Bonds the compass for stocks' course

It's decision time for the bond market: Either interest rates aregoing up sharply, or they're about to tumble. And the woozy stockmarket is likely to be right behind bonds.

That was the widespread feeling on Wall Street as financialmarkets braced for an onslaught of economic data Thursday and today.

In recent speeches, Federal Reserve Board Chairman AlanGreenspan appeared to make clear - as clear as he makes any point forpublic consumption - that the data would largely determine whetherthe Fed feels obligated to tighten credit for the first time sinceearly 1995.

The Fed doesn't meet until Aug. 20, but the bond market isn'tlikely to wait for the central bank to convene.

The results were mixed Thursday. The gross domestic product,the broadest measure of the nation's economic health, shot up at anannual rate of 4.2 percent from April through June, the CommerceDepartment reported. It was the steepest since a 4.9 percent rateduring the second quarter of 1994. But the National Association ofPurchasing Management reported U.S. manufacturing growth slowedunexpectedly in July, and the overall economy moderated afterexpanding strongly in June.

Bonds staged the biggest rally Thursday in almost four months asthe survey of manufacturers signaled slowing growth that could curbinflation.

The recently pummeled stock market followed bonds with a biggain. With growing worries about the strength of corporate earningsin the second half of this year and in 1997, the level of interestrates has again become a key determinant of stock prices.

Thursday's data followed the government's report Tuesday onsecond-quarter labor costs, which also sparked a mild rally in bonds.Analysts said that report, too, was mixed, showing considerableupward pressure on white-collar wages, whereas the overall growth inlabor costs was slightly below expectations.

Greenspan has warned that he would consider strong growth inwages to be potentially inflationary, forcing the Fed to boostinterest rates in an attempt to keep the economy from overheating.

Investors assume that if the Fed begins to tighten rates, itwill continue to do so until it is sure the economy is slowing.After one Fed move, "the market begins discounting the next move,"said Philip Braverman, economist at DKB Securities in New York.

That was the vicious cycle of 1994: Nearly every Fed boost inshort rates led to higher bond yields, as investors continually beton more to come.

But Lehman Bros. economist Stephen Slifer notes an importantdifference between 1994 and today: The Fed was boosting short-termrates from a much lower level - 3 percent compared with 5.25 percenttoday. In theory, that should mean that Greenspan & Co. don't haveto tighten as much to get the desired effect if they still think anincrease is necessary.

With the purchasing managers survey suggesting Thursday that theFed doesn't have to tighten credit, economist David Jones of AubreyLanston & Co. says the 30-year T-bond yield could rapidly fall backto 6.75 percent.

Obviously, that's what the troubled stock market wants to see.But if the bond-market bears have it right and yields jump again, thestock-market bears see another plunge in prices and soon.

Corporate insiders, who were dumping their own companies' sharesat a record pace in the spring as prices soared, have slowed thatselling considerably in recent weeks as the market tumbled,insider-trackers report.

CDA Investnet/Insiders' Chronicle newsletter says the ratio ofinsiders' open-market transaction sales to buys has slid from 4.2 to1 in late June to 1.8 to 1 in the week ended Sunday. Thetransactions are tracked by insiders' required filings with theSecurities and Exchange Commission.

Bob Gabele, editor of the newsletter, said the abatement ofselling is a good sign, suggesting that insiders don't want to let goof shares at current depressed prices. But Gabele also said thereisn't yet any sign of heavy insider buying - the signal that wouldindicate insiders see current share prices as bargains.

Los Angeles Times writer Tom Petruno's column appears Tuesdaysand Fridays.