Economic Scene; Post-Crash High Is Hard to Explain

The trouble with using the expectations theory to try to explain the market’s strong response to this week’s inflation report is that the rise in consumer prices was just about in line with expectations, neither above nor below them. The consensus of economists has been that consumer prices would rise in 1989 by about 5 percent. If anything, the March report was worse (not better) than expected. But excluding food and fuel prices, which jumped, the Consumer Price Index rose at an annual rate of about 5 percent. Loath as it is to start a recession, the Fed is just as wary of losing its credibility as an inflation fighter: Alan Greenspan, its chairman, and his colleagues are caught in a corner between ”tighter” and ”looser.” In that bind, the Fed is likely to stay about where it is until it can determine where the greater threat is coming from. As Mr. Greenspan said in Congressional testimony earlier this year, ”If we remain attentive to the course of events and take prudent actions on a timely basis, I am optimistic that we can make further progress toward the objectives of full employment and price stability.”
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Silk, Leonard

Full text: [New York Times] Apr 21, 1989

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Japan Says It Won’t Hike Interest Rates Financial Officials Declare They Will Not Match West Germany’s Surprise Increase

Japanese officials today quashed speculation that Japan will match West Germany’s surprise increase in interest rates, easing anxieties of a global interest rate spiral. Rumors abounded that the Bank of Japan would soon raise its discount rate-what it charges commercial banks for loans-after West Germany’s central bank unexpectedly raised key interest rates by a half-point Thursday. In West Germany, the Bundesbank boosted rates to ward off inflation by slowing monetary growth. The increases sent a distress signal throughout the world, hammering stock prices in London, New York, Paris and Toronto.
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Full text: [Los Angeles Times (pre-1997 Fulltext)] Apr 21, 1989

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STOCK PRICES CLOSE LOWER

Volume on the floor of the Big Board came to 175.97 million shares, down from 191.51 million in the previous session. Nationwide, consolidated volume in NYSE-listed issues, including trades in those stocks on regional exchanges and in the over-the-counter market, totaled 208.04 million shares. Even if the dollar doesn’t weaken further, many observers said the higher rates in West Germany significantly reduced any chance that the Federal Reserve might ease U.S. credit policy any time in the near future. Standard & Poor’s industrial index fell .92 to 353.38, and S&P’s 500-stock composite index was down .96 at 306.19.
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Full text: [Journal Record] Apr 21, 1989

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W. German interest rates rise/Surprise move sends world stock prices and dollar lower

It said the moves were aimed at slowing monetary growth. Strong rises in money supply tend to increase inflation and West German money supply growth is still expanding beyond the target set for this year by the central bank. “Higher oil prices have got the Bundesbank worried,” said Commerzbank economist Juergen Pfister. “Inflation looks likely to reach 3 percent and that is not good for the Bundesbank.” The discount rate is the rate at which the central bank buys bills from banks, which influences other lending rates. The Lombard rate, which usually forms the ceiling for short-term money market funds, is the rate at which the Bundesbank lends to banks against securities pledged as collateral.
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Full text: [Houston Chronicle (pre-1997 Fulltext)] Apr 21, 1989

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First Capitol adopts `poison pill’ / Takeover defense comes amid drop in stock price

Dave Bruining, chief financial officer of First Capitol, said Thursday that the company’s directors had been considering the move for three months and added “we have not jumped into this just because of (last week’s) bad news.” He said the move was not in response to any potential acquisition and added no acquisition proposal “is seriously on the table.”
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Gazette Telegraph

Full text: [Colorado Springs Gazette - Telegraph] Apr 21, 1989

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Dollar sinks as Germany hikes rates

The dollar sank on world currency markets Thursday after West Germany’s central bank raised two key interest rates, a startling move that hinted at similar moves around the world. The dollar took the rate rise on the chin, falling sharply against its West German counterpart. It was down 0.7 percent on the day. U.S. bond prices were also sharply lower. The surprise West German rate increase-aimed at fending off inflation-sent a distress signal throughout European and North American markets, sending stock prices in London, New York, Paris and Toronto sharply lower. On Wall Street, stocks recovered somewhat. After blue chips plummeted, with the Dow Jones industrial average declining more than 25 points, the index ended the day 9.53 lower at 2377.38.
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Chicago Tribune wires.

