by John M. Curtis
(310) 204-8700

Copyright June 5, 2002
All Rights Reserved.

oom and gloom rules Wall Street despite a slew of upbeat economic numbers. But the real number that counts is the amount of investors unwilling to risk hard-earned dollars in the stock market. With nearly $5 trillion lost in market capitalization since March 2000, most investors no longer have faith in long-term investing. Euphoria of the late '90s has now given way to the Prozac-days of 2002, punishing investors daring to invest in equity markets. It's no cliché the stock market "is risky and not for everyone." Even 401(k) and pension fund holders have pulled the plug on popular mutual funds, once the darling of a new generation of aggressive investors, expecting hefty returns in the late '90s. Financial scandals—especially Enron and Tyco Int. Ltd.—haven't helped matters, leaving investors dubious of major brokerage houses. Trust in brokers hit all time lows with household names like Merrill Lynch getting sued for conflicts of interest and misrepresentation—especially the unhealthy link between analysts and investment banking. Wall Street gurus like Goldman Sach's Abby Joseph Cohen are nowhere to be found.

      Many corporate executives—richly rewarded with stock options—are now following Enron's lead, liquidating company-held shares anticipating more loss in equity value. "There is absolutely no greed left in the system, only fear," said Phillip Dow, director of equity strategy at brokerage RBC Dain Rauscher in Minneapolis, totally inverting the reality that "greed" drives corporate personnel to dump shares. Former Enron CEO Jeffrey Skilling didn't unload $21 million worth of his company stock out of fear. Greed is still alive and well in corporate America. "It's almost in fashion to be negative now, which speaks to a big psychological change. A few years ago the mind set was 'buy on dips.' Now it's don't trust anything," said Dow, again failing to mention that stocks have only headed south since March 2000, with a few small exceptions. Burned by declining share prices, most investors aren't masochistic or mesmerized by favorite brokerage-house gimmicks like "long-term investing" and "hedging against inflation."

      Today's whopping deficits both at the state and federal level are directly related to the government's loss of capital gains income. Without collecting taxes on capital gains, surpluses evaporated quickly, leaving growing deficits. With market capitalization dramatically reduced and corporate cash flows dependent on profitability, there's scant money with which to reinvest, hurting earnings at otherwise profitable companies. When earnings drop, share prices tend to follow closely behind. Even today's deflated share prices still have historically bloated price-to-earnings ratios, signaling that the hemorrhaging hasn't ended. For the past two months, large-investor stock sales have eclipsed stock buys 4-1, according to David Coleman, editor of New York-based newsletter Vickers Weekly Insider. Specialists on trading floors know what happens when sell orders swamp buy orders: equity prices head south. When corporate insiders dump shares, it sends a bad message to prospective investors.

     During bull markets, investors jump in to reap profits, creating the momentum to push markets forward. Three years into the longest bear market since 1939-41, investors can't talk themselves into long-term time horizons, creating a reverse momentum effect, literally sucking the life out of the market. "Insiders are looking for better places to put their money these days than in their own companies," said Coleman, stating the obvious that a mattress is far better for saving than a deteriorating stock market. With some stock prices pennies on the dollar, investors can't sacrifice cash reserves under the illusion that someday things will come back. No family—or corporation for that matter—can finance daily activity speculating about historic yields. All bets are off when companies like Enron or Global Crossing go Chapter 11. There's little talk now about private investment accounts for Social Security, especially since the stock market proved so unreliable. Before investors jump back in, they'll need more guarantees than only charts talking about historic averages.

      During the late '90s, the economy grew dependent on the bull market. Government's fiscal policy was dictated by the whopping surpluses generated from capital gains. Consumer spending also escalated, pushing Fed Chairman Alan Greenspan to radically tighten monetary policy to contain "the wealth effect," caused by excess consumer spending. Fearing inflation, Greenspan hiked interest rates eight times from Jan. 1999 to Feb. 2000, derailing the strongest bull market in U.S. history—causing a precipitous drop in government receipts. It was, after all, lavish market capitalization that fueled unprecedented capital spending, permitting otherwise slow-moving industries to show substantial earnings. Though consumer spending accounts for about two-thirds of the Gross Domestic Product, capital spending jump-starts the economy, creating jobs and opportunity. With the stock market stuck in reverse, capital spending won't increase anytime soon, creating an indefinite drag on the economy.

      Investors currently don't see any light at the end of the tunnel. Long-term investing no longer promises historic gains, because otherwise solvent companies are falling by the wayside. "We're seeing across-the-board selling in most industries, and at the highest ratio since the mid-1980s. This sends a dangerous signal about the market," said Coleman, suggesting that the slide might continue. Piling up whopping deficits, local, state and federal government must stop fantasizing about future windfalls and get down to the unhappy task of reducing spending. No individual—or government for that matter—can stake their future on when the "market comes back." Given the current bear market, government must learn to live within its means or face an even greater calamity down the road. With deficits ballooning out of control, one only hopes that the White House and Congress finally get the message.

About the Author

John M. Curtis is editor of OnlineColumnist.com and columnist for the Los Angeles Daily Journal. He's director of a Los Angeles think tank specializing in corporate consulting and strategic communication. He's author of Dodging The Bullet and Operation Charisma.

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