Crash Raises Fears of Recession in County : Chapman Economist Says Long Stock Slump Could Depress Economy

Peter Churm lost $333,000 Monday, and things didn’t get any better the rest of the week.

By Friday, Churm was down $626,040 on his 333,000 shares of Fluorocarbon common stock, and the total market value of Fluorocarbon--the high-tech rubber and plastics company he heads--was off $8.1 million.

Not only that, but as he watched in horror Monday as the Dow Jones Industrial Index plummeted a record 508 points, Churm also saw a hoped-for business merger crumble amid the crash.

Variations on Churm’s story--with dollar amounts and missed opportunities both considerably larger and considerably smaller--were being told all over Orange County as investors, business executives, stockbrokers and even those who have never owned a share of stock tried to come to grips with one of the most unsettling weeks in U.S. financial history.

A lot of money was lost, business deals were canceled or delayed, and the investment habits of thousands of people were changed.

But the real impact on the county’s economy is still to be felt.

Economist James Doti, acting president of Chapman College and head of its school of business, said: “The real question is whether this will be a long-lived crash. . . . Things could come back next week. But if the market stays around 2,000 for the next two months, it will have a significant effect on the economy.

“Economists talk about the ‘wealth effect,’ which largely determines retail and investment spending,” Doti said. “If people perceive themselves as poorer or less wealthy, they will cut back” on spending, and businesses are no different.

If the wealth effect were measured now, it would likely be as depressed as the market.

In Orange County, an estimated 500,000 people--those with direct investments in stocks and mutual funds--were affected by the week’s stock market gyrations.

Watched Shellshocked

They watched shellshocked as the Dow index dropped 508 points on Monday and alternately cheered and winced as it rose Tuesday and Wednesday in seesawing hourly spurts. But hopes for recovery from Monday’s debacle fell with the market on Thursday, and, after Friday’s paltry one-third point increase, the Dow ended the week down 296 points, or 13.2%, at 1,950.7.

Based on data developed in a New York Stock Exchange survey of individuals and their direct stock investments, Orange County shareholders are believed to have lost about 13% of the value of their portfolios, or about $445 million for the week. That does not include losses in individual retirement accounts and company-sponsored retirement plans.

And Orange County’s 100 largest publicly traded companies, Fluorocarbon among them, did not fare any better.

The gross market value of the companies was $14.7 billion when the market closed Oct. 16.

It dropped to $12.7 billion by the close of trading Monday and ended the week at $10.1 billion--a 31.3%, $4.6-billion decline.

But as disastrous as the numbers sound, they don’t mean much all by themselves.

A loss of $4.6 billion--even $445 million--is a lot of money. But most of it was a “paper” loss--the eroding of stock profits accumulated as the market rose over the past five years. Even after the worst week in market history, Friday’s closing Dow Jones average of 1950.7 was more than double the 777 points recorded on Aug. 11, 1982--the date the longest bull rally in history began.

Repercussions for Years

But while a number of business executives said their confidence in the economy is unshaken, they also said the week’s market activity will have repercussions for business activities in the county for years to come.

With depressed stock market prices, Orange County’s young, growth-oriented companies might have trouble finding the money needed to expand development and marketing. Such companies have traditionally been able to raise money by selling additional shares of stock on the market.

“The stock prices are too low to raise much money, and investors are going to be afraid of buying new issues,” said Walter W. Cruttenden III, chairman of Cruttenden & Co., a Newport Beach investment banking firm.

Executives said that with fewer companies raising money through equity offerings, demand for loans to finance operations is likely to grow significantly. The resulting rise in interest rates could choke business.

“Especially after the next election, there could be a difference in policies, which could send rates up,” said Robert Gumbiner, chairman of FHP International, a Fountain Valley health maintenance organization. “Businesses are going to take a second look at expansions.”

Companies also might postpone expansion as they monitor consumer confidence following the market collapse.

‘Got to Be More Cautious’

“It could have a major impact on demand,” said A.J. Moyer, chief financial officer at Irvine-based Western Digital, a company whose stock was especially hard hit during the week, falling 29.5% to close Friday at $15.625. “A half a trillion dollars (in U.S. stock value) was taken out, and a lot of wealth disappeared.”