Full text: [Chicago Tribune (pre-1997 Fulltext)] Apr 21, 1989

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BankAmerica Net Up 152%; Interest Income Fueled Gain Series: 1

The 152% jump was fueled by a big rise in net interest income to $987 million from $779 million in the first quarter of 1988. The margin widened to 4.60% from 3.66%. BankAmerica, like Citicorp and other banks with consumer deposit-gathering networks, benefited from rising interest rates during the quarter. Analysts noted that BankAmerica benefited particularly from its $15.3 billion in noninterest-bearing deposits. BankAmerica, once the largest banking company in the United States, lost a total of $1.8 billion from 1985 through 1987 as the company was rocked by problem loans and high expenses. BankAmerica’s stock price plummeted, its dividend was omitted in 1986, and the company became the subject of an unsuccessful hostile takeover bid by First Interstate Bancorp, Los Angeles, in 1986. The problems culminated that year in the resignation of Samuel H. Armacost as chief executive officer and his replacement by Mr. Clausen. Cost-Cutting Helps Recovery
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TERESA CARSON, West Coast Bureau

Full text: [American Banker (pre-1997 Fulltext)] Apr 21, 1989

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EASED FEARS ABOUT CREDIT SPURRED MARKET

NEW YORK – A dramatic move to raise interest rates in West Germany hasn’t dashed hopes on Wall Street for a downturn in rates in the months ahead. The news Thursday of half-point increases in the West German central bank’s official interest rates sent a jolt through the American stock and bond markets, as well as driving the dollar downward in foreign exchange. But stock prices stabilized soon afterward and began a speedy recovery as analysts increasingly came to the view that a new international round of credit-tightening wasn’t likely.
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Full text: [Seattle Times] Apr 22, 1989

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Dairy Mart Managers Plan Buyout

Dairy Mart Convenience Stores Inc. said yesterday that a group of senior managers led by company chairman and founder Charles Nirenberg plans to take the company private for $15 per share, or a total of at least $40.78 million. Dairy Mart’s Class A stock jumped by $4.75 a share, closing at $13.75, a 52.8 percent increase that made it the largest percentage gainer on the over-the-counter exchange. Its Class B stock was the day’s fourth largest percentage gainer, rising by $3.25 a share, or 32 percent, closing at $13.50. Both classes of stock established new 52-week highs. (excerpt)
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Downing, Neil

Full text: [Providence Journal] Apr 22, 1989

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Perkin-Elmer Plans to Shed Unit

”With the dismal saving rate we have,” he said, ”much of the American manufacturing base is being destroyed, and it doesn’t bode well for the future.” ”I think it’s a good idea,” said Lee Margosian, an industry analyst at Thomson McKinnon Securities Inc. ”It’s a tough business, it’s highly cyclical and it needs very substantial capital outlays and research and development funds. I think if the pie is only so big, there will be fewer shooting for the pie.” Stock Price Rises ”For me to take my company out of the semiconductor equipment industry is a very difficult thing to do personally,” he said. ”On the other hand, if a financial analyst were to look at the results of Perkin-Elmer in recent years, it would not take long to conclude that the principal reason for the diminished cash positon of our business was the semiconductor equipment industry.”
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MARKOFF, JOHN

Full text: [New York Times] Apr 22, 1989

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Vipont Expects Classification Fight Over Toothpaste to End This Summer

FORT COLLINS-Embattled Vipont Pharmaceuticals Inc. expects that its fight wit the Food and Drug Administration over the company’s Viadent products will be over this summer. At the company’s annual meeting held at the Fort Collins Marriott Friday, President Lawrence L. Frederick told 500 shareholders that Vipont officials met with the FDA on April 5 and have begun a legal defense of their product. The company wants to prove that Viadent toothpaste and mouthwash should be classified as an easily approved cosmetic, and not as a drug, which must meet strict clinical tests. (excerpt)
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Bettelheim, Adriel

Full text: [Denver Post] Apr 22, 1989

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Program buying pushes Dow above 2400

A late burst of futures-related buying pushed stock prices sharply higher Friday, as the Dow Jones industrial average pushed beyond the 2400 level for the first time in 18 months. Traders cited buy programs tied to the expiration of April stock index futures and options as the deciding factor as the average surged 32.08 to 2409.46. It was the third time this week that stock prices closed at their best levels since the October, 1987, crash. More than 40 million shares changed hands on the New York Stock Exchange during the final half-hour, in which the Dow climbed nearly 20 points. Trading was moderate through the rest of the session, with Big Board volume totaling 187.3 million shares, up from 176 million Thursday.
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Chicago Tribune wires.

