September generates a fresh look at Wall Street's rumor mill

Summer's coda -- Labor Day -- is behind us. On the way to work now, you can see school-bound kids racing to the bus stop with ``Masters of the Universe'' lunch boxes dangling from their arms. On Wall Street, as elsewhere in the world, September ushers in a sense of expectancy, of new opportunity -- at least, that's the hope. August cast a pall over the market. Lately, as in 1984, most stock gains have been based on whispers of pending takeovers or restructuring.

``It's been a story market,'' says Newton Zinder, master of E. F. Hutton's technical-analysis universe. The only stocks posting significant gains are ``either takeover, restructuring, or buyback stories. The market in general is languishing.''

But this week, says Mr. Zinder, could be pivotal. ``It does have predictive value, historically. What happens the week after Labor Day usually tells what the market will do in the following month.''

Last week, the Dow Jones industrial average closed up 15.69 points, at 1,334.01 on Friday. But Mr. Zinder wasn't cheered by this. ``I'm a little nervous at this juncture. The rally was of very poor quality: Volume was light and trading very narrow.'' Much of the Dow's gain could be traced to buyback plans and takeovers in just a few stocks:

Westinghouse stock jumped $6 in two days when it declared its intention of buying back 25 million shares (14 percent) of its own stock. The company is also considering selling its 33-state Group W cable-TV system, which might fetch between $1 billion and $2.8 billion.

Trading in Union Carbide stock has been heavy for two reasons. Last week, the chemical firm said it will buy back 10 million shares and lay off 4,000 workers. And takeover speculation has arisen due to GAF Corporation, which now has a 9.9 percent stake in Carbide and says it wants to increase that to 15 percent.

Stock in Cessna Aircraft took a five-point bounce on rumors of merger plans. The business and general aviation aircraft market is in a prolonged slump, forcing many companies to seek partners with deep pockets. Chrysler bought Gulfstream Aerospace early this year. General Dynamics, which has been seeking a nondefense acquisition, bought about 2.5 percent of Cessna in 1983.

The Wall Street takeover rumor mill has also tacked several dollars onto the stock prices of Grumman, E. F. Hutton, and Sperry. Word is that RCA may announce a stock buyback, and that has boosted the price of its shares.

It's tempting to try to profit from these kinds of quick gains -- especially when the market is listless. But money managers say over and over again: Don't buy a stock unless you would buy it anyway, regardless of its takeover potential.

Let's assume you've done your homework. You have selected a few solid companies you think should appreciate in value. Perhaps you already own these stocks.

Is there a way to know when you should sell them or choose stocks with a greater likelihood of takeover?

Yes, according to David G. Funk, president of John Magee Inc., a subsidiary of Buttonwood Securities in Boston. Mr. Funk says takeover targets often exhibit a distinctive trading pattern before the announcement of a merger or hostile takeover. His firm first noticed the pattern in 1974, then in 1977, during another period of high takeover activity.

Mr. Funk watches the most basic of technical indicators, price and trading volume. And the pattern is as follows:

``The stock trades in a narrow range for a period of time. Then you see a succession of days with a rising price on increasing volume. Then all of a sudden, usually on a Friday, the stock zooms to a new high. The next three weeks to three months it settles back down on low volume. Then for no public reason, [it] shoots to a new high on very high volume.''

The first spike is created by insiders buying stock when a possible merger or takeover is first discussed; the second spike, usually on a Friday, is when final details are being worked out.

``In the last few days all the lawyers and printers know what's happening. The reason for the Friday spike is very simple. [The principals involved] see that they're close to doing the deal. They figure this weekend they're going to get it done. So people hurry back into the market on Friday. Most of that is illegal insider trading,'' comments Funk. But, he adds, it happens again and again.

Mr. Funk identifies several stocks as having exhibited a potential takeover pattern this year: Lone Star Industries, Time Inc., Amerada Hess, Allied Stores, and Foster Wheeler. In most cases, he notes, the companies deny talks are going on.

To take advantage of this pattern, Funk suggests purchasing stock during the pullback after the initial spike. He concedes that a stock may be ``in play'' for many months and may record many upspikes before a deal is completed.

``Not all stocks exhibiting this pattern are going to be taken over,'' he warns. ``Also, if the secret is well kept, there will be no such pattern.'' Chart: Interest Rates. Rates as of 8/29

Percent Prime rate 9.50 Discount rate 7.50 Federal funds 9.69 3-mo. Treasury bills 7.07 6-mo. Treasury bills 7.21 7-yr. Treasury notes 9.98* 30-yr. Treasury bonds 10.37*

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