Boom,

By John Greenwald

The day was star-crossed: Friday the 13th in the month of October, on the eve of the second anniversary of a devastating market crash. "I'm telling you, psychology is really funny. People get crazy in situations like that," said portfolio strategist Elaine Garzarelli. Last week Friday the 13th lived up to its frightful reputation. After drifting lower at a sleepy pace for most of the day, the Dow Jones industrial average abruptly lurched into a hair- raising sky dive in the final hour of trading. By the time the 4 p.m. closing bell halted the rout, the index had dropped a nightmarish 190.58 points, or nearly 7%, to close at 2569.26.

The sell-off was the sharpest since the market plunged 508 points on Oct. 19, 1987. In terms of points, it was the second largest loss in Wall Street history; in percentage, the day ranked twelfth worst. "It's total emotional and psychological chaos," said Eugene Peroni, an analyst with Janney Montgomery Scott, a Philadelphia brokerage firm. "People are dumping < everything. A great deal of money is being lost."

The drop invited instant comparison with the month's two historic calamities: the 1987 collapse on Oct. 19 and the 1929 debacle on Oct. 29. Particularly gnawing was the memory that 1987's Black Monday was preceded by a Friday plunge of 108.35 points. Last week's drop-off rekindled fears that an era of heedless borrowing by corporations and the Federal Government might finally be coming to grief. At the very least, the rout reminded investors that the stock market is a volatile place where fortunes can vanish at the touch of a computer key. After one frantic hour of selling conducted to a large extent by program trades, nearly $200 billion of stock values were wiped out last week.

The Bush Administration moved swiftly to avert any sense of crisis after the market closed. Declared Treasury Secretary Nicholas Brady: "It's important to recognize that today's stock market decline doesn't signal any fundamental change in the condition of the economy. The economy remains well balanced, and the outlook is for continued moderate growth." But Massachusetts Democrat Edward Markey, who chairs a House subcommittee on telecommunications and finance, vowed to hold hearings this week on the stock market slide. Said he: "This is the second heart attack. My hope is that before we have the inevitable third heart attack, we pay attention to these problems."

Experts found no shortage of culprits to blame for the latest debacle. A series of downbeat realizations converged on Friday, ranging from signs of a new burst of inflation to sagging corporate profits to troubles in the junk- bond market that has fueled major takeovers. The singular event that shook investors was the faltering of a $6.75 billion labor-management buyout of UAL, the parent company of United Airlines, the second largest U.S. carrier. "That's when all hell broke loose," said Robert Newman, a floor trader for Equitrade Partners. "It was very reminiscent of something I do not care to think about."

On one point most thoughtful Wall Streeters agreed: the market had reached such dizzying heights that a correction of some sort seemed almost inevitable. Propelled by favorable economic news and a wave of multibillion-dollar takeovers, stocks had soared more than 1,000 points since the 1987 crash. But by last August some Wall Streeters were clearly worried. Noted Donald Stone, a floor specialist for Lasker, Stone & Stern: "I've been on the trading floor for 39 years, and I've never seen the market go up so fast for so long without a major break." Yet the bulls kept on running. Just last Monday the market closed at a historic peak of 2791.41, its fifth record high in as many sessions.

The looming anniversary of 1987's crash had prompted many on Wall Street to search for comparisons between 1987's boom and this year's. In an investor newsletter dated Oct. 1, Shearson Lehman Hutton cited twelve ways in which this year's rally seemed more likely to last. Among them:

-- Interest rates were rising then, while they are stable or falling now.

-- The economy was growing unsustainably in 1987, but more gradually this year.

-- Investor sentiment was wildly bullish then, and far more cautious now.

Yet this year's rally has rested on some shaky foundations. Chief among them is the relentless pace of corporate takeovers, which enriched everyone on Wall Street, from stockholders to investment bankers. But the buyouts have been fueled by financing from a junk-bond market that was severely weakened last month when Canadian developer Robert Campeau nearly defaulted on $1.27 billion of debt payments on loans that he had used to acquire Allied Stores and Federated Department Stores. In the wake of Campeau's problems, the money for new takeovers has begun to dry up.

Meanwhile, the Government's chief early-warning gauge of inflation indicated last week that the U.S. economy may be headed for trouble. The Labor Department said its Producer Price Index rose 0.9% in September, or about 10% on an annual basis, to break a three-month string of declining wholesale prices. Earlier in the week, Federal Reserve Chairman Alan Greenspan suggested that the Fed remains wary of inflation and therefore would be averse to easing interest rates. That was not what Wall Street wanted to hear.

The heaviest blow to the market came Friday afternoon. In a three-paragraph statement, UAL said a labor-management group headed by Chairman Stephen Wolf had failed to get enough financing to acquire United. Several banks had apparently balked at the deal, which was to be partly financed through junk bonds. The takeover group said it would submit a revised bid "in the near term," but the announcement stunned investors who had come to view the United deal as the latest sure thing in the 1980s buyout binge. Said John Downey, a trader at the Chicago Board Options Exchange: "The airline stocks have looked like attractive takeover targets. But with the United deal in trouble, everyone started to wonder what other deals might not go through."

Nowhere was the shock greater than on Wall Street, where some traders had left work early Friday to enjoy a balmy Indian summer day. "I was on the floor until 2:30," said specialist Stone. "The trading was so quiet that I decided to go home." But by the time he got there shortly after 3, the damage was already out of control. "I saw quite a bit of panic selling," said Muriel Siebert, who heads a discount brokerage that bears her name. UAL shares fell 5 1/2 points before trading in its stock was halted because the number of sellers overwhelmed buyers. Delta Air Lines, a frequently rumored takeover target, dropped 7 3/4.

