What's bad for bonds was good for stocks
The bond market's loss last week was the stock market's gain. Investors abandoned the bond markets to put their billions into equities, which they hoped would somehow inflation-proof their assets. This drive by investors pushed the Dow Jones industrial average up 14.25 points; it closed at 895.73. Volume remained high -- as it has all year -- with over 50 million shares crossing the tape in three out of five trading sessions.
Dudley Eppel, a trader with Donaldson, Lufkin & Jenrette, a brokerage house, says the buying activity came from institutions, individuals, and foreign sources. Overseas investors have been encouraged by the steadiness of the dollar recently.
The chief part of the surge was in oil stocks and railroads. The oil stocks soared in large measure because of reports of a major natural-gas discovery in the Overthrust Belt in southwestern Wyoming. The well, drilled by Standard Oil of Indiana, reportedly encountered a field that some analysts theorized might stretch some 15 miles.
One Texas-based analyst even suggested the field could contain as much as 7 to 10 trillion cubic feet of gas -- roughly half the yearly consumption of gas in the United States.Until there is further testing of the field, however, its actual size will be subject to speculation.
Benefiting from this speculation were the stocks of Standard of Indiana and its partners, Dow Chemical, Gulf Oil, and Union Pacific, which owns Champlin Petroleum.
The railroads were strong, partly because of the upward move of Union Pacific and Santa Fe, both of which have land in the Overthrust Belt. However, they also benefited from a favorable report by L. F. Rothschild, Unterberg, Towbin suggesting that the deregulation moves going on with the Interstate Commerce Commission could aid the whole industry. The broker also said he felt the reorganization of the Rock Island line could change the dynamics of the industry.
"Overthrust enthusiasm" spread even as far as Esmark, the giant food conglomerate involved in meatpacking. Esmark owns some land in the Overthrust area of New Mexico -- and this helped push its stock up 6 points last week.
While investors were busy buying stock in the "natural resource" play, they also continued to dump their bond portfolios. Long-term interest rates soared in a bond market described by most participants as the worst in the history of the financial markets.
Frank Parrish, vice-president of Fidelity Management, a mutual fund company based in Boston, termed the situation "panic selling."
"It looks like people are willing to throw out their bonds at any price," Mr. Parrish commented. US government securities yielded over 12 percent and long term Aaa- rated telephone bonds finally ended the week with close to a 13 percent yield.
Behind the collapse in the bond market, he notes, is a reassessment of the inflation scenario. Mr. Parrish, who calls himself an "optimist," is now predicting a 10 percent inflation rate for 1980. Other, less optimistic economists expect a 12 to 13 percent inflation rate.
The inflation surge is being fueled by a number of sources, he points out. Chief among the culprits are higher government spending and an economy that remains strong. "It looks like the government is planning on keeping the economy moderately strong through the election," he says.
Despite the market's strength last week, Mr. Parrish is skeptical that the Dow will break through the 900 level on this move. He predicts that "it might pop through on a "fakeout' basis, but then will pull back again. Then, there will be one more reaction down before we get a decent rally -- moving the Dow through the 900 level -- sometime this summer."
Gold continued bouncing around the $600- to-$700 levels last week. One sign of how the higher price was attracting new ventures came when Occidental Petroleum announced it would open a new gold mine outside Ely, Nev., at a cost of $25 million. The mine would be expected to produce 750,000 short tons of ore annually, with 0.12 ounces of gold per ton. Thus, Oxy would get back its investment in the first year as revenues amounted to $54 million, if gold stayed at these levels. Oxy stock was higher last week.
In other corporate news last week, RCA Corporation agreed to sell Random House to Newhouse Publications for $65 million, and Chrysler Corporation announced it was negotiating with Peugeot over the joint production of some light cars and trucks in the US.Chrysler also received a $100 million loan from the French automaker and announced a $1.1 billion loss for 1979.