Selling mangles markets amid air of uncertainty

By Adam Shell, USA TODAY

	Richard Drew, AP
	Panic sets in on the floor of the New York Stock Exchange.

NEW YORK — Wall Street has endured a horrific week of trading, in which the Dow Jones industrial average has lost more than 1200 points, part of the worst 7-day streak ever.

After 4 consecutive days of new bear market lows, many investors are hoping a bottom is near.

When the stock market shut down for 4 days after terrorists toppled the World Trade Center, many Wall Street pros viewed the layoff as a positive, a much-needed period of reflection that would diminish the desire to dump stocks in a panic.

But after thinking things over, investors wracked with uncertainty fled stocks anyway.

Stock prices have been slammed ever since trading resumed Monday after the longest shutdown since the Depression. The Dow Jones industrial average, the bluest of the blue chips, has plunged more than 1200 points, or 12.8%, in 4 days. More than $1.2 trillion dollars in shareholder wealth, as measured by the Wilshire 5000 index, has been wiped out.

			The damage
			Dow Jones industrial -383 points Thursday -1,229 points this week -28.5% from its high Nasdaq composite -57 points Thursday -224 points this week -70.9% from its high S&P 500 index -32 points Thursday -108 points this week -35.5% from its high

Once-complacent investors are running scared. Confidence in stocks has been undermined — at least for the time being. Wall Street is filled with uncertainty — the equivalent of kryptonite for stock prices. The USA is on the verge of a war with an unknown enemy. The economy, in the words of Federal Reserve Chairman Alan Greenspan, has ground to a halt. Corporate earnings are dropping fast, and layoffs are mounting due to massive disruptions to U.S. businesses, a result of the terrorist strikes.

"Financial markets are built on trust and confidence, and if that is damaged, it's not hard to understand why stock prices are moving down sharply," says Jeremy Siegel, finance professor at the University of Pennsylvania's Wharton School.

So who's selling? Pretty much everyone who still owns stocks.

Big institutions top the list. Thursday, when the Dow plunged 383 points to 8376, professional investors were regularly putting in sell orders of 100,000 shares for blue chips such as General Electric and Microsoft. Block trades ranging from 10,000 shares to 30,000 shares were the rule, not the exception. "It's the big institutions saying, 'Oh, my God,' " says Chris Wolfe, strategist at J.P. Morgan.

Individual investors have caught the selling bug, too. There are signs that mutual fund investors are taking losses and shifting into bonds and money market funds. Mutual fund giants T. Rowe Price and Vanguard Group both reported stepped-up redemption activity this week — but reported no panic.

Vanguard spokesman Brian Mattes said Thursday that some customers were making small adjustments, such as moving 20% of their holdings from stock funds into money market funds. "They're rebalancing at the margins," he says.

But those small adjustments add up. TrimTabs.com, a research firm that tracks fund flows, estimates that investors yanked $9.4 billion out of stock funds Sept. 17-19 — the same amount they withdrew for the entire month of August. Still, it paled in comparison with the record $15.9 billion that fled stock funds in the 3 days ended March 19, 2001.

Traders say intense selling pressure also is coming from hedge funds, foreign investors and large insurance companies that need to raise money quickly to help fund huge payouts to victims of the terrorist attacks on the Pentagon, World Trade Center and a downed jet in rural Pennsylvania.

Morton Cohen, chairman of Clarion Group, a New York-based hedge fund, described the mass liquidation of stocks this way: "On a scale of 1 to 10, this sell-off is becoming an 8 or 9."

Watching the stats

A statistical analysis shows how serious the situation is getting. The Dow has now closed down seven consecutive sessions, the first time that's happened since May 1989, says MarketHistory.com. And the 16.2% drop was the worst 7-session streak ever.

