Long thing of possible interest :
September 2, 1998
As Stock-Market Gains Dissipate,
So Does a Bit of Economy's Froth
By MICHAEL SICONOLFI, E.S. BROWNING and PATRICK MCGEEHAN
Staff Reporters of THE WALL STREET JOURNAL
Stocks came back smartly Tuesday, but not before investors had gotten a
troubling hint over the past few weeks of what it would mean to their lives and
businesses if shares no longer were heading steadily, inexorably higher.
It was an experience new to many: The last 20% stock decline came nearly
eight years ago, and the last grinding, relentless down market was 25 years
back. With another long and deep decline in U.S. stocks no longer
unimaginable, it is worth exploring some people's reactions to the recent chill
winds.
Mark Schwartz's reaction, for instance. In last year's raging bull market, Mr.
Schwartz felt so rich that he sold a $25,000 chunk of his portfolio of Israeli
high-technology stocks to pay for his son's bar mitzvah.
What's left of that portfolio has since plunged. So when it came time for Mr.
Schwartz to finally buy the "restored and pristine" Jaguar of his dreams, he
just couldn't do it. The Bryn Mawr, Pa., lawyer figured he could make do with
his 1988 Volvo, 135,000 miles and all. It wasn't just Mr. Schwartz's stocks
that took a beating. So did his psyche.
Even Tuesday's comeback still leaves investors
as a whole about $2 trillion poorer. The Russell
2000 index of small stocks -- the kind many
individual investors favor -- is off 29% since
April. One result is that many people are already feeling less well off, and some
are starting to pull back from the types of spending commonplace in the bull
market's heyday.
And it isn't just individuals who are affected. The 1990s' rising stock prices
paved the way for a record crop of entrepreneurial businesses to tap the public
markets for capital, primarily through initial public stock offerings. In addition,
some of the world's largest corporate mergers have taken place in the past few
years, compliments of high stock prices that made deals easier to do. Finally,
in corporate compensation, steadily rising share prices have made stock
options a valuable part of millions of pay packages, not just for executives, but
also for some lower-level employees.
While it is hard to say how profoundly a bear market would affect these
corporate practices -- so much would depend on how relentless the bear was
-- it is notable that initial offerings have already been slammed. An IPO well
that stayed dry for a long time could, unbeknownst to the world, lead to the
death of any number of innovative little companies that years from now might
otherwise have become major players. The venture-capital seed money that
funds those kinds of start-ups also would likely dry up.
All this could weaken the "entrepreneurial spirit" that has flourished in the
1990s, says Reena Aggarwal, associate professor of finance at Georgetown
University. It would be particularly problematic for potential start-ups because,
Ms. Aggarwal says, no other country in the world has any substantive
new-issue market for young companies: "The U.S. is the only country where a
Netscape and Yahoo! can go public."
Just one new issue came to market last week, down from 19 only four weeks
ago. Other IPOs have been postponed or canceled. One casualty is
Galacticomm Technologies Inc., a Fort Lauderdale, Fla., software company,
which was slated to price an $11 million IPO Tuesday and begin trading
Wednesday. Galacticomm plans to try for its IPO in a couple of weeks,
provided the market stabilizes. If not, "you have to temper your ambitions,"
says Peter Berg, chief executive, and try tapping private sources of capital
instead.
In the years since Americans last lived through a prolonged bear market --
1973 and much of 1974 -- the world has become a very different place. For
one thing, it is more sensitive to stock-market swings. In the mid-1970s,
Silicon Valley was in its infancy, and many of its fabulous growth stocks
didn't yet exist. Powerhouse companies that today drive an economy centered
on technology -- behemoths such as Microsoft, Cisco Systems and Dell
Computer -- hadn't been founded. It was nearly unimaginable that a young
company could hire an earring-wearing engineer with a fat package of options,
then see him jump off to found his own company and take it public in the
stock market.
Retirement accounts those days tended to be run by faceless pension-fund
executives with an attachment to bonds and predictable returns. Today,
individuals often manage their own retirement accounts, shifting them into and
out of a dizzying array of mutual funds. Indeed, individuals never have been
more vulnerable to a stock downturn. Fueled by the bull market, households'
net worth -- their financial and real assets less liabilities -- earlier this year hit a
record six times their disposable personal income.