Some safeguards installed in the market after the 1987 crash may have helped cushion last week's fall. In Chicago the Mercantile Exchange twice halted trading in S&P 500 futures contracts, which represent the stocks in the Standard & Poor's 500 index. The automatic cutoffs, or "circuit breakers," slowed the contracts' drop. In 1987 parallel free falls in New York and Chicago, which are linked by computerized trading programs, had aggravated the collapse. But last week some Chicago traders claimed that the stoppages in futures trading restricted the ability of some investors to hedge their losses, forcing them to dump stocks and exacerbating the selling frenzy in Manhattan.

Many investors, especially short-term speculators, were badly shaken. The biggest losers were Wall Street arbitragers, who make money by buying the stock of takeover targets and selling it at a higher price when the deals go through. The high anxiety about the junk-bond market sent the stocks of takeover targets plunging across the board. "The arbs got their heads handed to them," said Anson Beard, the chief trader for Morgan Stanley. "Very few anticipated that the UAL buyout could fail." Small investors suffered less because they have been less active in the market since the 1987 crash.

The market drop echoed around the world. In Tokyo, Noriko Hama, a senior staffer at the Mitsubishi Research Institute, warned that "it could be very hard to stop" the Wall Street plunge from sending ripples through foreign stock exchanges. Tokyo's volatile Nikkei index fell 445.02 points last Thursday, its sharpest drop since June. The index rebounded 320.97 points on Friday to close at 35,116.02, down 93.33 for the week.

To many investors, the most disturbing aspect of the Wall Street slide was its breathless speed. "We have a history of market bubbles and panics," says Allen Sinai, chief economist for the Boston Company Economic Advisors. "But because of the advance in communications, corrections that used to take days, weeks or months now take minutes. Any positive or negative events get communicated in seconds." Sinai added that while "a drop of 190 points is shocking and a source of great anxiety and nervousness, it doesn't suggest that the sky is going to fall. The lesson of 1987 is that financial markets often have a life of their own."

Brokerage houses rushed to convey a similar message to their customers after the plunge. Merrill Lynch urged investors to stay in the market for the long haul. The company recommended that customers split their investments among Treasury bonds and stocks of companies in such growing fields as health care and pollution control. "Looking for the quick killing is one of the surest ways of getting hurt in the stock market," says chairman William Schreyer. "One of the things we encouraged our clients to do after Oct. 19, 1987, was to stay with the market, think long-term and get professional advice."

Many investors seemed ready last week to stick with the market for the long haul. John Markese, research director for the Chicago-based American Association of Individual Investors, said most of the group's 110,000 members "did nothing" after the 1987 crash, "and I suspect they will do nothing this time." In San Francisco, investor Robert Simon said of Friday's drop, "It tells me the market is overheated. I have been wary since 1987," Simon noted, "and I am more wary today." Nonetheless, he said, he remained as heavily invested in stocks as he was two years ago.

Some market watchers viewed the drop as a signal of a coming U.S. downturn. While the economy avoided a slump after the 1987 crash, these moneymen fear that the U.S. may not be as lucky again. "I believe a recession of some sort is imminent," says Richard Huebner, a senior vice president of the Hanifen, Imhoff brokerage in Denver. "It didn't happen in 1987, but this time the environment is changed. Our economy was overheated then. This time it is slowing down, which makes recession more likely. The market appears to be telling us that it is six to nine months away."

But other experts considered Friday's free fall to be far less worrisome. Said James Wilcox, an associate professor of business administration at the University of California, Berkeley: "My own opinion is that the market was overvalued by at least 200 points and that basically this is a reversion to sanity. I look upon it as a breath of thoughtful fresh air." Peter Lynch, manager of the $11 billion Fidelity Magellan fund, was upbeat too. "America is not a basket case," Lynch said. "The only thing that could bring a major decline is if inflation went back into double digits."

In Congress the stock drop rekindled fears of a financial collapse that have flickered since the 1987 crash. Michigan Democrat Donald Riegle, chairman of the Senate Banking Committee, said the Friday decline might indicate "a marked change in market psychology" about the value of stocks that "would be a very important development, to say the least." Riegle, who this month called for a Government study of the role of junk bonds in leveraged buyouts, said the plunge indicated that "there's a lot more at work here than the LBO story." But a senior White House official insisted the drop simply reflected "the falling through of the UAL deal." He added: "We're confident the market will straighten itself out."

Wall Street, Washington and investors around the world will be watching the market with nervous anticipation to see whether it can shake off its anxiety attack. The Federal Reserve will monitor events carefully to determine whether it should come to the rescue with a dose of easier money, as it did in 1987 to restore confidence. One fervent hope was that high-rolling investors would come roaring back into the market, looking for bargains. But while it was easy to attribute last week's chiller to everything from program trading to superstition about Friday the 13th, there was a deeper message: confidence in the stock market will remain shaky as long as the U.S. economy rests on a mountain of debt that neither politicians in Washington nor business leaders on Wall Street seem willing to confront.

CHART: NOT AVAILABLE

CREDIT: NO CREDIT

CAPTION: FRIDAY THE 13TH

Dow Jones Industrials daily closings

With reporting by Bernard Baumohl, Frederick Ungeheuer and Jane Van Tassel/New York