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To: HG who wrote (95912)	3/9/2000 12:37:00 PM
From: H James Morris	Read Replies (2) \| Respond to of 164684

Happy, thanx I'll check it out. Put your bear cap on and read this. Amen. But is anyone listening??? >during a session that saw the Dow industrials post their fourth biggest one-day point drop ever. Earnings? What are they? That seems to be the overwhelming sentiment these days. Yesterday's selloff provided more proof. The Dow Jones industrial average, made up of blue chips making money, dropped 3.7 percent yesterday; the Nasdaq, made up of many hip New Economy companies losing money by the bushel, dropped just 1.2 percent -- following a huge run-up. The question is whether this disdain for profits arises because of the amazing popularization of the stock market -- almost 50 percent of households owning stocks directly or indirectly -- or in spite of it. Here's a statistic to ponder, but only while you are sitting down: Last year, the shares of all publicly traded companies that earned a profit declined by an average of 2 percent, while shares of companies that lost money surged an average 50 percent. Whew! And thanks to H. Bradlee Perry of Boston's David L. Babson & Co. for that amazing bit of intelligence. It seems to dovetail with earlier findings by Professor Baruch Lev of New York University. He tracked 5,000 companies over 20 years and concluded that market volatility is rising because investors are increasingly uninformed about the fundamentals of their holdings. Investors assign half the relevance to earnings that they did 20 years ago, Lev concluded. Profits are the very backbone of investment fundamentals. On the other hand, maybe the fundamentals that we old-timers revere, such as earnings, aren't relevant any more, as so many New Economy adherents argue. And maybe the public -- wiser than academics believe -- understands that the New Economy dot-coms really don't have to make money to succeed, at least in the foreseeable future. Because the entire nation has gone ga-ga over gambling in all its forms (lotteries, casinos, Internet gambling, ad nauseam), the most plausible explanation is that people are simply playing the momentum game -- buying rising stocks and dumping declining ones, and damn the fundamentals. That's gambling. It's hardly a profound understanding of the New Economy. What's more distressing is that momentum is in vogue on Wall Street, too -- not just Main Street. This is hardly the first time that the gambling craze has engulfed Wall Street. It always has been politely called speculation. The big trouble with all this is that households are borrowing and spending heavily because of stock market (and also housing) price appreciation. Since the stock market part of this equation is based on speculation, there may be trouble when the bubble bursts, if it is not starting to do so already. "Because households have borrowed against their asset gains, a fall in the stock market would expose the economy to a potentially brutal recession," says Ian Morris of the New York office of HSBC Group. "A 25 percent decline in the stock market would result in a 9 percent fall in households' net worth." "Equity values have risen to the point where they do affect the behavior of middle-class consumers," says Michael L. Goldstein of New York's Sanford C. Bernstein & Co. He points out that the richest 10 percent of stockholders have 85 percent to 90 percent of stocks' total value, so a big hit would fall on those who could cut consumption -- say, buy a Mercedes instead of a Rolls-Royce. "But the bulk of spending, about 80 percent, comes from the other 90 percent of households," he points out. Thus, a sharp market decline could wallop the economy. Because consumer spending is two-thirds of the economy, "the stock appreciation that is driving consumer outlays is driving the economy," says Springfield, N.J.-based economist A. Gary Shilling. Federal Reserve Chairman Alan Greenspan clearly understands that. Once again this week, he made remarks that show he believes market gains are leading to a dangerous overheating of the economy. The remarks helped generate this week's selloff. Last year, the Fed had a schizoid policy: It was raising interest rates, but inflating bank reserves because of Y2K fears. That newly created money helped drive up a small corner of the market. According to The New York Times, about three-fourths of blue chips are already down at least 20 percent or in a bear market. Shilling says he thinks the Fed will start draining those reserves. Others haven't seen evidence of it yet. The bottom line is the economy itself is riding along to a disquieting degree on a bunch of stocks that are losing money by the bushel. Securities and Exchange Commission Chairman Arthur Levitt said this week that many retail investors don't understand how the markets work, and are overextending themselves. Amen. But is anybody listening?