"There is a wrench that could temporarily halt the gears of a market recovery, however. Corporations may rush to lower previous forecasts before the deadline passes for executives to sign off on financial reports.
"To the extent you get some key companies taking that kind of action, that could really give us a final bottom,"
'Stockalypse' Gives Sinking Feeling
Reuters
By Pierre Belec
Saturday July 27, 7:13 am Eastern Time
NEW YORK (Reuters) - It's a betting game that the entire world is watching, as Wall Street investors could determine the course of the economy in the United States and abroad. Do they have the nerve to drive stocks up?
The stock market's plunge has flushed out more than $7 trillion in wealth since the bubble burst in 2000 and people who got filthy rich during the Great Bull Market of the 1990s are suddenly feeling poor. Fair to wonder what impact this reverse wealth effect will have on consumer spending.
Back in the boom days, investing in stocks was such a huge money-making machine that the Street viewed the market as "The Economy."
Now that stocks are crumbling, how much longer before the market shock begins to hurt consumers who generate two-thirds of the nation's activity.
While the Dow Jones industrial average on Wednesday posted its biggest one-day gain of the year, veteran traders warn that one-day wonders do not signal a trend, and it's unclear that investors plan to come off the sidelines.
TIGHTEN PURSE STRINGS
If the rope around people's necks winds tighter and they see more of their wealth go up in smoke, the risk is that consumers may tighten their purse strings, thereby shutting down the main engine driving the world's biggest economy and adding to Wall Street's woes.
The risk cannot be ignored because of the public's massive participation in the market. Nearly half of the nation's households had a stake in stocks at the height of the bull market.
The damage is already being felt. U.S. consumer sentiment tumbled in early July as Americans agonized over their losses. The gloom probably got worst in the two weeks after the University of Michigan did the survey, with the Dow tumbling more than 1,000 points.
In the 1990s, mutual funds were the financial fashion and an unparalleled flood of cash poured into the wishing well of stock funds. But many investors are wondering if there will always be a pot of gold at the end of the Wall Street rainbow.
There's a big sucking sound in Manhattan's financial district. Investors are pulling money out of U.S. stock mutual funds. In June, investors yanked $13.8 billion out of stock funds, the third largest outflow on record, exceeded only by $15.4 billion in March 2001 and $30 billion in September following the attacks on the World Trade Center and the Pentagon, according to Lipper, the mutual fund tracking firm.
401(k) BASKET CASE
Indeed, people are getting tired of losing their shirts. Their 401(k) retirement plans have been turned into 911 emergency basket cases. The market is on course to post a third straight yearly decline. The last time that occurred was 1938 when investors were still reeling from the nasty memories of the Great Depression.
The numbers speak for themselves. The Dow is down about 32 percent from its peak, the technology-laced Nasdaq composite has fallen an eye-popping 75 percent and the Standard & Poor's 500 is down 45 percent.
The loss of stock market wealth will wreak havoc on the long-term health of the economy, says John Challenger, chief executive officer of Challenger, Gray & Christmas Inc., an international outplacement firm.
A growing number of older Americans are postponing their retirement or have chosen to rein in spending because the crash has crushed their 401(k) plans.
The alternative to working more or cutting back on spending will have a big impact on the economy, says Challenger.
"The growing population of older Americans was expected to inject large sums of money into the economy through their mass consumption of goods and services," he says. "These seniors were among the wealthiest ever and were going to spend copious amounts of money in their 30-plus years of retirement."
BEARISH FOR AVERAGE INVESTOR
There's a lot of talk the market needed to go through a healthy cleansing after years of excesses. Analysts are preaching that the longer the bear market hangs on, the more appealing the investment environment will be after the fall. But the fact that stocks have kept on falling and the selling has been so severe since June is bearish for the average investor.
More importantly, people should not expect a socko ending to this summer's market crumble.
Stocks may bounce back but worth keeping in mind is that bear-market rallies are tricky. Dead-cat bounces or in this case, a dead-bull recovery, are much more dangerous than buying in a bull market because bear-market rallies can reverse course at the drop of a dime.
The market has been rocked by an unexpected stream of bad corporate earnings, economic uncertainty, terrorist attacks and stunning corporate scandals. The risk premium of owning stocks has gone up, and investors have been driven to safe havens such as bonds, money markets and gold.
The smart money is running to the bomb shelters because historically, years of super-normal stock returns -- 20 percent plus gains in the 1990s -- have usually been followed many years of sub-par returns.
STARVED FOR CAPITAL
As investors avoid stocks, the other risk is that companies will be starved of capital. Lacking cash to grow, businesses may be forced to make a new round of spending cuts that would slam the economy back into recession. A dramatic drop in business spending was the main reason the economy slipped into recession last year.
Business spending continues to be the wobbly wheel on a shopping cart. Second-quarter capital spending increased for the first time in eight quarters, but a closer look at the numbers showed the gain was caused by companies needing to replace inventories that had dropped to depressed levels in the past year.
The economy is still shaky and the barrage of rate cuts by the Federal Reserve last year failed to stimulate growth across a broad sector.
There are many reasons why the rate cuts did not work. One is that the Sept. 11 attacks on the United States happened just as the first couple of reductions were starting to filter through the economy. Since it takes six to nine months for the Fed's stimulative easy money to do its thing, the process was just beginning to ooze through as the airplanes hit.
Then, came the corporate scandals that drove a stake through the heart of the market.
