FINANCIAL MARKETS : Disney Deal Can’t Save Dow, Which Drops 7; Yields Fall

Despite a buying frenzy in the entertainment sector after Walt Disney Co. revealed plans to acquire Capital Cities/ABC Inc., most stock indexes closed slightly lower and yields declined modestly Monday.

Investors brushed aside income and spending data and waited for release this week of a batch of other key economic data that could determine the market’s next major move.

Popular Wall Street indicators registered minor losses. The Dow Jones industrial average drifted at slightly depressed levels for much of the day and ended with a deficit of 7.04 points at 4,708.47.

The yield on the Treasury’s main 30-year bond fell to 6.84% from 6.90% late Friday.

Disney was the New York Stock Exchange’s volume leader, rising 1 1/4 to 58 5/8, while Capital Cities/ABC soared 20 1/8 to 116 1/4 in brisk Big Board trading.

Investors have been using the possibility of takeovers as a criterion for stock purchases and the surprise news from Disney focused extra attention on the media-entertainment group, where consolidation has built momentum in recent months.

Other entertainment companies that rose: CBS surged 1 7/8 to 77 3/4, GE rose 1/4 to 59, Time Warner added 1/4 to close at $42 7/8, Turner Class A rose $1 to $21 3/4 and Seagram rose 5/8 to $36.

Overall, gainers squeaked past losers on the Big Board with a closing tally showing 1,165 stocks up, 1,056 down and 789 unchanged.

John H. Shaughnessy, director of research at Advest Inc., said the news reminded investors of how attractive values remain on Wall Street regardless of the steady advance the market has made this year.

“This is another element underscoring the impressive values in this market,” he said.

The impact on markets of unexpectedly sluggish data on income and spending was offset by a report on manufacturing activity in the Chicago area, considered a bellwether for the country.

The Commerce Department reported Americans’ personal income rose 0.4% in June while spending increased an anemic 0.2% last month.

Coming on top of news Friday that the economy barely expanded in the second quarter of 1995--turning in its weakest performance in nearly four years--the income and spending data renewed hopes for interest rate cuts.

But the hopes were tempered by the report from Chicago area purchasing managers, which showed pockets of strength.

The consensus remains that the rate cut engineered by the Fed earlier this summer might be all that’s needed now that the economy seems to be perking up. The central bank’s policy panel probably will forgo another rate reduction when it meets in August, many analysts now believe.

Other important economic reports will be released this week, including the National Assn. of Purchasing Management index, the government’s leading indicators, new home sales, factory orders and July jobs data.

“With purchasing and jobs, we should have a much better idea of what the Fed is likely to do,” said one analyst.

Lackluster action overseas offered nothing to arouse a response on Wall Street. European trading was light due to the summer doldrums with prices finishing lower in Frankfurt, London and Paris. Stocks fared better in Japan, with the Tokyo stock exchange’s main index advancing for the fourth consecutive trading day.

Among Monday’s market highlights:

* Wallace Computer soared 14 1/2 to 58 3/8 after Moore Corp. launched a hostile takeover bid of $56 a share, or $1.3 billion, for Wallace.

* USAir shed 1 5/8 to 9 1/2 after the company late Friday ended talks with its unions on a wage concession and restructuring package.

* Among the high-tech group, Intel Corp. lost 2 1/8 at 65 and Microsoft sank 2 1/8 to 90 1/2. Chipcom fell 2 7/8 to 41 after Gruntal & Co. said the company may be in play after Cabletron Systems filed for regulatory clearance to buy 50% of Chipcom, although Chipcom already has a merger deal with 3Com Corp. Cabletron fell 4 1/4 to 52 and 3Com lost 2 3/16 to 74 1/16.

* Insurance Auto Auctions shed nine to 17 on worries over the company’s second-quarter earnings later this week.

Natural gas soared 6% to a six-week high amid concern that a tropical storm now in the Atlantic Ocean could gain strength and move into the Gulf of Mexico, disrupting production. Natural gas for September delivery on the New York Mercantile Exchange surged 9.1 cents to $1.614 for each million British thermal units, the highest price since June 19.

The same storm pushed orange juice prices higher on fears that it would damage the Florida crop. Another storm hit Texas’ Gulf Coast and brought welcome rains to southern cotton fields. That storm could bring needed rain to the Midwest, where severe heat has stressed corn and soybean crops. Cotton and grain prices fell.