The Nasdaq composite and Standard & Poor's 500 index also have been laid waste this week. After Thursday's 3.7% drop, the Nasdaq's 4-day losses swelled to 13.2% — leaving it down 70.9% from its high. After its 3.1% slide Thursday, the Standard & Poor's 500 closed at 985, the first time it has closed below the psychologically important 1000 level since Oct. 13, 1998. All three major indexes are trading at 3-year lows.

There's no shortage of reasons investors — both big and small — want out of stocks:

• Investment time frames have changed. Financial planners say investors with time horizons of less than 3 to 5 years should be in cash, not stocks. The swelling number of layoffs — U.S. airlines have announced job cuts of 100,000 employees in the last week alone — is having an effect on people hit by the layoffs: Many need to tap portfolios now to raise cash.

"You can't underestimate the impact of thousands of people losing their jobs," says Fane Lozman, chairman of Scanshift.com. "A lot of these people can't afford to play the market anymore."

• Earnings are falling. Professional investors are revaluing stocks in the wake of the economic slowdown, which was exacerbated by the business shutdown caused by the terrorism fears. J.P. Morgan, for example, is recalculating how much it is willing to pay for certain stocks, now that long-term annual earnings growth rates are expected to be closer to 8% to 10%, far below the high-teens growth of the 1990s. "This is a very strange time," Wolfe says. "The threat of war throws everyone's earnings forecasts out the window."

• Some investors who want to buy stocks can't. To better cope with the damaged bond-trading systems caused by the attack, The Bond Market Association recommended this week that government bonds be settled in 5 days, rather than the usual 1. The new rule has handcuffed some investors who sold bonds but could not get their hands on the proceeds of the sale for 5 days, delaying stock purchases.

"Many who want to buy are presented with this dilemma," says Tom Stevens, senior managing director of Wilshire Associates. It's unclear how widespread the problem is. Creston King, portfolio manager at David Selected Advisers, says some bond brokers were able to settle transactions for him in 1 day, as usual. He expects settlements to be back to normal by Monday.

• Many on Wall Street are in mourning. Wall Street has endured fear: fear of recessions, job losses and even depression. But never before have its key players suffered such an intense feeling of "tragic sadness," says Steve Leuthold, head of the Minneapolis-based money management firm Leut hold Group. "This isn't money, it's friends. In my 40 years in the business, I've never seen such a prevailing gloom of sadness over the entire community."

The sadness has been compounded by the depressing sight of red arrows and plunging stock prices. Unlike a bull market, when any fresh cash lying around is put to work in stocks immediately, investors are reluctant to pour the cash they raise from their sales back into the market.

The ICI reports inflows of $75.4 billion into money market mutual funds this week, the second-highest ever. The record inflow was $89.3 billion in January 1998. Almost $67 billion of this week's inflow, however, came from institutions looking to stash cash in money funds for the slightly higher yields.

Looking at institutions

Rumors that individuals are the cause of the market meltdown are simply not true, says Don Cassidy, senior research analyst for Lipper Analytical. He believes fund managers, not investors, are doing most of the selling. Many may be trying to do some "window dressing" by dumping their losing stocks and beefing up their cash positions before Sept. 30, the end of the third quarter, he says.

Despite the steep slide this week, some say the selling pressure may not have been exhausted. Todd Salamone, research chief at Schaeffer's Investment Research, says we haven't reached "the peak of fear" needed to put in a market bottom.

He notes that the Chicago Board of Exchange's volatility index — which measures how much options players are willing to pay for "portfolio insurance" — now registers 47. When stocks melted down in October 1998 during the Russian financial crisis, it reached a high of 60.

But there are a growing number of money managers who say the recent carnage has taken into account much of the negative economic fallout sparked by terrorism. Stocks are getting down to prices that could spur buying, says Pat Adams of Choice funds.

Even if the market has hit bottom, many Wall Street pros advise caution until the future becomes more clear. "We are in a new market environment," says Gary Anderson, editor of Equity Portfolio Manager. "The rules have changed."

Contributing: Matt Krantz, John Waggoner, Sandy Block