1 Wham! Bam! Twice in two weeks the unraveling of the on-again, off-again UAL buy-out slammed the stock market.
2 Now, stock prices seem to be in a general retreat.
3 Since peaking at 2791.41 on Oct. 9, the Dow Jones Industrial Average has lost 194.69 points, or 7%, closing Friday at 2596.72, down 17.01.
4 The number of issues falling on the New York Stock Exchange each day is eclipsing the number of gainers.
5 And the number of stocks hitting new lows far outstrips the number setting new highs.
6 But why should an iffy $6.79 billion leveraged buy-out deal shake the foundations of the entire stock market?
7 Opinions vary about how important the UAL deal was to the market's health, but analysts generally agree that the market gyrations created as the UAL plan crumbled revealed a fundamental change in investor psychology.
8 'If this had happened a few months ago when the atmosphere was still very positive it wouldn't have been greeted with anything like the impact it has had over the past two weeks,' says Dennis Jarrett, a market strategist at Kidder Peabody.
9 There are, of course, analysts who view the near-panic that briefly swept through investors on Oct. 13 and again on Oct. 24 as momentary lapses of good judgment that have only temporarily undermined a healthy stock market.
10 Sure, price action is volatile and that's scary, but all-in-all stocks are still a good place to be, they suggest.
11 The reaction to the UAL debacle 'is mindless,' says John Connolly, chief market strategist at Dean Witter. 'UAL is a small deal as far as the overall market is concerned.
12 The only way you can make it a big deal is to draw linkages that just don't make sense.' He suggests, for example, that investors may have assumed that just because UAL couldn't get financing, no leveraged buy-outs can get financing.
13 Carried even further, some investors assumed that since leveraged buy-outs are the only thing propping up stock prices, the market would collapse if no more LBOs could be done.
14 'There will still be deals,' argues Mr. Connolly. 'There may not be as many and the buyers may not get away with some of the things they've done in the past, but deals won't disappear.' He forecasts that the emphasis in mergers and acquisitions may soon return to what he calls 'strategic deals, in which somebody is taking over a company not to milk the cash flow, but because it's a good fit.'
15 And even without deals, Mr. Connolly figures the market would remain healthy.
16 He notes, for instance, that there hasn't been a merger or acquisition among the 30 stocks in the Dow Jones Industrial Average since 1986, yet that average only three weeks ago hit a record high.
17 'Those stocks are up because their earnings are up and their dividends are up,' he says.
18 Even the volatility created by stock index arbitrage and other computer-driven trading strategies isn't entirely bad, in Mr. Connolly's view.
19 For the long-term investor who picks stocks carefully, the price volatility can provide welcome buying opportunities as short-term players scramble frantically to sell stocks in a matter of minutes. 'Who can make the better decision, the guy who has 10 seconds to decide what to do or the guy with all the time in the world?' he says. 'What on earth does the UAL deal have to do with the price of Walmart, which I was able to buy on Oct. 16 at a very attractive price?'
20 Kidder Peabody's Mr. Jarrett also sees some benefits to the stock market's recent drop. 'We've run into a market that was beginning to run out of steam and get frothy,' he says. 'The balloon had been blown up so big that when somebody came along with a pin -- in this case the UAL deal -- we got a little pop.'
21 The pop sobered up investors who had been getting a little too ebullient, says Mr. Jarrett. 'It provided an excuse for people to get back to reality and to look at the economic data, especially the third-quarter economic numbers, and to realize that we can't continue to gloss over what is going on in the junk bond market.'
22 But he figures that at current levels the stock market is comfortably valued, even with the economy obviously slowing. 'Just because we've got some realism back in the market doesn't mean it's going lower from here,' he says. 'The bottom line is that it's healthy to have this kind of sideways activity, especially after a 30% gain in stock values over the past 12 months.' He's now estimating that after a period of consolidation, the Dow Jones Industrial Average will once again forge new highs.
23 Maybe, maybe not.
24 Abby Joseph Cohen, a market strategist at Drexel Burnham Lambert, isn't nearly so sanguine about the market's chances of surging to new highs anytime soon.
25 Her view is that stock prices have three major props: merger and buy-out proposals, earnings and the economic outlook.
26 At current levels of economic activity and earnings, stocks are fairly valued, she says.
27 But any chance for prices to surge above fair value lies in the speculation that accompanies a vigorous merger and buy-out business, and UAL has obviously put a damper on that. 'Stocks aren't cheap anymore, there have been some judicial and legislative changes in the merger area and all of this changes the arithmetic of deals,' she says. 'I'm not saying they've stopped altogether, but future deals are going to be structured differently and bids probably won't be as high.'
