STOCKS : Failed U.S.-Iraq Talks Send Dow Into Tailspin

Wall Street stocks plunged Wednesday after a grim-faced Secretary of State James A. Baker III said his talks with Iraqi Foreign Minister Tarik Aziz had failed to produce progress toward a settlement of the Persian Gulf crisis.

The Dow Jones industrial average tumbled more than 80 points in a matter of minutes, erasing a morning rally of more than 40 points that had been based on early optimism about the talks.

The 30-share index closed down 39.11, or 1.6%, at 2,470.30, its sixth straight day of losses. The blue chip index has fallen every trading session so far this year, for a total drop of nearly 164 points.

Volume on the New York Stock Exchange was a heavy 191.1 million shares, compared to 143.4 million Tuesday. Losing issues outnumbered gainers 948 to 577.

The market’s abrupt about-face was dramatic. “The market just literally stopped during the (Baker) press conference,” said Frank Baxter, president of brokerage Jefferies & Co. in Los Angeles. “Then, you could see peoples’ faces drop here when it was clear that nothing had been accomplished.”

But analysts noted that, considering how inevitable war now appears, there was no panic selling on Wednesday. Instead, “The market is in paralysis,” Baxter said.

That suggests that most investors believe that stock prices already factor-in the potential economic ramifications of war, and that the selling is taking place only on the market’s fringes.

In fact, the Dow fell the most of any major index on Wednesday. The S&P; 500 index lost 1.1%. The NASDAQ over-the-counter composite fell just 0.4%.

Michael Metz, strategist at Oppenheimer & Co., suggested that the market may even surprise the pessimists with a rally soon because prices already reflect low expectations.

“Most investors who are terrified--and rightfully so--of the external environment, have liquidated (positions) to the point where they are reasonably comfortable,” Metz said.

But experts agree that Wall Street now is betting on a quick U.S. victory over Iraq--and that any scenario other than a short war could wreak havoc with stocks. (Related stories, A1, D1.)

Among the market highlights:

* The Dow was pulled down by heavy losses in Du Pont, off 1 1/2 to 33 1/8; United Technologies, down 1 3/4 to 43 1/4; Woolworth, off 1 1/2 to 25 7/8, and Primerica, off 1 to 21 7/8.

* Some of the day’s biggest losers were drug issues, as investors continued to bail out of one of the few winning stock groups of 1990. Bristol Myers fell 1 1/8 to 61 3/8, Johnson & Johnson lost 1 5/8 to 65 5/8, Upjohn dropped 3/4 to 35 5/8 and Immunex gave up 1 1/4 to 34 1/2.

* Oil and oil-service stocks also were broadly lower, even as oil prices soared. Baker Hughes tumbled 1 1/8 to 22 3/4, Oceaneering fell 3/4 to 9, Schlumberger dropped 1 1/8 to 51 7/8 and Exxon lost 7/8 to 49 7/8.

* Defense contractors plunged, as the negative implications of huge Pentagon contract cancellation with McDonnell Douglas and General Dynamics outweighed any perceived benefits from war. McDonnell slumped 3 1/4 to 28 after collapsing 7 1/2 Tuesday. General Dynamics fell 1 1/4 to 21 1/4, Rockwell slid 1 1/2 to 23 1/4 and Loral lost 1 1/8 to 32 1/4.

* Apple Computer was one of the few market bright spots. It jumped 2 to 45 1/4 after detailing the huge success of its new computer line. Elsewhere, Sequent Computer plunged 5 3/4 to 11 1/2 after forecasting disappointing earnings.

* Castle & Cooke slipped 1/4 to 28 1/4. The firm said it negotiated an $800-million four-year credit pact with banks, replacing short-term credit lines.

* Blockbuster Entertainment surged 2 1/8 to 25 1/2. It was added to S&P; 500-stock composite index, touching off buying by index funds set up to duplicate the performance of the index.

In London, share prices closed firm but below the day’s best levels on hopes that the meeting between the United States and Iraq would produce a diplomatic solution. The Financial Times-Stock Exchange 100 index rose 29 to close at 2,128.9.

In Frankfurt, German shares jumped 1.6% in extremely nervous trading, lifted almost entirely by speculation fueled by the length of the Geneva foreign ministerial meeting. The 30-share DAX index climbed 21.21 to 1,375.16.

In Tokyo, stocks closed firmer after a day of sluggish trading before the Iraq-U.S. meeting. The Nikkei average ended up 71.43 at 22,969.27. At midday today, the Nikkei was down 153.93 points.