Full text: [Chicago Tribune (pre-1997 Fulltext)] Apr 22, 1989

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HOW TO KILL A COMPANY; Anatomy of a Leveraged Buyout

In the winter of 1978, [Maurice Houdaille] common stock was selling for around $14.50 a share, well below the conglomerate’s book value. A depressed stock price was a familiar problem for Houdaille-as for many other industrial conglomerates in the stagflation-prone ’70s. Houdaille had a more immediate problem as well: The conglomerate’s long-time CEO, Jerry Saltarelli, wanted to retire. But passing the baton, while keeping Houdaille independent, was not going to be easy. Speculators noticed that Houdaille was simultaneously debt-free and cash-rich, making it a likely takeover candidate. Funny things-and heavy trading-began to occur in Houdaille stock. The prospect of an unfriendly takeover worried Saltarelli. For his energetic lieutenant, [PHIL O'REILLY], it posed an even greater threat. Taking a leaf from his days as a star football lineman at Purdue, O’Reilly had worked long and hard to overcome every obstacle in the way of his becoming CEO. But now, on the verge of success, Houdaille stood to lose its independence. At a meeting in Florida, KKR explained the deal. A small group of investors, primarily KKR and holdover Houdaille management, would acquire all the conglomerate’s public shares. The cash necessary for the buyout would be borrowed primarily from institutional investors, which would lend the money based on Houdaille’s assets. Saltarelli and O’Reilly were mystified by one thing. Where was Houdaille going to get all the cash to pay off the high-interest, or junk-bond, debt incurred as a result of the buyout? At this juncture KKR introduced the Houdaille executives to their silent but consenting partner in the deal: Uncle Sam. KKR hastened to add that managing for cash flow, rather than quarterly profits, would not be easy. But other managers had proved that it could be done. And if Houdaille executives could do it too, they would enjoy a financial windfall when the firm went back to the stock market in four or five years-not to mention immediate profits from the $40 buyout and the hefty raises promised if the LBO was consummated. Phil O’Reilly, for one, was promised a raise from $110,000 to $200,000, exclusive of bonuses. Little wonder that wags on Wall Street soon took to calling LBOs the “kiss which turns the frog into a handsome prince.” In May 1979, Houdaille became the first large industrial corporation to undergo a leveraged buyout. The deal was a milestone. No corporation worth more than $100 million had ever been leveraged, and the Houdaille deal was worth $390 million. Wall Street immediately recognized that the financial rules were no longer the same. “The public documents on that deal were grabbed up by every firm on Wall Street,” one buyout artist, Frank Richardson, recalled several years later. “We all said, `Holy mackerel, look at this!’ “
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Max Holland

Full text: [The Washington Post (pre-1997 Fulltext)] Apr 23, 1989

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Extra! Extra! Many no longer read all about it

At about 4:30 p.m. each day, House receives FaxPaper, a one-page, legal-sized summary of the next day’s Hartford Courant. It includes summaries of the latest state, local, national, international and sports news, a weather forecast, a summary of Courant editorials and syndicated columns by George Will and David Broder, among others, and closing stock prices of 15 firms of local interest. Thus, it should be no surprise that when the American Newspaper Publishers Association convenes in Chicago on Monday, members may be less enthusiastic about President Bush’s luncheon address than about panels on issues hitting them hard in their honor boxes: readership, illiteracy, devising new news products and luring armies of young people inclined to TV, radio and magazines but not the newspapers beloved by their parents. “Earnings are great, but it is possible that the newspaper, in its current form, will not exist one day,” says Ron Martin, executive editor of USA Today and chairman of an American Society of Newspaper Editors’ committee on the future of newspapers.
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James Warren. James Warren reports about the media for The Tribune.

Full text: [Chicago Tribune (pre-1997 Fulltext)] Apr 23, 1989

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Estate of Insurance Exec Sues Firm Over Stock Buy

The estate of one of the founders of Insurance Management Associates Inc., a Wichita insurance and risk management firm, is suing the company, its board of directors and two officers, saying the firm schemed to pay less than fair market value for stock the company repurchased under a stock purchase agreement. The suit, filed late last month in Sedgwick County District Court by the estate of Paul Yankey Jr., is the result of two years of unsuccessful negotiations for an out-of-court settlement. At the heart of the lawsuit is the contention by Yankey’s estate that William Cohen Jr., one of the founding partners in the firm, masterminded efforts to buy the stock at less than fair market value. (excerpt)
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Palmer, Patrick

Full text: [Wichita Business Journal] Apr 24, 1989

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The Second Century — Wiring Up: Computerized Trading Starts to Make Inroads At Financial Exchanges — Reuters, Telerate and Others Seek to Connect Sellers Directly With Buyers — Bad News for the Middlemen?

