In the stocks

How long will the market's free-fall continue?

Published July 16, 1996 11:25AM (EDT)

In the last few days, the stock market has fallen substantially, leading to speculation that the longest-running bull market in history may be coming to an end. Trying to make sense of the rapidly changing financial scene, we spoke to Christopher Byron, who writes about Wall Street for the New York Observer and Esquire.

What do you make of these last couple of days' stock market plunges, which seem to be led again by high-tech stocks?

Frankly, I'm not surprised by any of this. I just think this was a correction that was long overdue. There's nothing fundamentally wrong with the stock market -- I think it's still a good place to put your money. But it got to crazy speculative levels with these price-earning multiples -- we were seeing many companies that didn't even have any revenue, didn't even have a product on a store shelf, selling at multiples that were equivalent to the GNP of France. It was really crazy. There was no rhyme or reason to any of it. Eventually, inevitably, it was going to unwind, and this is the unwinding, that's all.

We're seeing what we call a regression to the mean. All of these companies at the outside fringes, with PE multiples unheard of in investing history, are collapsing before your eyes, and that collapse will continue until this regression settles down into some kind of predictable pattern. That's when people can make a lot of money again and sleep at night.

Is it just the new companies? I also see Hewlett-Packard and other of these more established high-tech companies having some less-than-stellar results.

They're all good companies. There's absolutely nothing wrong with any of them. What's happened here is that they got swept along in this insanity, this belief that trees can grow to the sky. Well, they don't. The furthest reaches of the possibly defensible PE multiple for high-tech stock has got to be Microsoft, and even that stock is coming down fast.

Do you see more unwinding in the days ahead?

Absolutely. Because all that's happened here is that everybody has decided, "It's time for me to take my money and run." You can't have 50,000 people get in the down elevator all at once. That's what happened.

Would it be fair to call this a panic?

No, but I'll tell you when it would be. If we start to see frantic liquidation in mutual funds, then I would say we have a big, big problem in this country, because so much of the capital wealth of this country now is tied up in mutual funds. Mutual funds now have more of the nation's capital than the nation's banks do. So if everybody showed up at CitiCorp tomorrow morning and said they wanted their money out, well, you've got a panic.

Where do you think the Dow Jones Industrial Average might regress to?

Who the hell knows? If I really knew, I wouldn't be doing this.
But there's a major support level around 4800. There are a lot of solid holders at 48. In October of last year it was at 48. If we saw the same thing happen here with a lot of buying and selling and moving sideways at 48, I'd say that's the end of the correction.

So we could be looking at another 300-point loss.

Yeah. Christ, it could happen in two days.

And there's another big support level at about 38. That level ran from January of '94 all the way to the end of '94. If this fall ever goes to 37 or 3800 on the Dow, take out a second mortgage on your house and just start buying stocks. You know, these things always overshoot themselves.

But you're expecting it to level off at around 48.

If it stops at 48 and it goes sideways for a month or two, I'd say it's over. If it goes to 48 and then starts going sideways, I'd say that's it, that's a real good buying time if you're an investor in the stock market.

But it could go further down?

Absolutely. If it crashes right through 48, the next one you're gonna look at is another thousand points down. It's a big drop. And if it does that and gets to 38, hock the house because you can make real money.

When I grew up, everybody waited for Ford and Chrysler to report their earnings. It was as if the market was driven by car companies. And now it's driven by Netscape and Yahoo!

Absolutely. Well, that's what happened in this bubble here. The market isn't driven by them at all. There's about 20 or 30 stupid mutual fund managers who are going to be looking for work in about a month because they put a lot of money into those stocks. This is definitely a technology-driven market, but the software stocks are not the ones that are driving it, it's outfits like Motorola. And the one or two software stocks that really count -- Microsoft, Oracle, the big, real companies.

Are we seeing the planet's transformation from an industrial economy to a high-tech economy?

Well, it's been driving this market since '94, that's for damn sure. And the way I'm looking at this chart right now, there's an awful lot of wishful thinking going on.

Clinton's Cuba balancing act
President steers a delicate middle course on trade-related lawsuits



President Clinton's decision to allow Americans to take legal action against foreign firms doing business with Cuba, but also to change his mind after six months, is an artful political compromise aimed at minimizing political damage among two different groups: U.S. trading partners overseas and the powerful Cuban-American constituency at home.

Facing a deadline Tuesday, Clinton had to decide whether to waive a provision in a law that would allow Americans who lost property in Cuba during the revolution to file suit in U.S. courts against foreign firms now trafficking in those assets.

The provision, Title III of the controversial Cuban Liberty and Democratic Solidarity (Libertad) Act (better known by the names of its Republican sponsors, Sen. Jesse Helms of North Carolina and Rep. Dan Burton of Indiana), had been bitterly criticized by U.S. trading partners, including Canada and several European countries, who are worried their firms would become targets of such lawsuits. Many of these countries, arguing that the United States is violating international law by extending its trade policies beyond American shores, threatened reprisals against U.S. firms and their executives if Clinton allowed the law to go into effect.

