Dow Takes A Dive

U.S. stocks fell Wednesday on disappointment with the Federal Reserve's rate cut, turmoil in overseas markets and a number of high-profile profit warnings.

The Dow Jones industrial average closed down 237.90 points, or 2.9 percent, to 7,842.62.

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The Fed, in a move that caught few on Wall Street by surprise, trimmed a key short-term interest rate Tuesday in response to concerns of slowing U.S. economic growth. But many observers were looking for a cut of a half percentage point, rather than the quarter-point cut they did get.

The central bank's policy-setting Federal Open Market Committee voted to lower the federal funds rate to 5.25 percent from 5.50 percent. The federal funds rate is the rate commercial banks charge each other for borrowing funds on an overnight basis. The Fed last lowered the rate on Jan. 31, 1996.

U.S. financial markets continued to speculate about which bank or brokerage house might be the next to reveal its exposure to losses suffered by hedge funds. This, in the wake of last week's rescue of Long-Term Capital Management L.P. from the brink of collapse by a group of banks and brokerages.

Bankers Trust (BT) was the name bandied about the most Wednesday in connection with hedge fund exposure and its stock slipped 1 13/16 to 59. In response, the company said virtually all of its loans to the funds are collateralized by cash or Treasury securities.

Meanwhile, bond prices staged a gigantic leap Wednesday, responding to the U.S. stock selloff, hedge fund buying, and worries of further bank and brokerage exposure to hedge fund losses.

"The paranoia about various banks and brokerage firms having difficulties associated with hedge fund losses was at work in today's bond rally," said Tony Crescenzi, chief bonmarket strategist at Miller Tabak Hirsch.

In the bond market, the 30-year Treasury bolted 2 28/32 points, to yield 4.958 percent, a level not seen since the government began regularly issuing the maturity in 1977.

In Wednesday's market indicators:

• The Standard & Poor's 500 Index fell 3.1 percent.
• New York Stock Exchange losers soundly beat winners by 19 to 12.
• On the Big Board floor, 801 million shares hit the tape, 7 percent more than Tuesday.
• The Nasdaq Composite declined 2.3 percent. Declining issues led advancers by 23 to 16 in the Nasdaq Stock Market. Volume totaled 724 million shares.
• The Russell 2000 Index of small-company stocks sank 0.6 percent.

• RJR Nabisco Holdings (RN) declined 1 9/16 to 25 3/16. It steered analysts to expect third-quarter results to be about 20 percent to 23 percent less than consensus expectations. The company cited poor business conditions in Russia and other Eastern European nations as the main reason for the grim forecast.
• Unocal (UCL) sagged 1/2 to 36 1/4. The integrated petroleum concern warned analysts that its third-quarter profits would come in below 10 cents a share due to lower natural gas prices and higher expenses associated with production. Wall Street had looked for 20 cents.
• SM&A (WINS) crumbled 7 5/8 to 17 1/4 after the provider of systems engineering, program integration, and proposal management services said it will undercut Street projections with its third-quarter results. Most analysts had pegged the figure at 17 cents a share. SM&A pointed to delays on key projects as hampering revenues to the tune of about $3.5 million.
• American Airlines (AMR) dropped 3 5/8 to 55 7/16 after the company said it plans to sell three units and focus on its core business.
• Telecommunications equipment provider Northern Telecom (NT) fell 3 5/8 to 32 1/4. Although the company told analysts Tuesday that it sees third-quarter earnings in line with current estimates, a reference to weakness in some areas of Nortel's business was interpreted by some as a profit warning, analysts said.
• Warburg Dillon Read analyst Nikos Theodosopoulos cut his view of Northern and other suppliers of telecom gear. ADC Telecommunications (ADCT) fell 2 5/8 to 21 1/8, Tellabs (TLAB) sank 4 13/16 to 39 13/16, and PairGain Technologies (PAIR) lost 1 15/16 to 8 1/8 after the analyst sliced his ratings of the telecommunications equipment manufacturers to "hold" from "buy."