The Dow Jones industrial average reached a four-month high last week, closing in on the elusive 900 level. Once the widely watched average approached the "magic 900," however, it backed off. Thus, for the week the average gained 12.2 points, closing at 881. 83. Volume was moderately active.
Hildegard Zagorski, assistant vice-president at Bache Halsey Stuart Shields inc., noted that "the last three times the market has reached the 900 level it has fallen back 100 points, and this is making people leery."
Still, despite widespread skepticism about the market, it continues to move up. One of the reasons for the rise, Mrs. Zagorski says, is the portfolio "window dressing" by mutual funds. As the calendar quarters come to an end, mutual funds and other institutions try to improve the way their portfolios look by buying issues that have been "hot." Or, if the stock market has been moving down, the mutual funds often sell stocks at the end of the month to raise cash. Since the stock market has been strong for the last quarter, the inclination of portfolio managers appears to be to buy stocks.
In the portfolio switching this week, the institutions were active buyers of the oil stocks, including Mobil, Standard Oil of California, Superior, Exxon, and Valero Energy. Coal mining companies, including Joy Manufacturing and Bucyrus-Erie, were also in favor.
Stocks that lagged the market included the chemicals, motors, and some of the capital- goods issues.
One of the reasons for the shifting is the expectation of sharply lower earnings for some of the more cyclical companies. Merrill Lynch, Pierce, Fenner & Smith Inc. says it expects major earnings declines for companies in the credit-sensitive, consumer-based industries as well as the capital-goods sector. Specific industries Merrill expects will post sharply lower earnings include cement, savings and loans, mobile homes, forest products, property liability insurance, leisure time, autos, tires, railroads, aluminum, chemicals, agricultural machinery, and auto and truck parts.
Even though analysts are rapidly downgrading their earnings forecasts, James G. Joyce, director of research at Tucker, Anthony and R. L. Day, a brokerage house, says, "The potential for negative surprises outweighs the opportunity for gain in the overall market at this time." Mr. Joyce says he is particularly disturbed that investors are adopting the attitude that the recession will be a "normal" downturn. Considering the current severity of the economic slide, he says questions remain over when a sales pickup will occur.
Lower business activity has meant sharply lower interest rates. Even the prospect of "cheap money" hasn't sent businesses rushing to their local banks, however. One reason may be that interest rates will go still lower. At least that's the theory of Argus Research, another brokerage house, which holds that rates will fall another 2 1/2 to 3 percent. Thus, the federal funds rate, which has been hovering around 9 to 9 1/2 percent, will fall to 6 1/2 percent in the next six months. By then long- term bonds could be yielding 9 1/2 to 9 3/4 percent, Argus predicts, compared with 10 1/2 to 11 percent at present.
The main reason for the continued slide, Argus says, is the Federal Reserve Board's desire to expand the money supply, which is not meeting the Fed's growth targets.
In the marekt last week, Tamco Enterprises continued to woo City Investing. Tamco in recent weeks has been negotiating with City and has now increased its tender offer price to $32.50 a share, or $1.2 billion. City Investing said it would study the new proposal. It has rejected all the others.
Gold mining stocks were gainers last week as the price of gold moved to $617 per troy ounce. Although there was no specific news to account for the price activity, reports said Middle Eastern buying helped push the price up.