The headlines in the papers cannot be ignored: Wall Street is a reflection of how we see our economy and last week securities fell sharply: The Dow went from 9,605.51 on September 10th, the last full day the market was open before the attacks in Washington and New York, to 8,235.81 on Friday. In five trading days the Dow lost 1,369.7 points or 14.25 percent.

Various news reports suggest that investors lost $1.4 trillion during week. But this figure is out-of-context and overstates real-world losses.

Imagine that you bought stock at $50 a share five years ago. It goes to $100. The stock then falls to $85.75.

Have you "lost" $14.25 -- $100 less $85.75? In some ways, yes. Your stock has less value than when it was at $100 and so your wealth declines. You have less ability to borrow. If you were planning to sell in October for $100 or so, you're out of luck,

But your "losses" are on paper. You did not write a check or pull dollars from your wallet. Like most people, you did not buy at $100 a share. Your account is smaller, but you have more than $50 a share which you actually paid. When last I looked, buying at $50 and selling at $85.25 would produce a substantial profit.

For many investors the losses of the past week are strictly paper. Essentially the stock market is back at levels last seen in 1998 -- and in 1998 people in the U.S. lived very well.

But for some investors the losses are real and will hurt:

• Recent purchasers with a need to quickly sell.

• Those who planned to sell shortly after September 11th and anticipated a certain sale value.

• Those who bought on "margin." With a margin, investors borrow money from stock brokers to purchase additional shares. This is fine if the shares hold their value or rise. If share prices fall however, investors may face a "margin call," the requirement to pay off some or all of the stock broker's loan. If investors don't have the cash or prefer not to pay, then the broker will sell the investor's shares, shares which are security for the loan.

The bottom line looks like this: In terms of the stock market there's no doubt that investors have less wealth than they had a month ago or in March, 2000. That said, investors have an enormous amount of wealth today, securities worth many trillions of dollars.

Where the stock market goes from here is an open question. There's an argument to be made that many companies were over-priced and that a "correction" was due. We have already seen the bottom drop out of the market for Internet and high-tech shares, in large measure because firms could not deliver projected earnings -- or any earnings. As well, before the terrorist attacks of September 11th the market had been significantly down from the highs of Spring, 2000.

Lower share prices mean huge problems for many "new economy" companies. Rising stock prices essentially allowed these firms to print a form of money: They could trade shares for existing, profitable companies and they could attract skilled workers at low salaries by offering stock options. New economy firms could issue more shares to raise additional capital, and they could issue convertible bonds with the expectation that most bondholders would want to convert to stock.

But if stock prices are not rising, then new economy finances change:

• Acquiring companies with real profits for stock suddenly becomes impossible.

• Workers with options to buy at $50 have little incentive to stick around when shares are priced at $15.

• Investors have no reason to buy shares when companies have few dollars in the bank, no profits, and no prospects.

• Convertible bonds with little-if-any upside opportunity will not be salable. This is a problem because firms could sell such bonds and then hope that investors would convert to stock ownership. In this way the firm would raise money and not be forced to pay interest on the bonds it issued.

What makes the marketplace interesting at all times is that what looks awful to Jones may be a buying opportunity for Smith -- thus the Dow rose 367.49 yesterday. Firms with profits and dividends will no doubt attract investor attention once the current period of unease passes. Good companies which used to be $30 a share are surely more interesting at $15.

For more articles by Peter G. Miller, please press here.

Published: September 25, 2001

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