STOCKS : Dow Falls 37.57; Bonds Trigger Market Slump

The stock market fell sharply Tuesday in response to another heavy selloff in bonds, as investors fretted that interest rates may not fall much lower.

The Dow Jones industrial average closed down 37.57 points to 2,886.85. The Dow’s plummet followed a slim rise on Monday and a 50.98-point drop last Friday.

In the broader market, losing issues outnumbered gaining ones by about 4 to 1 in nationwide trading of New York Stock Exchange-listed stocks, with 1,189 down, 388 up and 496 unchanged.

Perhaps ominously, trading volume surged to a heavy 207.9 million shares on the Big Board, from 129.62 million Monday.

Stocks were dragged lower as Treasury bond prices tumbled--and long-term interest rates rose--after news that retail sales in April fell less than anticipated, and that the government revised up sharply the March sales figure.

Even though investors want to see such signs of economic recovery, they don’t want to see interest rates rise as a result of a recovery. “Stocks can’t stand without bonds,” said Jack Solomon, a technical analyst at Bear, Stearns & Co.

Investors took the sales report to mean that the Federal Reserve will be reluctant to push interest rates down further.

“The real problem is that (long-term interest) rates are creeping higher,” said Ralph Bloch, chief technical analyst at Raymond James & Associates. “If they go to 8.50% or 8.75% (on T-bonds), the question becomes, ‘What does the stock market look at: higher rates or the reason--that the economy is recovering?’ ”

Traders chose to overlook bullish news on inflation. Consumer prices, which dropped in March for the first time in nearly five years, rose a modest 0.2% in April.

Among the market highlights:

* Transportation stocks, recent market leaders, led the downturn. AMR, parent of American Airlines, slumped 1 7/8 to 61 3/8. Analysts said the firm told them that profit estimates for the second quarter were too high. Delta fell 2 1/4 to 72 5/8 and UAL lost 3 1/8 to 150 3/4.

* Utilities were broadly lower on interest rate worries. Pacific Enterprises dropped 1 1/4 to 32 1/8, Pacific Telesis lost 1 to 38 7/8 and Peoples Energy dropped 3/4 to 24 1/4.

* Bank and insurance stocks also fell on rate concerns. First Interstate dropped 1 7/8 to 36 1/8, insurer Twentieth Century fell 3 to 39 1/2 and S&L; Ahmanson lost 1 to 16 3/8.

* Oil stocks, which have been trying to rally of late, were hit hard. Texaco fell 2 1/8 to 65, Unocal lost 1 1/8 to 25 3/4 and Halliburton slumped 1 3/8 to 42.

* Marathon Group lost 1 1/8 to 25 1/8 as more than 35.5 million shares changed hands. U.S. Steel fell 3/4 to 25 on more than 7.3 million shares. Wall Street sources speculated that investor Carl C. Icahn had sold the shares.

* Casino firm Caesars World jumped 1 5/8 to 22 7/8 after saying it expects to report earnings of 53 to 58 cents a share in the quarter ended April 30, versus 44 cents a year ago.

Other Southland stocks moving on earnings reports included Optical Radiation, down 1 to 24 3/4, and Republic Pictures, down 1/8 to 8 7/8 despite reporting sharply higher quarterly results.

* Loral Corp. added 1 1/4 to 39 5/8. Goldman Sachs upgraded its rating on the defense contractor to “buy” from “neutral.”

In overseas trading, British shares lost all their modest morning gains during the afternoon, with the Financial Times 100-share average ending the day at 2,463.7, down 22.9 points. German shares also fell, with the DAX average off 12.40 to 1,598.50.

In Tokyo, the 225-share Nikkei average slipped 63.12 points to 26,030.08.

In Mexico City, the Bolsa index advanced to another record, gaining 11.04 points to 1,019.51. (TelMex offering, D3.)

Credit

Bond prices sank as dealers tried to unload remaining stockpiles of bonds from last week’s Treasury auction, and as traders feared that an economic recovery will mean higher interest rates.

The steep price drop was the second since the U.S. Treasury completed a record $37-billion auction Thursday. Prices fell sharply Friday and recovered somewhat on Monday before Tuesday’s selloff.

The Treasury’s bellwether 30-year bond fell 27/32 point, or $8.44 per $1,000 in face amount. Its yield jumped to 8.33% from 8.25% late Monday. The Tuesday yield was the highest since March 21.

Traders were spooked by the retail sales reports for March and April, which hinted at more strength in the economy than the bond market had been expecting.

The federal funds rate, the interest on overnight loans between banks, held at 5.81%.

Currency

Dollar traders saw the retail sales report in a different light than the bond market--viewing it more as a sign of weakness--and sent the U.S. dollar down in a session dominated by technical trading.

Currency traders said the dollar’s steep rise in recent months has stalled as market participants try to determine the economy’s direction.

The dollar also lost ground because of the stock and bond markets’ weak performances.

Several traders said technical factors in the market buoyed the German mark and overshadowed reports that German central bank chief Karl Otto Poehl would resign later in the year.

In New York, the dollar fell to 1.696 German marks, down from 1.714 on Monday.

Also in New York, the dollar closed at 137.97 Japanese yen, down from Monday’s 139.45.

Commodities

Cotton futures prices bounded higher on the New York Cotton Exchange after a report of severe planting delays fed speculation that shortages could develop later this year.

Cotton futures settled 1.09 cents to the permitted daily limit of 2 cents higher, with the contract for delivery in July at 90.33 cents a pound.

Gold futures also fell on New York’s Commodity Exchange but silver futures advanced, boosted by bargain hunting. Gold settled $1.40 higher across the board, with June at $361.20 an ounce; silver was 5.5 to 6.5 cents higher, with May at $4.05 an ounce.

Gasoline futures fell sharply on the New York Mercantile Exchange, but other energy futures ended mixed ahead of the American Petroleum Institute’s weekly stocks report.

Light, sweet crude oil settled 17 cents lower to 6 cents higher, with June at $20.74 a barrel.