“You’ve got to be more cautious in your planning, or you aren’t being prudent,” Moyer said. He said Western Digital officials are watching order rates and expenses with caution.

“You’re going to see companies concerned about cash flows more than ever. They aren’t going to be buying a lot,” said Ronald White, chairman of Centennial Group, a real estate syndicator in Orange.

Many executives said, however, that they are confident the economy will remain strong. And many believe the market collapse has created new opportunities.

“I think it presents some excellent growth prospects for acquisitions,” said David Bright, president of Newport Beach-based National Education.

A growing handful of companies have looked at collapsed market values as a blessing--a chance to buy assets for far less than they are really worth.

“A lot of people are looking at this as an opportunity to take over other companies. They’re looking at the basics of companies, and they see that they’re sound,” said R. D. Hubbard, chairman of AFG Industries in Irvine.

Consolidation Outlook

But stock and industry analysts say there should not be a great move toward consolidation of Orange County companies.

“Although some of these companies are great targets, are they financeable is the question,” said Russell Diehl, president of Diehl & Co, a Newport Beach investment banking firm.

He said he believes that the Federal Reserve Board--which has increased the money supply dramatically to help lower interest rates--wants commercial banks to “stop playing investment banker” by financing corporate acquisitions.

For its part, AFG has joined the ranks of companies that are taking advantage of sharply lower stock prices to buy back their own assets at depressed prices.

Shortly after trading closed last Monday, directors at AFG and Safeguard Health Enterprises in Anaheim approved stock buyback plans to take advantage of lower share prices and to boost investor confidence in their stocks. By the end of the week, more than a dozen county-based firms were among the hundreds of companies across the nation that had announced such plans.

Although their market values had plunged, companies such as AFG can afford to buy back their shares on the open market because fluctuations in the market price of a stock do not directly affect the company that issued it.

Businesses “go public” by selling stock in order to raise capital. Once the shares are sold, the issuing company’s finances are not affected by fluctuating market prices.

Faith in Economy

But stock prices still are reflective of the investment community’s faith in a company, just as market ups and downs reflect a level of faith in the overall economy.

Larry J. Card, a Pacific Mutual Life Insurance vice president who manages that Newport Beach company’s $3.5-billion stock and bond portfolio, said that the market plunge will depress both individual and corporate confidence at least “a little bit.”

“The key is whether this loss of confidence will translate into a general economic slowdown or whether the actions of the Fed, the Administration and the Congress will rebuild confidence,” Card said.

Card agreed with Doti and other analysts that at least in the short run, both consumer and corporate spending is likely to slack off. “The first thing to go is big-ticket spending,” he said. “The impact will be on things like new home purchases, luxury cars . . . and some businesses’ expansion and capital improvement plans.”

Such a spending slowdown “would have a great impact open the county’s gross product,” said Doti. “We usually have six to nine months lag time for a change in the market to have a significant impact. . . . The market has been one of most reliable leading indicators (of economic trends),” he said, “and seldom has a correction like this not been followed in six to nine months by a recession.”

But the Federal Reserve Board’s decision this week to increase the money supply “could overwhelm the negatives in the short run” and avert a recession, he said.

As they wait for a signal as to where the economy is headed, many in Orange County--fearful of the stock market--have begun putting their investment dollars into money-market funds. One reason most Orange County companies’ shares continued declining in value even during the midweek rallies is that investors are being unusually cautious.

Young Companies

“Most Orange County companies have only been public since 1980 or 1983,” Diehl said. “Investors are looking for histories. Orange County companies are young, unseasoned securities. They have younger management teams and less mature balance sheets. Institutions are going to be looking for the opposite of those things,” Diehl said.

But, he said that as blue chip stocks increase in value, the secondary stocks might become increasingly attractive because of their potential value.

And that might make Peter Churm fell a little better.

His week began with a lunch at which he had planned to put together a merger deal.

But as soon as he was seated at the restaurant, he heard a television report that the Dow had dropped 219 points.

“By the time we were served,” he said, “it was down 319 points. By the time we left, it was down 425. We were in a state of shock,” said Churm, whose merger discussions dissolved into disbelieving talk about the market.

“We started out putting the deal together, and by the time we left we had abandoned the whole thing and decided we’d wait three months.”