Riding Out the Aftershocks

By Stephen Koepp

The panic was gone, but not the sense of helplessness. Like survivors of a natural disaster, Wall Streeters swung in a half-rational pendulum of despair and delight last week. Ready for a fresh quake in any direction, investors searched for definite portents in every new development in the U.S. dollar, interest rates and the budget deficit. But if the market was capable of a one- day, 508-point drop on Black Monday, Oct. 19, who could say what it might do next? Some seers thought they knew, yet their conclusions were as contradictory as they were passionate. "We are out of the woods!" proclaimed a bull, Michael Metz, an analyst for Oppenheimer & Co. "The house is on fire. Stay out!" declared a bear, Jay Goldinger, a Beverly Hills financial adviser. "There's no reason to go back in and be a hero," he added.

Yet for the moment the bulls held sway -- barely -- despite the scorching they received on Black Monday. Their derring-do sent the Dow Jones industrial average up 42.77 points last week, to close at 1993.53. Fueled mainly by large institutional investors, the rise was the first feeble recovery following the back-to-back record weekly drops of 235.48 and 295.98 points earlier this month. Even so, the market's comeback is nascent, to say the least. The Dow now stands 729 points, or 27%, below its August peak of 2722. In terms of lost value, U.S. stocks remain $850 billion below their recent high. Moreover, while many big shots may be persuaded that the market is safe to re-enter, the general population will not soon forget the spectacle of Wall Streeters in a panic. Consumer confidence shows signs of flagging at just the wrong time, the beginning of the Christmas retailing season.

Still, the market's trend last week was definitely up. The Dow began in the depths of gloom, sinking 156.83 points on Monday to record the second biggest point drop in history. The next day brought the beginning of the rally, for no apparent reason except that investors still had cash to invest after selling so furiously in previous sessions, and began to see blue-chip bargains among the battered stocks. The Dow rose 52.56 on Tuesday, .33 on Wednesday, a robust 91.51 on Thursday and 55.20 on Friday. Even the over-the-counter market, which was more devastated in the fall than the New York exchange, showed signs of life on Friday, rising 5.3%.

Among the newly confident buyers were foreign investors, who had recoiled in the aftermath of Black Monday and whose return had been considered doubtful. "We believe that the U.S. market has bottomed out. The worst is over," said Yoshitaka Yamashita, an executive vice president for Japan's Nomura Securities. "Things have stabilized, and again we are accumulating shares."

The market's sturdiness was particularly impressive in the face of a sliding U.S. dollar, which fell 2% to 3% last week against major trading currencies. At one point the dollar traded in New York at 137.20 yen, a 40-year low, and 1.721 West German marks, the lowest in seven years. The drop apparently represented a Reagan Administration plan to abandon its policy of holding the currency steady in favor of allowing it to enter a managed decline. Many economists believe the dollar must fall 10% or more to help ease the U.S. trade deficit by making American goods more competitively priced.

Ironically, the prospect of a dollar drop was one of the central fears that touched off the market crash, since a weaker currency could rekindle inflation. But the crash itself has now reduced the market's inflation fears, simply by having erased $850 billion in the potential buying power of stockholders. "American households lost the equivalent of six years of savings," says Donald Straszheim, chief economist for Merrill Lynch. "That is a major contraction and a weakening of inflationary pressures."

As the market shook off some fears, it finished digging out of the record- keeping mess left over from the week of Oct. 19, when an unprecedented 2.3 & billion shares changed hands on the New York exchange. Though trading is computerized, the systems became so backed up that thousands of electronically transmitted buy and sell orders were lost in the crunch, and details of other trades remained in dispute. Typically such snafus affect only 1% of trades, but during crash week the level rose to 5%. Clerks at the Big Board worked on weekends, many dressed in blue jeans and with youngsters in tow, to sort out the mess.

As the numbers emerged, Wall Street brokerages began to make estimates of their losses. Even though many investment firms will reap bounteous commissions because of the market's high volume, many others suffered huge trading losses in the crash. The prestigious firm of L.F. Rothschild said it suffered $44 million in net losses for the month, but denied speculation that it might have to merge with a healthier company. Charles Schwab, the largest U.S. discount brokerage, announced a loss of $22 million, mostly attributable to one unidentified freewheeling corporate customer that was unable to cover losses on its account. At least one bank was stung hard: Continental Illinois, which only three years ago was the beneficiary of a $4.5 billion federal bailout. Continental said it will post a loss for the fourth quarter because of a $90 million deficit in customer accounts at a subsidiary, First Options of Chicago, a company that indemnifies traders on the turbulent options and futures exchanges.

