Institutionalized Panic

Panic is an emotion that on Wall Street has long been attributed to the small individual investor. Last week the "institutional" investors--managers of mutual funds, pension funds, insurance companies, bank trust departments--who now dominate trading, showed that they are subject to it also. Their panicky unloading of Combustion Engineering, Inc. stock led to an astonishing price break.

Combustion Engineering, a Stamford, Conn. -based maker primarily of steam-generating equipment, over the previous 16 months had announced a series of major contracts that had driven its stock up to a January high of 106 1/4 per share. Gradually, the price settled back, to 75 1/8 last Monday, but the stock continued to be held by many institutions whose chiefs regarded it as an attractive long-term investment. But last Tuesday the Wall Street Journal published a back-page article under the three-column head: "Combustion Engineering's Order Surge May Have Been Based on Risky Deals." The story said that the company had agreed to unusual contract conditions and also reported heavy selling of the stock by company "insiders."

Brokers were promptly deluged by such a wave of sell orders that governors of the New York Stock Exchange decided that they could not let the stock trade at all on Tuesday. "We delayed the opening to let the psychology cool down," commented a party to the decision. By noon Wednesday enough buy orders had been rounded up to bring off a trade of 120,000 shares--on which the price dropped to 48, down an amazing 27 1/8 points, or 36% of the stock's Monday value. Even though Wagner, Stott & Co., specialists in the stock, bought 35,000 shares for its own account, the price of the stock continued to drift down to a Wednesday close of 46 1/2. By week's end it had recovered only to 50 7/8. Veteran Wall Streeters blamed a herd instinct among institutional money managers to unload immediately a stock that had been publicly labeled risky--or, in other words, panic.

Jonathan Kwitny, the Wall Street Journal reporter who wrote the story, and his managing editor Frederick Taylor were astonished by the reaction but stood by the story. Combustion Engineering got out a press release accusing the Wall Street Journal of unspecified inaccuracies and is preparing a more detailed rebuttal in the form of a letter to stockholders. The episode is a glaring example of the erratic stock-price jumps caused by the tendency that managers of institutional portfolios have to buy or sell as a group. The fear of being whipsawed by those swings is one of the major factors that are driving small investors out of the market.

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