Amid Shadows of the Past, Wall St. Gropes for Course

For a nation on the brink of a new century, we’re spending a lot of time milling in the dark shadows of the 1920s and 1930s lately.

Last week, for example, Congress and the White House finally agreed on an overhaul of Depression-era banking laws--after nearly two decades of wrangling.

The pact would repeal parts of the 1933 Glass-Steagall Act, the landmark legislation that separated the banking business from the securities business in the wake of the 1929 stock market crash.

There was a certain irony in that, in a week in which memories of 1929 haunted the stock market yet again: By avoiding a crash last Tuesday, the market defied the “55-day curse” that became part of Wall Street lore after the 1987 crash.

In 1929 and then again in 1987 the Dow Jones industrial average collapsed exactly 55 days after reaching its record highs for those eras. So the Dow, which peaked Aug. 25 this year at 11,326.04, needed to do something spectacularly bad last Tuesday for the 55-day curse to score a hat trick.

But history was foiled this time: The Dow rose on Tuesday, as it did four of five days last week, racking up a net rebound for the week of 450 points, or 4.5%, to 10,470.25 by Friday.

That made life more miserable for Wall Street bears who have been expecting the market’s latest slump to turn into something much nastier. Instead, even beyond the blue-chip Dow index there were more signs of recovery last week, as the total number of stocks rising outnumbered those declining on three of five days--something that hasn’t been happening much since mid-summer.

Congress, by taking a sledgehammer to what remains of the financial-services industry firewalls thrown up by Glass-Steagall, sparked a tremendous rally in financial stocks of all kinds on Friday--banks, brokerages, insurance companies, etc. Investors naturally are betting on a new wave of mergers across those industries.

Chase Manhattan, for example, surged 21% for the week, to end Friday at $80.63. Bank of America also jumped 22% for the week, to $58.75, while PaineWebber Group gained 18% to $38.

The sign of some kind of legislative progress in Washington served to blunt criticism a week earlier that Congress, far from revising outdated laws from the 1920s and ‘30s, was more interested in reliving that era--in particular, by adopting an isolationist foreign policy.

The Senate’s rejection of a global treaty banning nuclear tests had brought widespread accusations that lawmakers were taking the same dangerous path trod by Congress after World War I, when the United States refused to back the League of Nations--a fateful decision that many believe set the stage for World War II.

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On Wall Street, of course, that’s deeper than many people are willing to go today in looking for reasons to buy or sell. On the other hand, opening the door to more consolidation in the financial services industry is something to which any investor could relate.

The rebound in the financial stocks spurred by the expected end of Glass-Steagall is significant--or could be--because those stocks historically have been leading indicators of the broad market trend.

This year many of the financial shares peaked in spring, and have since suffered much greater declines than other stocks. If they now have bottomed, and if they can stay in an upward trajectory, they could be signaling that the rest of the market won’t be far behind.

“Wishful thinking,” say the market’s pessimists. They point out that while stocks rallied last week, the bond market isn’t going along with the program. Treasury security yields continued to rise, with the bellwether 30-year T-bond ending Friday at 6.34%, up from 6.26% a week earlier and just under a two-year high.

The bond market seems to be resigned to another Federal Reserve rate increase when the central bank convenes on Nov. 16. If bond traders are right, say Wall Street’s bears, then investors rushing to buy stocks last week may soon be in Lucy Ricardo mode: As Ricky used to say, they’ll have some ‘splaining to do.

The bears were left last week with another reason to be hopeful, courtesy of one more move to undo a legacy of the 1920s-30s: The Securities and Exchange Commission said it will consider revamping 60-year-old rules that govern “short selling,” or bets on falling stock prices.

In particular, the SEC will study revising or even throwing out rules that effectively keep short sellers from ganging up on stocks to drive them lower.

In a short sale, a trader borrows stock (usually from a brokerage’s inventory) and sells it in the market, hoping to repay the loan later with shares purchased at a lower price. If the stock indeed falls sharply, the short seller can make a small fortune--which is a big reason the SEC’s 60-year-old regulations forbid short selling at ever-lower prices in the case of a stock that is already collapsing.

Maybe, the SEC hinted, today’s markets are mature enough, and liquid enough, that they don’t need that kind of anti-bear protection that Depression-era, post-market-crash regulators felt was essential.

Some shareholders of such blue-chip giants as Philip Morris, Waste Management and Xerox, however, would take issue with the idea that the stock market today is an ocean of liquidity.

Those stocks have lost half or more of their market value this year, suffering the kind of lightning declines that used to be reserved for much smaller stocks.

The extraordinary volatility is no doubt unnerving many investors. But in a market in which everyone can be online, trading stocks in nanoseconds, it might only be surprising if we weren’t experiencing this level of volatility.

Even if you think this is a bear market, and the Dow index has much further to fall, the losses already suffered by many blue chips should serve to remind of an old truism: Stocks don’t all bottom on the same day.

Whatever your overall market view now--bull or bear--it’s best to think about trying to make volatility work for you. That may mean simply looking more aggressively for opportunities and being willing to jump on them.

But dealing with greater volatility also may mean quickly cutting your losses if an investment is going against you--and you know you don’t have the patience to wait for it to come back.

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Tom Petruno can be reached by e-mail at [email protected].

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Big Names, Smaller Prices

How unforgiving has Wall Street become? Consider the lost of market value this year in these brand-name giants, all of which are struggling, but most of which are hardly terminal. Market value is stock price times number of shares outstanding-- the total financial value shareholders ascribe to the business.

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Mkt value Current Latest at ’99 peak mkt. value Pctg. stock Company (billions) (billions) decline price Waste Management $37.1 $10.7 -71$ $17.25 Mattel 17.0 5.5 -68 13.06 Xerox 42.4 16.8 -60 25.38 Charles Schwab 63.3 26.0 -59 31.75 Philip Morris 142.2 59.2 -58 24.75 Allstate 38.6 20.0 -48 25.00 Bank One 74.4 39.9 -46 34.06 Gillette 70.2 39.1 -44 36.00 RJR Tobacco 3.7 2.2 -41 19.75 IBM 251.9 169.9 -33 93.94

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Source: Times research, Bloomberg News