No major financial institutions were crippled in the crash, but many small brokerages were less fortunate. Some folded when a few high-rolling customers were unable to cover their margin accounts, in which they had bought stocks by borrowing up to half the cost of a share. As many as 50 firms have closed their doors or sold out to larger companies, according to Perrin Long, who follows the industry for Lipper Analytical Securities. Some 300 more of the industry's 12,000 firms may follow, he said. One casualty last week was First Potomac Securities of Falls Church, Va., which collapsed when two customers failed to meet combined debts of $2.6 million. "There's nothing I can do," said Carole Haynes, a stockbroker who started the company just three years ago. "Everything I own is in this firm."

Many portfolio managers who became stars during the bull market emerged from the crash notably tarnished. George Soros, 57, who until Black Monday was regarded as one of the canniest investors in Wall Street history, saw his Quantum Fund drop some 36%, to $1.67 billion. Other stars emerged overnight. Elaine Garzarelli, 36, a research analyst and fund manager for Shearson Lehman Bros., had emphatically predicted a collapse exactly one week before Black Monday in an interview on Cable News Network. Her stock fund, the Sector Analysis Portfolio, reportedly gained 5% during the week of the crash because Garzarelli had moved the fund out of stocks and into cash and Treasury bills. Result: Garzarelli, who bases her prognostications on an elaborate computer model, now sends visible tremors through the market with her predictions, which remain bearish at the moment.

Many stockbrokers are nervous for another reason: the wrath of their clients. "I want to strangle my broker," says Manhattan Insurance Agent Matthew Costa. "I wanted to sell everything on the Friday before the crash, but she told me I had good stocks and should hold on. Now she keeps giving me excuses why she can't meet me for a few days." While Costa's threat was figurative, customer anger seemed all too real last week after an investor who lost nearly his entire multimillion-dollar portfolio walked into a Merrill Lynch outlet in Miami with a .357 magnum in his briefcase and killed the branch manager, seriously wounded a broker and then committed suicide. The customer, Arthur Kane, 53, later turned out to be a disbarred Kansas City lawyer and convicted con man who was living in Florida under a witness protection program. Despite the incident's odd circumstances, it crystallized brokers' fears; in one Queens, N.Y., office, brokers reportedly donned buttons that read, I AM NOT THE BRANCH MANAGER.

Most of the harm that brokers may face, however, is financial. An estimated 24,000 of the securities industry's 300,000 workers are expected to lose their jobs in the market slowdown. Many more may forfeit their six-figure bonuses. The economic ripple effects will be felt most strongly on the Eastern Seaboard, especially in New York City, where sales of luxury cars, expensive homes, jewelry and other trappings of Wall Street success are already starting to suffer. The city could also be hurt by a falloff in tax revenue from the financial industry, which last year amounted to $150 million, or 12% of the tax base. Anticipating a drop, Mayor Edward Koch last week put a freeze on plans to hire 5,200 new workers, including 1,948 police officers.

Signs are increasing that the crash is discouraging consumers across the U.S. as well. While polls immediately afterward showed only a modest amount of alarm, later surveys indicated that the Wall Street shock was starting to register. According to a Wall Street Journal/NBC News poll of 2,394 Americans last week, nearly two out of three (64%) say a major economic downturn is very or somewhat likely in the next twelve months. "Since about 19% of total retail sales occur during November and December, the plunge could not have come at a more inopportune time," says Robert Chandross, chief economist of Lloyds Bank in Manhattan.

Even so, many stockholders seem to be reacting with coolheadedness, choosing to hang on to their stocks in the hope of long-term gains, the old-fashioned way of investing. Says Roderic Pettigrew, an Atlanta physician: "I'm not panic-stricken. I didn't plan to use the money to buy my Christmas gifts. To me it doesn't make sense to pull out. If you do, you have no chance to recover." Concurs Andy Karos, a furrier in Glenview, Ill.: "I don't intend to get out a loser, so I'm leaving my money in the market." But that strategy stems more from bewilderment than confidence. Says Alan Shaw, Smith Barney's chief market analyst: "Investors from all walks of life are sitting back, shell-shocked, trying to figure out what it all means." Until they do, not many individuals are likely to put fresh money into the manic market.

With reporting by Thomas McCarroll and Raji Samghabadi/New York