For the first time, big established exchanges are backing these steps, though with considerable anxiety and internal friction. Led by Mr. Melamed, a World War II refugee from Poland who chairs the Chicago Mercantile Exchange’s executive committee, the Chicago Merc and futures exchanges in New York, Paris, and Sydney are launching an ambitious project called Globex: Buyers and sellers will be electronically matched, and there will be no human intervention. The Chicago Board of Trade, London International Financial Futures Exchange and the Chicago Board Options Exchange have unveiled slick computer networks of their own that also bypass the exchange floors. The two chief suppliers of electronic systems — Reuters Holdings PLC and Telerate Inc. — are scouring the world for other exchanges to automate. They are circumspect about their ultimate goal, because it is so radical and would so profoundly disrupt the financial world’s current power structures. But if electronic trading takes off, these companies and others like them may have a shot at becoming as powerful as the exchanges are today, in control of the infrastructure that links the world’s markets. (Telerate is 67% owned by Dow Jones & Co., publisher of this newspaper.) Reuters and Telerate already have enormous networks of terminals on thousands of desks around the world. For them, electronic trading offers an alluring chance to wring more revenues from the same networks. Today, stock price data skitter along their wires from exchanges to their customers’ terminals. Tomorrow, bids and offers will skitter back along the same wires. In financial markets where exchanges don’t exist, such as foreign currencies and bonds, this is already starting to happen.
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By Michael W. Miller and Matthew Winkler

Full text: [Wall Street Journal] Apr 24, 1989

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Stock Price Falls On McDonnell Douglas Report

McDonnell Douglas Corp. stock skidded more than $5 a share after the aircraft maker and defense contractor reported a first quarter that included a big operating loss in its transport-aircraft business. A gain from an accounting change helped the St. Louis company more than triple its net income to $169 million, or $4.43 a share, from $51 million, or $1.33 a share, a year earlier. But investors quickly looked beyond those numbers to the $66 million operating loss in transport aircraft, and a loss for the quarter of $10 million before the accounting change. The company also said that its transport-aircraft business had an operating loss in the MD-80 commercial aircraft program and that a provision of $31 million for estimated added costs in the T-45A Goshawk trainer airplane for the Navy. It said it has agreed to extend testing and make modifications “to correct deficiencies in flight characteristics” of the aircraft.
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By Robert L. Rose

Full text: [Wall Street Journal] Apr 24, 1989

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A Great Leap Forward for Executive Pay — Stock Options Propelled Gains By CEOs in ’88

In an analysis of compensation at 40 of the top 100 U.S. companies, Towers Perrin, a consulting company, found that salaries and bonuses in general (not counting stock options or other long-term incentives), were up sharply in 1988. Chief executives at 26 out of the 40 surveyed companies had salaries and bonuses in excess of $1 million. The median annual salary and bonus payment for chief executive officers in the 40-company study was $1.2 million, up 14.4% from 1987. The really big gains in compensation, however, came from the exercise of stock options. Towers Perrin found that the median gain from the exercise of stock options for chief executives was $916,936, up 40% from $653,592 the year before. And the trend is likely to continue. Big stock-option grants don’t automatically mean big profits for executives, because the gain is realized only if and when the stock price rises and the executive exercises his or her option by buying the shares. But many stock-option grants these days are so large that even a small increase in stock price could yield sizable payouts. Last year Ralston Purina gave some top executives options for stock valued at more than 10 times annual salary and bonus.
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By Amanda Bennett

Full text: [Wall Street Journal] Apr 24, 1989

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Preventing Another S&L Disaster

It leads to another flaw in the Senate’s bill. What if an S&L doesn’t have enough capital? A good regulatory system orders it not to try to expand until it gets into compliance. The Senate’s bill, in contrast, would let it continue to expand even while remaining short of capital. Some of the S&L operators apparently fought the no-growth rule furiously; they play financial games that depend on quick growth to raise stock prices. The trouble with those games is that they are played with the public’s money-customers’ deposits backed by federal deposit insurance.
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Full text: [The Washington Post (pre-1997 Fulltext)] Apr 24, 1989

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Stock market doldrums frustrate options traders

If the stock price remains below the exercise price of the option _ as it likely will in a flat market _ they pocket the premium, thereby increasing their yield. If the stock price drops, the premium has the effect of lowering the original cost per share, thereby reducing losses. The only risk is that the stock price will rise above the exercise price _ and the shares will be called. But investors keep the premium. For the Polaroid combination, with the recent stock price at $37.50 U.S., you’d sell the July $40 calls and the July $35 puts, for a total premium of about $2. Although this strategy has some risk on the downside _ if, for example, the underlying stock declines dramatically during the period of the put option _ it’s protected on the upside because the call option is covered by the stock you bought. [Richard Croft] recommends three stocks for this strategy: PWA, trading at $15.50; the October $15 call option is about $1.75; General Motors (US) at $39.75; the September $40 call option is about $2.25; and Salomon Brothers (US) at $24.38; the July $25 call option is about $1.50.
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Deborah Read

Full text: [The Ottawa Citizen] Apr 24, 1989

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