Many investors remain flush, of course, after nearly eight years of market
gains. The full impact on the spending and other behavior of individuals and
corporations tends to lag behind the market action. And, of course, the market
correction could be over; stocks could continue yesterday's broad rebound and
earn back the losses. Indeed, optimism about a recovery led Gregory Hinckley,
chief operating officer of Mentor Graphics Corp., Wilsonville, Ore., to buy
5,000 more shares of his company's slumping stock to add to the 25,000
shares he already owned. "I'm a contrarian by nature," he says.
Yet many people suddenly "don't feel as wealthy as they did, and are less likely
to splurge," says John Lonski, chief economist at Moody's Investors Service
Inc., the credit-rating company. "Spending on big-ticket items" will suffer, Mr.
Lonski predicts. "What you're going to find is that consumer confidence will
be much more sensitive" to a market swoon.
About a quarter of consumer spending is "due to the wealth from the stock
market," estimates Sung Won Sohn, chief economist at Minneapolis banking
group Norwest Corp. "A correction or bear market, which is what I think we
are seeing, will have a significant impact on consumer spending," he says, "and
therefore on all the companies selling to consumers. And two-thirds of the
economy is driven by consumer spending."
Credit Suisse First Boston Corp., which had losses in Russia and other
emerging markets, has told recruiters it won't be doing any more hiring for its
bond, investment-banking and derivatives departments this year. A spokesman
says those divisions at the firm, a unit of Credit Suisse Group, had already
"met their head count" although "exceptions" are permitted. "This is routine
business practice this time of year," he says.
Meanwhile, some analysts say a worsening market slump would threaten the
long-anticipated November IPO of Wall Street giant Goldman, Sachs & Co.
Goldman says its "plans remain unchanged."
If the stock market gives the nation a chill, New York City could face a frost.
The largest U.S. city has become more dependent than ever on Wall Street in
the past five years. Wall Street bonuses hit $12 billion last year, bringing
budget surpluses to government, according to a report by state Comptroller
Carl McCall. Securities firms incurring emerging-market trading losses are
likely to cut bonuses and perhaps lay people off, surely affecting the region's
financial health.
From his front-row view of the market's drama of recent weeks, Mark
Greenstein had seen enough by the end of last week to lose his appetite for a
bigger condo and a new car. A broker at a small Wall Street firm, Mr.
Greenstein was in the midst of selling a one-bedroom apartment in Manhattan
for $255,000, with his sights set on a two-bedroom priced at about $350,000.
He says he also had his eye on a new Mercedes to replace the 1983 Cadillac
Coupe de Ville he inherited from his father. He has scrapped those plans, at
least for now, because he thinks trouble in stocks could portend a weaker
real-estate market down the road. "I'll just keep the old Caddy running," he
says, and take the ribbing from his colleagues.
Corcoran Group, a real-estate brokerage firm in New York, has held
workshops to coach brokers on "how to reassure your buyer." Among the
tips: Remind them that "unlike most stock portfolios, a home is a long-term
investment." Though they needed more hand-holding, most prospective buyers
went ahead with their purchases -- until last weekend, says the firm's
president, Barbara Corcoran. She says buyers started pulling out of deals,
citing fears about the direction of stocks.
Silicon Valley, where scores of high-tech start-ups have enriched employees
with lucrative stock options, also faces some cracks. Already, some tech
companies have begun repricing options, which allow holders to buy shares at
a set price. With the steep stock-price plunges, some of those options have
become essentially worthless. Companies such as Quickturn Design Systems
Inc. in San Jose, Calif., have "reloaded" them at lower prices, partly to keep
employees from bolting. The company's "most valuable talent" was being
wooed by rivals, and it needed to reprice the options to keep those employees
"focused and content," says Raymond Ostby, chief financial officer.
Some area restaurants have felt a chill. Steve Koidal, general manager of Left
At Albuquerque in Palo Alto, finds people still are drinking his margaritas and
eating his salmon and fajitas. But business, instead of growing steadily as in the
past, has become choppy. The restaurant will do record business one day,
"and then some other days have been extremely slow for no apparent reason,"
he says.
Many tech stocks trading on the Nasdaq Stock Market have been in a slump
since April. And even as overall California home sales rose 8.1% in July from
June, sales in Silicon Valley slid 7.3%, according to G.U. Krueger, deputy
chief economist at the California Association of Realtors. Lee Blansett put his
Palo Alto house on the market in early August, hoping to make a quick killing
after seeing a two-year buying frenzy in the area. He thought he would sell in
two weeks. It took four.
"What ended up happening was that instead of getting multiple bids as we
expected -- six or seven has been typical in Palo Alto -- we only got one," says
Mr. Blansett, a market researcher with a Palo Alto health-care consultancy.
