Cause of the big dip

Press, 10 January 1986, Page 9

Cause of the big dip

By

JOHN CRUDELE,

of the New York Times (through NZPA) New York A sudden shift in Wall Street’s thinking about interest rates sent a shock wave through the stock market that lowered the Dow Jones industrial average 39 points, for its biggest numerical fall. (The great fall in 1929, however, was a greater percentage fall.) “There was pandemonium,” said Mr Martin Krouner, managing director of the brokerage firm of L. F. Rothschild Unterberg Towbin, who said that because stock prices have risen so much over the past few months “people are going to have go get used to more volatility. The Dow began sinking slowly when trading began on Wednesday (U.S. time). By the end of the day, trading on the New York Stock Exchange exceeded 180 M shares, making it the fifth busiest day in history, and stocks were down an average of 90 U.S. cents. The Dow, which finished at 1526.61, lost 39.10 points or nearly 2.5 per cent of its overall value.

At that time, traders said the price of stock-index futures, which are a means for betting on the general movement of the stock market rather than on individual stocks, became so cheap that they attracted hordes of professional buyers. The prices had been dragged down by the interest rate predictions and other factors. Those buyers, engaging in a complex strategy, sold stocks, especially blue chip shares. This second half of an arbitrage process, that has been occuring with more regularity over the last year, has in the past resulted in some of the wildest price swings ever experienced by the stock market. “It was just unbelievable,” said Mr John Havens, vicepresident of block trading at Kidder Peabody and Company. “The only other thing like this was the day of the Hunt brothers' silver crisis.”

As far as the market averages are concerned, the only other recent session to rival Wednesday’s was a 36.33 point drop in the Dow on October 25, 1982.

IBM, which in good times often leads the stock market higher, proved to be one of the weakest stocks, falling $U56.75, to 5U5148.125. It had been as low as JUSI47. Other technology stocks took their cue from IBM.