28 But that's not the only problem for stocks.
29 The other two props -- earnings and the economic outlook -- are troubling, too. 'M&A is getting all the headlines right now, but these other things have been building up more gradually,' she says.
30 Third-quarter earnings have been generally disappointing and with economic data showing a clear slowing, the outlook for earnings in the fourth quarter and all of 1990 is getting worse.
31 'There are a lot more downward than upward revisions and it looks like people are questioning corporate profits as a means of support for stock prices,' she says.
32 With all this, can stock prices hold their own? 'The question is unanswerable at this point,' she says. 'It depends on what happens.
33 If the economy slips into a recession, then this isn't a level that's going to hold.'
34 Friday's Market Activity
35 Stock prices tumbled for a third consecutive day as earnings disappointments, a sluggish economy and a fragile junk bond market continued to weigh on investors.
36 The Dow Jones Industrial Average fell 17.01 points to 2596.72 in active trading.
37 Volume on the New York Stock Exchange totaled 170,330,000 shares.
38 Declining issues on the Big Board were far ahead of gainers, 1,108 to 416.
39 For the week the Dow Jones Industrial Average sank 92.42 points, or 3.4%.
40 Oil stocks escaped the brunt of Friday's selling and several were able to post gains, including Chevron, which rose 5/8 to 66 3/8 in Big Board composite trading of 2.4 million shares.
41 The stock's advance reflected ongoing speculation that Pennzoil is accumulating a stake in the company, according to Dow Jones Professional Investor Report.
42 Both companies declined to comment on the rumors, but several industry analysts told the Professional Investor Report they believed it was plausible that Pennzoil may be buying Chevron shares as a prelude to pushing for a restructuring of the company.
43 USX gained 1/2 to 33 3/8 on a report in Business Week magazine that investor Carl Icahn is said to have raised his stake in the oil and steel company to just about 15%.
44 Earlier this month, Mr. Icahn boosted his USX stake to 13.4%.
45 Elsewhere in the oil sector, Exxon rallied 7/8 to 45 3/4; Amoco rose 1/8 to 47; Texaco was unchanged at 51 3/4, and Atlantic Richfield fell 1 5/8 to 99 1/2.
46 Mobil, which said it plans to cut its exploration and production work force by about 8% in a restructuring, dropped 5/8 to 56 1/8.
47 The precious metals sector outgained other Dow Jones industry groups by a wide margin for the second consecutive session.
48 Hecla Mining rose 5/8 to 14; Battle Mountain Gold climbed 3/4 to 16 3/4; Homestake Mining rose 1 1/8 to 16 7/8; Lac Minerals added 5/8 to 11; Placer Dome went up 7/8 to 16 3/4, and ASA Ltd. jumped 3 5/8 to 49 5/8.
49 Gold mining stocks traded on the American Stock Exchange also showed strength.
50 Echo Bay Mines rose 5/8 to 15 7/8; Pegasus Gold advanced 1 1/2 to 12, and Corona Class A gained 1/2 to 7 1/2.
51 Unisys dropped 3/4 to 16 1/4 after posting a third-quarter loss of $4.25 a share, including restructuring charges, but other important technology issues were mixed.
52 Compaq Computer, which had lost 8 5/8 Thursday following a disappointing quarterly report, gained 5/8 to 100 5/8.
53 International Business Machines dropped 7/8 to 99 7/8.
54 Digital Equipment tacked on 1 1/8 to 89 1/8, and Hewlett-Packard fell 3/8 to 49 3/8.
55 Dividend-related trading swelled volume in Merrill Lynch, which closed unchanged at 28 3/8 as 2.7 million shares changed hands.
56 The stock has a 3.5% dividend yield and goes ex-dividend today.
57 Erbamont advanced 1 1/8 to 36 1/2 on 1.9 million shares.
58 Montedison, which owns about 72% of the company's common stock, agreed to buy the rest for $37 a share.
59 Himont, another majority-owned unit of Montedison, added 1 1/4 to 47 1/8.
60 Milton Roy jumped 2 to 18 3/8.
61 Crane said it holds an 8.9% stake in the company and may seek control.
62 Crane dropped 1 1/8 to 21 1/8.
63 Comprehensive Care, which terminated its agreement to merge with First Hospital, dropped 7/8 to 3 7/8.
64 The company's decision was made after First Hospital failed to obtain financing for its offer.

Wham ! Bam ! Twice in two weeks the unraveling of the on - again , off - again UAL buy - out slammed the stock market .
on - again ,
Why is the UAL buy-out on-again off-again?