U.S. STOCK DECLINE RENEWS DEBATE ABOUT FUTURES
Wall Street's biggest one-day drop since
1914 has revived a bitter debate about whether modern
investment techniques turn shifts in investor psychology into
colossal moves in share prices.
    "The market has gotten away from the players," said Dudley
Eppel, vice president-equity trading at Donaldson Lufkin and
Jenrette Securities Corp. He says stock index futures and
options have distorted the investment process.
    But Wall Street professionals who work with index futures
and options insist the blame is misplaced.
    Fischer Black, head of the trading and arbitrage division
at Goldman, Sachs and Co, says so-called program trading
strategies involving opposite positions in futures on stock
indices and the underlying stocks deserve almost no blame for
today's decline. "People have changed their minds about the
future of the economy," he said. Another strategy, known as
portfolio insurance, may have exagerated the decline to a small
degree, said Black.
    Eli Wachtel of Bear, Stearns and Co was emphatic. "I do not
believe the drop was precipitated by portfolio insurance or
expanded by program trading."
    "The only thing that will stop it in the end is the value
investor who comes in and says 'IBM still sells computers', and
buys for traditional reasons" said Jeffrey Miller of Miller
Tabak Hirsch and Co.
    IBM <IBM> fell 31 to 104 as the Dow Jones Industrial
Average dropped more than 500 points.
    Several years ago Miller's firm was one of the first to
pursue program trading strategies, seeking to lock in an
automatic profit by taking advantage of discrepancies in the
prices of the futures and the underlying stocks. But he said
his firm has not been involved in that since late last year.
    Miller said some investors who were burned in the recent
market declines may have miscalculated the effects of portfolio
insurance. He estimated 70 to 80 billion dlrs in invested funds
prior to the decline were hedged with futures.
    The way portfolio insurance is used, Miller said, investors
at the time they protect their portfolios commit themselves to
a future course of action such as buying a put option. While
negative news such as trade deficits and budget deficits build
for months, the put options tend to be crowded into a narrow
span of time, because they are executed as the market starts to
fall.
    Miller said at present people can only guess how much
portfolio insurance is in use. He suggested some system of
disclosure could put other investors on guard that the seeds
were being planted that might add to a future decline.
    But in any case Miller argued that index futures and
options do not initiate market trends.
    People like Eppel of Donaldson, Lufkin and Jenrette were
steadfast in their criticism. "If I had my way there wouldn't
be any index futures," he said. "They propelled the market up
when nothing was going on and now we're paying the price."
    Another irate trader, referring to IBM's 31 point drop,
complained "what announcement did IBM make over the weekend
that made its stock drop 31 points?" IBM was as high as 175-7/8
earlier this year.
    Some economists agreed that the stock market could be
sending signals about the economy.  Allen Sinai, chief
economist for Shearson Lehman Brothers, told Reuters the 508
point decline represented "a crisis of confidence.
    "This is a a bona-fide financial crisis. The market is
showing panic. I suspect there is a wholesale deserting of our
markets by a lot of foreign investors."
    Sinai said the crisis was caused by continuing U.S. budget
and trade deficits and by rising interest rates. "This is not a
signal of the start of a recession, but a strong indicator that
one is coming if nothing is done in Washington to deal with the
budget and trade deficits," Sinai said.
    Some market participants said redemptions by investors who
own mutual funds fueled the decline. But Steve Norwitz, a
spokesman for T. Rowe Price Associates, a Baltimore-based
investment management firm, said redemptions and switches into
money market funds by Price's one mln accounts amounted to less
than two pct of assets. "It's not a rout by any means."
   
    Norwitz said the company normally receives about 3,500
telephone inquiries from its customers each day. On Friday, he
said, when the Dow index fell 108 points the volme of calls
rose to around 7,000 and today it exceeded that although he did
not have a precise number.
    Ike Kerridge, an economist with the oilfield service firm
Baker Hughes Inc., was one of several analysts who said the
evaporation of billions of dollars of paper profits could alter
consumer behavior.
    "This could be the trigger for a national recession which
would be very unusual in an election year," Kerridge said.
 Reuter