Agents had told him to expect $540,000 to $550,000; he sold for $515,000,
and to get that figure, the agent gave up part of the commission.
"What we are seeing is that Silicon Valley is very much driven by IPOs and by
Nasdaq," Mr. Blansett says. "Nasdaq has been down, so everyone's options
have been underwater. And the slowdown of the IPO market means that you
don't have so many people wandering around with $500,000 in cash in their
pockets. So we've had a lot less liquidity in the market."
Even the toniest areas back East are feeling pain. William Benedetto, an
investment banker, a month ago looked to sell his waterfront summer home in
Long Island's Hamptons for more than $1 million. But as the market has fallen
off, so has the number of visitors. Last Thursday, as the Dow Industrials
plunged more than 350 points, a potential buyer from Wall Street canceled a
visit because, Mr. Benedetto says, he "couldn't leave" his computer screen.
"Waterfront premiums had been the highest in 20 years," Mr. Benedetto says.
"Now the premium may be shrinking because of the market."
The market downturn has affected Mr. Benedetto in other ways. When he
offered to buy a car for his son, the third-year medical student asked for a
BMW. Mr. Benedetto had another idea: a Saturn.
For some, the pinch has been personal and professional. Michael Cohen, a
stockbroker at Robert W. Baird & Co. in Florida, planned to soup up his
Harley-Davidson motorcycle, which would have cost just $1,500 to $2,000.
But with his clients pulling back, Mr. Cohen sat tight on the bike. "It's the little
things I might have done otherwise," he says.
What Gary Goldstein, president of Whitney Group, an executive-recruiting
firm, decided to put off was a kitchen renovation of his 1790 Colonial home in
Bedford, N.Y. The shares of his firm's parent, Headway Corporate Resources
Inc., have plunged to $5.625 from $12.75 on Nasdaq, and Mr. Goldstein has a
"big chunk" of his net worth in the stock. "I've lived there 10 years; there's no
reason I can't wait another six months" to do the kitchen, Mr. Goldstein says.
The potential impact on corporate America is harder to quantify, but it's clear
that a battered stock price, from whatever cause, disrupts a company's
investment, development and, sometimes, hiring plans. Interneuron
Pharmaceuticals Inc. in Lexington, Mass., has faced such a battering, although
it was due not so much to this weak market as to last year's withdrawal of
Redux, the diet drug that Interneuron developed and American Home Products
Corp. marketed. Having experienced a depressed stock price, Interneuron
spokesman Bill Boni observes that "a general market downturn like this makes
it difficult for small companies because it makes it difficult for investors to
focus on the potential of individual products in your pipeline."
Meanwhile, the outlook has changed for some companies that have grown
rapidly through acquisition, such as Conseco Inc. The financial-services and
insurance company has taken over 20 companies since 1982. "We haven't
been immune from this fallout," says Conseco Chairman Stephen Hilbert. "It
also seems like anybody that's acquired anything has gotten killed as well."
Some acquisitive corporate executives see the decline as an opportunity. Mr.
Hinckley, the Mentor Graphics COO, thinks the market upheaval will help his
company's all-cash hostile takeover bid for rival Quickturn for $12.125 a
share, which was recently rejected. With Quickturn at $9.8125 a share
Monday on Nasdaq, Mr. Hinckley commented, "A few more days with the
market going down 500 points, and it'll be looking more attractive." Quickturn
shares rebounded a bit Tuesday to $9.875. The company declined to
comment.
For some individuals, it is their company's stock that has hurt them most.
Employees at Lehman Brothers Holdings Inc., who own 25% of the firm's 122
million shares outstanding, have had paper losses in the past several weeks
totaling more than $1.38 billion, as their company stock -- which can make up
much of their annual income -- has plunged by more than 50%. "My kids
didn't have to go to college," quipped William Ahearn, a Lehman spokesman,
late Monday as Lehman's shares plunged 14%, or $6.3125, to $39.375, on the
Big Board. The shares rose 25 cents Tuesday.
Still, given the price at which people have been able to buy the stock,
"everybody still has appreciation," Mr. Ahearn says.
At the end of a brutal Monday for the market and Lehman, Mr. Ahearn could
still look on the bright side. He joked that he now would have to figure out
how to pay for his recently completed vacation in West Virginia and added that
with Lehman's annual stock-grant program nearing, "we'll get more shares at
$45 than we would at $80."
Copyright c 1998 Dow Jones & Company, Inc. All Rights Reserved.
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