Amid Slide, Fear Grips Investors; Is Loathing Next?
Southland brokers say individual investors are showing the first signs of panic selling as the stock market continues to plunge.
Some brokers fear a huge drop in prices today, as more investors decide to exit rather than risk seeing their stocks fall another 20% or more in a severe bear market.
“There was a rush of selling at the close” Thursday, said Larry Rice, manager of over-the-counter stock trading at Wedbush Morgan Securities in Los Angeles. “That probably means it’s going to be a rocky opening” today, he said.
A Merrill Lynch broker in Los Angeles, who asked that his name not be used, admitted that Thursday was the first day since the Mideast crisis began that he got calls from clients expressing concern and wondering aloud whether they should sell.
He also said trading-oriented customers who have bought stock on credit, or “margin,” are being forced to liquidate their positions to repay the loans, adding to selling pressure.
At other brokerages, too, many clients’ attitude toward the market has quickly shifted. For weeks, the feeling has been that the market would soon stabilize, despite mounting concerns over the economy and the Iraqi invasion of Kuwait. But as stocks have fallen relentlessly--many are down 40% or more since mid-July--more investors have come to see the frightening specter of a prolonged bear market.
Now, the desire to flee stocks is rising sharply, causing anxiety even for investors who had considered themselves long-term holders.
To some experts, however, investor complacency overall is still too high. Not until many more stockholders decide to sell can the market reach a bottom, some say, and that could still be months away. Even so, panic clearly is beginning to grip the market:
* “We had a surge of selling early (Thursday) morning,” said Bob Reed, executive vice president of discount brokerage Jack White & Co. in San Diego. “There were a lot of people saying, ‘I want to sell everything.’ ”
* Frank Masselli, assistant branch manager at Paine Webber Group’s downtown Los Angeles office, said some of his brokers reported Thursday that their clients were suddenly bailing out. “We’re fighting hard to get them to hang on,” said Masselli, who argues that there are “some very strong companies now selling at dirt-cheap prices.”
* At discount brokerage Charles Schwab & Co.’s Century City office, manager Nancy Ybarra said she’s taking calls from “a lot of people saying, ‘I just don’t know what’s going on, but I’m not comfortable.’ ”
The panic isn’t yet universal, however. Some brokers report that their clients are eager to jump into the market, given that many stocks are at their lowest prices in more than a year.
“My own clients have been heavy buyers of high-quality blue chips,” said Lynn Reitnouer, partner at Crowell Weedon & Co.’s downtown Los Angeles office. His customers are snapping up such stocks as Philip Morris, Anheuser-Busch, Heinz and Sara Lee, he said.
Likewise, at the Woodland Hills office of Bateman Eichler, Hill Richards, manager Rocky Mills says he’s seeing a “surprising number of green tickets.” Client buy orders are written on green tickets; pink tickets are for sell orders. Looking at the day’s orders piled on his desk Thursday, Mills said, the green and pink tickets “look about equal.”
Reitnouer said buyers are motivated by memories of stocks’ relatively fast rebound after the 1987 crash. “They saw the result of 1987, and I think this is very similar” to that period, he said.
But many analysts say it’s dangerous to assume the market will repeat the 1987 experience. The oldest rule about the stock market is that it will do whatever is necessary to make fools out of the majority of investors. After the 1987 crash, most people thought a depression was coming and that stocks would plunge further. Instead, the market quickly recovered.
This time, the majority apparently wants to believe that this market turbulence will blow over, that the economy won’t go into recession, and that the Mideast crisis will be resolved favorably for the United States.
In Larchmont, N.Y., Investors Intelligence newsletter’s latest weekly poll of 130 investment advisers shows that while 48.0% now are bearish, 33.1% still are bullish and 18.9% say the market is merely in a correction. That means the majority believe stocks will soon go higher.
History suggests the bearish reading must go much higher before the market can bottom. Just after the market low in late January of this year, the bears totaled 57.3%. The highest reading was 60.9% in March, 1982--five months before the last bull market began.
While there’s little argument on Wall Street that many stocks have been beaten mercilessly, and that many may now be bargains, it’s also a fact that bear markets are rarely over in 30 days--which is about how long this one has gone on, measuring from the Dow Jones industrial average peak in mid-July.
You could pick up stocks at good prices now, compared to where they might be a year from now. But you might be able to get them for even less in the weeks and months ahead, if the bear psychology indeed has yet to peak.
Historically, bear markets have ranged from six to eight months in length to as long as 21 months. There frequently are rallies within bear markets, but they don’t last long. So even while some analysts insist the market will rally at the first sign of a U.S. victory in the Mideast or substantial peace negotiations, many experts say the deepening gloom in the market suggests the rallies ultimately will just bring out more sellers.
That has been the case so far. “After the market rallied (Thursday) morning, it couldn’t hold,” said Frank Baxter, president of Los Angeles brokerage Jefferies & Co., which mainly caters to institutional investors. “Fear prevails.”
If that sentiment continues to build, it could lead to a speculative blow-off that could take the Dow Jones industrial average down several hundred points in one day, some analysts say. With the “circuit breakers” now in place, trading on the New York Stock Exchange would be halted for one hour if the Dow falls 250 points. Upon reopening, if the Dow falls to a total daily loss of 400 points, trading would be halted again, this time for two hours.
Some investors wish the market would take that big hit, wash out the last of the sellers, and give the value-hunters a chance to begin rebuilding the market’s confidence, bit by bit.
But if the market does what it usually does--confound the majority--the big hit may never come. Instead, the selling could continue for months, in small amounts day by day, just as was typical in previous bear markets.
After the bull market of the 1980s, when investors came to believe that stocks only went up, the ratcheting-down of prices over many months “would be a new experience for 70% of the people in the market,” Baxter says.
That would be precisely the kind of lesson the market loves to teach its players.
LOCAL DESTRUCTION
How some Southland stocks have been beaten down since the market peak in mid-July, versus the Dow industrial average and the over-the-counter stock average.
July 17 Thurs. Pct. Stock close close drop LA Gear $27 1/2 $13 3/8 -51% CalFed 15 1/4 7 7/8 -48% Kaufman & Broad 11 1/8 6 1/2 -42% Tokos Medical 15 9 1/4 -38% AST Research 25 1/2 16 1/2 -35% Fluor 47 3/4 31 1/2 -34% Ashton Tate 10 3/4 7 1/8 -34% Teradata 28 1/2 19 1/4 -32% Optical Radiation 33 23 -30% Security Pacific 36 1/4 26 -28% Price Club 42 1/2 31 1/2 -26% Diagnostic Prod. 42 3/4 33 1/8 -23% Carl Karcher 8 1/2 7 -18% NASDAQ OTC compos. 464.48 360.22 -22% Dow industrials 2,999.75 2,483.42 -17%
