Rate Rise Lops 94 Points Off Dow in Day of Heavy Trading

A jump in interest rates set off an avalanche of profit taking Thursday, yanking the Dow Jones industrial average back from its first foray above 6,900 to a loss of nearly 100 points.

The session, the second-busiest in U.S. stock market history, also saw broader stock measures slide sharply after spending most of the day in record-high territory.

The Dow, up more than 56 points shortly after 11 a.m. PST, plunged to a loss of nearly 108 points before steadying. It closed at 6,755.75, down 94.28 points, or about 1.4%. The blue-chip barometer was nevertheless a healthy 4.8% ahead less than a month into 1997.

Earlier in the day, impressive earnings reports from United Technologies, McDonald’s and Texaco helped make a vague memory of Wednesday’s disappointment over IBM’s results. But the momentum died suddenly when bonds turned lower, boosting interest rates, as the market absorbed $12.5 billion in new five-year Treasury notes from a government auction in the afternoon.

Bond prices had risen in the morning on news that new claims for unemployment benefits made a big jump last week. The data offered some hope that inflationary pressures may remain tame despite an unsettling stream of unexpectedly robust economic data over the last month.

Such optimism on inflation has grown increasingly hard to justify after all the strong earnings reports over the last two weeks, said Larry Rice, chief investment officer at Josephthal, Lyon & Ross.

“Earnings are unquestionably good, and I think that’s what the bond market is reflecting here. The economy is not slowing down, it’s showing momentum,” Rice said. “But when the market continually makes new highs, it has gone a long way toward anticipating the good level of earnings we’ve gotten. So you really have no margin for error.”

The yield on the 30-year Treasury bond--a key determinant of borrowing costs and one that has surged in recent weeks on inflation jitters--initially dipped to 6.80% from Wednesday’s 6.83%, but then it spiked to nearly 6.86% in the afternoon. Higher inflation hurts bonds by making their fixed payoff less attractive; higher interest rates hurt stocks by slowing consumer borrowing.

Declining issues outnumbered advancers by a 5-4 margin on the New York Stock Exchange. Volume there was an extremely heavy 683.79 million shares, an all-time high. The combined volume on all U.S. stock markets totaled 1.647 billion, beating Wednesday’s 1.457 billion and second only to the 1.737 billion of last July 16.

The Standard & Poor’s 500-stock index closed at 777.56, down 8.67 points, or 1.1%, erasing an 8.44-point afternoon gain. The Nasdaq composite index fell 9.69 points to 1,378.37, after bobbing above the 1,400 mark for the first time. The NYSE composite index fell 3.65 points to 409.15.

* IBM extended Wednesday’s 10-point slide, plunging 6 1/4 more points to 151 3/4. The computer maker’s shares have tumbled nearly 10% over two days, peeling the equivalent of almost 50 points off the Dow.

* The Dow’s biggest gainer was United Technologies, which surged 3 1/8 to 69 5/8 after the maker of jet engines, helicopters, elevators and air-conditioning systems reported fourth-quarter results that beat expectations.

* Texaco, up 1 3/8 to 108 3/8, and McDonald’s, up 1 1/4 to 46 1/2, also exceeded earnings forecasts, cushioning the Dow’s fall. Sears Roebuck posted better-than-expected results, but its shares fell 2 to 49 1/8. “The market doesn’t trust the retailing sector. The consumer has a lot of debt,” Rice said.

* PepsiCo closed up 3 1/2 at 35 1/2 and was the NYSE’s most active issue. Buying was fueled by reports that the company was considering spinning off its sluggish restaurant business, which includes the KFC, Pizza Hut and Taco Bell chains. After the market closed Thursday, PepsiCo announced plans to give its stockholders shares in the restaurant business so PepsiCo could focus on its faster-growing soft drink and Frito-Lay snack operations.

* Texas Instruments added 7 to 70 3/4 as Taiwan’s Acer Group agreed to purchase TI’s mobile-computing business, which includes the TravelMate and Extensa notebook PC lines. News of the deal, TI’s second this month to shed an unprofitable business, came as the company reported fourth-quarter earnings just shy of analysts’ forecasts.

Overseas, Tokyo’s Nikkei-225 stock average fell 0.6%, Frankfurt’s DAX index rose 0.2% and London’s FTSE-100 advanced 1.2% to another record.

The dollar rose to a 47-month high of 119.47 yen, up from 119.03 on Wednesday. The rise was fueled by reports that the U.S. government wishes to strengthen the dollar and by a growing perception that Japan is unsure how to contend with the yen’s slide.

The dollar made an early advance against the German mark, although it failed to exceed Wednesday’s 31-month high. The dollar then fell against the mark on word that Germany’s central bank had not lowered interest rates at its biweekly policy meeting. Traders have been selling marks aggressively recently, in part because many thought the Bundesbank might loosen credit to stimulate Germany’s faltering economy.

The dollar ended at 1.6325 marks, off from 1.6421 marks on Wednesday.