CREDIT Bond Prices Tumble on Baker Statement Bond prices plunged a total 2.5 points in intraday trading Wednesday in a market initially charged by hopes of peace but finally deflated by pessimism over war in the Middle East.

The Treasury’s bellwether 30-year bond finished down 13/16 point, or $8.13 per $1,000 in face amount, at Wednesday’s closing. Its yield jumped to 8.45% from 8.38% late Tuesday.

Prices for the long bond rose on hopes for peace as talks between Secretary of State James A. Baker III and Iraq’s foreign minister lasted 6 1/2 hours, much longer than political observers had expected. Its yield dropped to as low as 8.25% during the day.

But the price dropped, and the yield rose as high as 8.47%, after Baker said the Iraqis were inflexible during the talks in Geneva.

“Everything revolves around this meeting, and all other factors were brushed aside,” said Dan Seto, economist for Nikko Securities. “Pretty much everything was eclipsed by this meeting.”

Meanwhile, investors poured into shorter-term Treasuries, seeking a safe place for cash amid expectations of war and uncertainties over the nation’s banks.

“There’s a tremendous flight to quality and the issues that have done well are the short-term bills,” said economist Mike Casey of Maria Ramirez Capital Consultants.

The discount rate on three-month Treasury bills plunged 0.23 percentage points to 6.19% as investors rushed in.

The federal funds rate, which represents interest on overnight loans between banks, traded at 5.5% at closing, up from 3% late Tuesday. Economists expect the rate to stabilize late in the week near its perceived target of 6.75%.

CURRENCY Pessimism Drags Down the Dollar The dollar fell against most other major currencies in a dizzying session that saw the currency surge from its lows after the United States and Iraq failed to make progress in talks on the Persian Gulf crisis.

By the end of the day, the dollar was at 1.537 German marks, down from Tuesday’s New York close of 1.541. It had fallen as low as 1.510 marks before talks ended between the United States and Iraq.

The dollar did close up against the Japanese yen, finishing at 136.80 yen, up from 136.50 Tuesday. Because of Japan’s dependence on oil imports, the Japanese currency has been under pressure from the threat of a spike up in oil prices in a gulf war.

“I don’t know what else to say,” said manager Albert Soria at Kansallis-Osake-Pankki Bank. “It’s been a roller-coaster ride.”

Dealers flocked to the U.S. currency after the peace talks failed because of its “safe-haven” status in times of world turmoil. It is expected to stay strong short term.

COMMODITIES Metal, Energy Prices Rebound After Talks Precious metals and energy futures were taken for a wild ride Wednesday as hopes for peace in the Persian Gulf sent prices sharply lower in the morning, only to reverse direction when talks between U.S. and Iraqi officials failed to end in agreement.

Gold for February delivery on New York’s Commodity Exchange plunged more than $10 an ounce in early trading, as the war premium that built up in the market in recent months was stripped away by optimism. Gold then rallied in the afternoon after Secretary of State James A. Baker III announced nothing came of his meeting with Iraq’s foreign minister.

“Everything keyed off the meeting,” said Randolph Donney, a metals analyst for Pegasus Econometric Group. “There was anticipation some deal was being cooked up. With no peaceful solution occurring, everything reversed.”

Gold settled 60 to 90 cents higher, with the contract for delivery in February at $393 an ounce. Silver was 2 to 7 cents lower, with March at $4.18 an ounce. Platinum was $1.20 to $2.20 higher, with January at $408.40.

Elsewhere, the failure of the peace talks resulted in one of the fastest swings in energy prices in the history of the New York Mercantile Exchange, analysts said.

The market was down $3.82 a barrel early, based on the feeling something positive would come out of the Geneva meeting. Then it rallied $7 in 10 minutes, creating chaos on the floor before settling back, one analyst said.

“The market ended rather even,” said Robert Baker, an energy analyst with Prudential-Bache Securities in New York.

The February light sweet crude contract opened at $27.17, plunged to $23.35 and then rocketed to a high of $31 before settling at $27.26, up just 9 cents from Tuesday.

“The surprise is that energy prices did not jump farther. It may be an indication that war fears may not be all that severe,” Baker said, adding that there is also belief supplies would not be severely disrupted in the event of war.

Grain and soybean futures prices closed mostly higher on the Chicago Board of Trade.

Corn futures were lower on professional and commercial selling, in the wake of the announcement late Tuesday that the United States had extended $530 million in feed grain credits to the Soviet Union.

Market Roundup, D8