For the week, Nasdaq fell 4.3 percent to 1,262, the S&P rose 0.6 percent to 853 and the Dow rose 3 percent to 8,264.
Looking For The Bottom
The Economist
From The Economist Global Agenda
July 26, 2002
Source
Stockmarkets have had another wild and terrible week. A slew of bad corporate news confused and alarmed investors. And there are fears of more bad news to come
INVESTORS had hoped for some respite. Share prices have been tumbling for weeks. Fear and exhaustion had gripped most markets. There were signs of panic. But, as it happened, this week brought another hair-raising ride, on both sides of the Atlantic. The Dow Jones Industrial Average of leading American companies plunged to levels last seen in October 1998, after the Russian bond default almost triggered the collapse of the Long Term Capital Management hedge fund. The FTSE 100 index of Britain’s 100 biggest stocks hit levels that it last saw six years ago, and came perilously close to 50% of its 6930 peak of early 2000. In continental Europe, matters were even worse: European indices have fallen further from their peaks than either their British or American counterparts. Sudden surges in prices this week followed precipitous declines, only serving to show how unsettled investors have become. Fraying nerves have been a continuing stream of bad news from companies, and fears of worse to come.
It was almost inevitable that WorldCom, the giant telecoms firm that admitted to a $3.9 billion accounting fraud last month, would file for bankruptcy. Even so, the filing on Monday confirmed that it would be a tough battle for creditors to recoup their losses. And it also raised the spectre of a bankrupt WorldCom, protected by the courts from having to pay interest payments, undercutting healthier rivals. The firm’s bankruptcy announcement set the tone for the week. Also on Monday, BellSouth, one of the so-called Baby Bell regional telephone companies, admitted that its profits would be much lower. This spooked investors because Baby Bells, who had sat on their hands during the frantic telecom boom of the late 1990s, were thought to be financially sound.
Falls in the market also triggered worries about the solvency of life assurance companies, particularly in Europe where they often act as the primary investment vehicle for many individuals. They also typically invest more heavily in shares than American insurance firms. So the downturn in share prices has been especially bad news for European assurance firms. There have been persistent rumours that many have been forced to sell large amounts of shares to raise enough cash to meet solvency targets imposed by law.
Life assurers in Britain, the Netherlands, Belgium and Sweden all admitted that they were suffering from market conditions. Aegon, a giant Dutch insurer, warned that its profits could fall by 35% this year. Fortis, a Belgian-Dutch financial-services group said that earnings could be some euro900m lower on account of the decline in its share portfolio. Sweden’s Skandia said that lower share prices had caused a 28% fall in monthly sales in its mutual fund business in June. And British-based Aviva, formerly CGNU, said it would have to cut its payout to policyholders by 5%. Munich Re, a reinsurance company, also came under scrutiny. It said last week that it would have to inject more money into its American subsidiary, American Re, and that it would raise provisions relating to losses arising from the September 11th attacks last year to $500m. This prompted Moody’s, a credit rating agency, to review Munich’s prized AAA credit rating.
Elsewhere in the financial sector, banks have been punished by investors as further questions were raised about what JP Morgan Chase and Citigroup, both longstanding advisers to Enron, knew about its complex financial structure. On Tuesday, July 23rd, it was alleged that both banks understood that the off-balance sheet financing vehicles which they helped Enron set up were used to mislead investors, according to evidence presented to a hearing held by a US Senate committee investigating the collapse of the Houston-based energy-trading company. The committee’s chief investigator also alleged that Citigroup tried to persuade other companies to adopt the same kind of schemes, succeeding with at least three. Investigators found e-mails that show that the banks understood that Enron was using these complex transactions to hide debt and artificially boost cashflow. The banks both denied any wrongdoing, relying on their assertion that the sort of transactions used were common practice on Wall Street. In any case, they claimed, banks should not be blamed for the failings of accountants.
Citi also faces investigation over the role the star analyst at its Salomon Smith Barney investment banking unit, Jack Grubman, played in Winstar, a company whose shares he strongly recommended to investors and whose board meetings he attended. The new telecoms firm, capitalised at $10 billion at the market’s peak, was sold for just $42.5m last December. That was around twice the $20m that Mr Grubman was paid by Salomon Smith Barney for his part in winning investment-banking mandates, one of them from Winstar, the firm about which he was supposed to be giving investors objective advice.
Share prices have fallen so sharply that there are rumours the Federal Reserve, America’s central bank, is considering an emergency meeting in order to counteract the resulting damages to financial liquidity. In the past few weeks, corporate-bond issuance has dwindled to a minimum. In trading in the money markets, yields on Treasury bills have fallen to 40-year lows as investors switch out of equities, seeking safer, if lower, returns. Other hopes may rest on the Fed in New York. Four years ago, the New York Fed stepped in to avert a liquidity crunch after the collapse in the assets held by Long Term Capital Management. However, as usual, both Feds declined to comment.
For the present, despite the mid-week rally, investors remain cautious. American stocks are still trading at price-earnings ratios well above their historic averages. The dollar looks set to weaken, which could trigger a mass sell-off of American securities by foreign investors. And markets tend to overshoot on the way down as well as on the way up. In the short term, there is nervousness about a new Securities and Exchange Commission rule that chief executives and chief financial officers have to swear to the accuracy of their companies’ accounts from the middle of next month. With the threat of jail sentences hanging over them, it is thought that at least some senior managers will rush to announce any bad news lurking in their firms' accounts before they have to put their own necks on the line. In any case, it looks as if there will be a few more rough weeks ahead before the markets settle down.