But Clinton also faced domestic political pressure from the pro-provision Cuban-American community, which could swing electoral results in the key states of Florida and New Jersey.

Clinton's response was a careful compromise. While he opened the way for legal action, he also decided that no lawsuits can be filed before Feb. 1, utilizing a clause in the law that allows him to review his decision every six months. At that time, President Clinton has the option to render meaningless his decision to allow legal action against foreign firms doing business with Cuba.

The compromise was worked out over the weekend at Camp David, where President Clinton, Commerce and State Department officials and the president's top political adviser, Richard Morris, discussed the commercial, legal, diplomatic and political implications of allowing Title III to go into effect.

The roiling dispute underscored the difference between U.S. policy toward Cuba, which Washington has boycotted for 35 years, and the policies of other governments, who have chosen to engage Castro's regime as a way to encourage change. The United States follows a similar policy of "constructive engagement" with the Communist regimes in China and Vietnam.

Administration officials say that over the next six months, Clinton will try to coordinate Cuba policy with U.S. allies so that it will no longer be necessary to invoke Title III. At the same time, they add, the fact that the provision is now hanging over the heads of investors in Cuba will make them think twice about remaining in Cuba or initiating new investments.

One trade official characterized Clinton's decision as an attempt to give all parties to the controversy something to tide them over until the issue of Cuba policy can be finally resolved with America's trading partners. "He can say to the Cubans that they still have the right to file suit and the firms are still being pressured," the official said. "He can say to the Europeans that their companies are not being sued because of the delay, so let's talk about reaching a common policy on Cuba. As far as Congress is concerned, I don't think he sees any benefit coming out of this, but at least now he has some arguments to counter their criticism."

Predictably, initial reaction to Clinton's compromise decision has been mixed, with Republicans blasting the president for what one called "his attempt to have it both ways" and business leaders and trading partners cautiously praising Clinton's formula.
"He didn't exactly waive the law, but he also delayed the date that law suits can be filed. So we think this is definitely a good first step," said Christopher Mustain of the European-American Chamber of Commerce, which had warned the administration about the retaliatory measures facing U.S. businesses abroad if Title III were allowed to go into effect immediately.

"We think it allows more time to consult with our allies about a common Cuba strategy and to check out the legality of this law, both under the constitution and under international law," Mustain said, adding that the legislation had been rammed through the Senate and House without ever having been reviewed by the Judiciary committees of both chambers.

Mustain said he had received favorable reactions to Clinton's decision from several trading partners, including Canada and Spain.

But business people and trade officials note that under U.S. law, foreign companies doing business with formerly American-owned firms in Cuba are still accruing liability as of Nov. 1, the date when law suits could have been filed had President Clinton not postponed the filing date. "So firms still face the threat of lawsuits, and they are continually going to have to wait on this six-month cycle for extensions of the waiver," Mustain said, noting the only way companies can get out of that situation is to disinvest before Nov. 1.

Marc Thiessen, spokesman for the Senate Foreign Relations Committee, which is chaired by Helms, said that continuing the threat was the only good thing to come out of Clinton's decision.

"Just the threat of these lawsuits will have an enormous effect in deterring business investment in Cuba," he said. "Businesses make their investment decision not on six-month projections, but on projections of years and decades. Businesses already have been fleeing Cuba because of this threat, and that threat is going to continue hanging over their necks, whether Clinton had the courage to implement the law or not."

Thiessen sarcastically described Clinton's compromise as "another example of the president taking a firm stand on both sides of an issue. The president wants to have it both ways, but the fact of the matter is he had a choice today that was very clear: He could either let people file law suits against people who are trafficking in their stolen property or not let them. And he chose not to let them sue. So he capitulated to Castro and his business collaborators."

A legal expert on trade with Cuba, who spoke on condition of anonymity, said the law, even if its implementation is postponed repeatedly, promises to complicate any future discussions between the United States and its trading partners about a common Cuba policy.

"Our trading partners in Europe and Canada believe that privatization of that state economy is the only way Cuba can make the transition to a free market economy and ultimately a free political system," the expert said. "But if the United States has this law hanging over everyone's head branding any commercial activity with anyone on the island as trafficking in stolen property, how can that occur? The Europeans may be initially pleased with Clinton's decision right now, but this could get very sticky later on."

Quote of the day

Don't worry, be happy

"About half of your sense of well-being is determined by your set point which is from the genetic lottery, and the other half from the sorrows and pleasures of the last hours, days or weeks.

"Be an experiential epicure. A steady diet of simple pleasures will keep you above your set point. Find the small things that you know give you a little high -- a good meal, working in the garden, time with friends -- and sprinkle your life with them. In the long run, that will leave you happier than some grand achievement that gives you a big lift for a while."

-- Dr. David T. Lykken, a University of Minnesota behavioral geneticist whose study of twins suggests that happiness may be genetically predetermined, like weight.
(From "Forget Money; Nothing Can Buy Happiness, Some Researchers Say," in Tuesday's New York Times.

By Andrew Ross

Andrew Ross is Salon's executive vice president.

MORE FROM Andrew Ross

Related Topics ------------------------------------------