

In New York, the dollar ended at 1.6423 German marks, up sharply from 1.6282 at Monday’s close.

“This is one of the biggest moves I’ve seen in years,” said Earl Johnson, vice president at Harris Trust & Savings Bank.

Just as the U.S. currency began falling on profit taking, central banks swamped the market with dollars, with the Federal Reserve, the German Bundesbank and the Swiss National Bank leading the way.

Dealers are wary about predicting where the dollar will head from here.

“You can’t say that we’ve hit a near-term top,” said BankAmerica’s Chang. “If that is what you’ve been saying recently, you’ve been wrong all along.”

Against the Japanese yen, the dollar fell in New York to 137.55 from 138.10 on Monday. The British pound weakened in New York, where it fetched $1.7800, less than late Monday’s $1.7938.

Other late dollar rates in New York, compared to late Monday, included: 1.4175 Swiss francs, up from 1.4065; 5.5945 French francs, up from 5.5485; 1,225.00 Italian lire, up from 1,214.75, and 1.1549 Canadian dollars, up from 1.1541.

Commodities

Petroleum futures prices leaped in reaction to a hazy report of lower Soviet oil exports and the shutdown of a giant Mexican oil refinery.

On other commodity markets, silver futures rebounded, leading precious metals higher; grains and soybeans were mostly higher, and livestock and meat futures were mixed.

Light sweet crude oil futures settled 46 to 88 cents higher, with the contract for delivery in April at $20.61 a barrel; home heating oil was 1.2 to 1.93 cents higher, with April at 57.72 cents a gallon; wholesale gasoline was 1.15 to 1.97 cents higher, with April at 71.76 cents a gallon, and natural gas was 0.5 cent lower to 0.6 cent higher, with April at $1.391 per 1,000 cubic feet.

Trading volume was relatively light, according to Paine Webber Inc. energy analyst James Ritterbusch, who said some of the strength in the crude market was a reaction to reports suggesting a 50% cut in Soviet oil exports.

The Soviet news agency Tass on Monday quoted Soviet President Mikhail S. Gorbachev as saying oil exports have been cut in half.

Bob Baker, energy analyst at Prudential Securities Inc., said the Tass report helped support crude oil futures. Prices of refined products rose on speculation that the shutdown Monday of a large oil refinery in Mexico City could lead to a 40,000-barrel-per-day increase in Mexican imports of gasoline.

Silver futures rose sharply on New York’s Commodity Exchange, erasing half of Monday’s steep losses and pulling gold prices up as well.

Silver futures settled 7.8 to 8.8 cents higher, with March at $4.021 an ounce and May at $4.053.

Credit

Bond prices fell sharply as the government reported that core inflation rose sharply in February, sapping demand for government securities.

“People are nervous about where inflation is going,” said Steven A. Wood, an economist at BankAmerica Capital Markets in San Francisco. “We’re presumably in a recession. Recessions are supposed to cure inflation. That has not been the case.”

Signs of improvement in the economy could indicate that the nation’s recession may be ending. But Wood said if inflation doesn’t abate, the Federal Reserve could be forced to reverse course and begin raising interest rates, which would translate to lower bond prices.

The federal funds rate, the interest on overnight loans between banks, was quoted at 6.188%, up from 5.938% late Monday.

In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds closed at 91 1/32, down 17/32. The average yield to maturity rose to 7.39% from 7.34% late Monday.

Market Roundup, D6

TECHS PLUNGE How some high-tech stocks tumbled Tuesday as IBM forecast disappointing earnings:

Stock Close and change IBM 115 1/8 -12 3/4 Digital Equipment 71 3/8 -5 1/4 Compaq 61 1/4 -3 5/8 Intel 45 1/4 -1 3/4 Amdahl 13 1/2 -1 3/8 Tandem 13 1/4 -1 Teradata 15 3/4 -1