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MARGARET WARNER: For that, we’re joined by Floyd Norris, chief financial correspondent for the “New York times,” and Bob Walberg, chief equity analyst at briefing.com, an online research and analysis firm. Welcome, gentlemen. Bob Walberg, on Monday when the market dropped 7%, people seemed almost relieved. But then day after day it just kept falling. Why?
BOB WALBERG: Well, that’s a very good question. I think the why comes from the fact that investors right now are dealing with a very uncertain environment, both politically and economically. Clearly we know that the ramifications from Tuesday’s terrorist acts are going to have a significant negative impact, short term, on the U.S. economy. And for that reason, you see investors reacting cautiously. Added to that is the threat of additional terrorist acts that could take place in the United States in the weeks and months to come and also the uncertainty about what the U.S. military involvement will be. That has created kind of a bunker mentality on the street and that’s why investors pushed markets lower this week.
MARGARET WARNER: But no the underlying economic fundamentals, as you all call them, weren’t terribly good either, were they? I mean is this all because of the terrorist attacks or is there another factor as well?
BOB WALBERG: We were teetering on recession prior to the attacks last week. It’s just an assumption now that we are going to fall into a fairly at least modest if not deep recession over the next one or two quarters. It is going to be quite difficult for the U.S. economy. And then from there it’s just so uncertain as to what the longer-term impact will be. A lot of that is going to depend upon whether or not, you know, the consumer holds up here and keeps the economy from faltering too seriously and to what degree we are involved militarily. Until we have a clearer picture, I think you’re going to see a cap on the up side of this market.
MARGARET WARNER: Floyd Norris, how does this week look to you?
FLOYD NORRIS: It looks very similar. We had a lot of relief Monday that it wasn’t worse. And then we came down a lot. Part of that was forced selling. Yesterday we saw a phenomenal thing. The Bass Brothers in Texas were forced to dump $2 billion worth of stock apparently on very little notice. They simply ran out of cash. And that affected a lot of smaller investors as well. The longer-term….
MARGARET WARNER: I’m sorry. Let me interrupt. What do you mean they ran out cash?
FLOYD NORRIS: They had borrowed money against their stocks and they owed the money. And the stocks weren’t worth what they had paid for them and they had to sell to raise cash to satisfy their lenders. That’s what’s called a margin call on Wall Street. They had one of the largest in history. Longer term for the stock market, we’re going to see whether the world’s confidence and Americans’ confidence in the U.S. economy holds up. People are worried now obviously that this could be a very long and bloody dispute between the terrorists and the United States, and I’m not sure people are completely confident that we know how to fight that war, let alone win it.
MARGARET WARNER: Bob Walberg, was the sell-off in all stocks across the board? Was it concentrated in certain sectors? What did you see?
BOB WALBERG: Well it was certainly widespread. There were a couple of sectors like the defense industry, which held up relatively well, gold, tobacco some of the more defensive industries did okay. But, in general, this is a widespread sell-off that included most industries led of course by those hit particularly hard such as the airline, the insurance, the hotel, the leisure industries. Those were the groups that were really pounded during the sell-offs.
MARGARET WARNER: And, Floyd Norris, who is doing the selling, what is driving this, small investors, large, institutional?
FLOYD NORRIS: To some extent everybody. However small investors seemed to have been doing a lot less selling than everybody else this week. It appears that the patriotic pitches that were made coming into this week had an effect. There’s also almost certainly been some foreign selling. We’ve seen the dollar showing some weakness. In times like these, people are tempted to move their money close to home. And of course if you’re an overseas investor, that means away from the United States.
MARGARET WARNER: But weren’t the overseas markets doing very, very badly as well, at least in Europe?
FLOYD NORRIS: They were indeed. All markets around the world have done badly since this attack. And there’s a good reason for that. Clearly the world economic picture is worse than it was before the attack, and it was pretty bad before it. Some people thought we were going to have the first worldwide recession, which all major economies were in recession, since the mid 1970s, during the first oil shock. So the view is very negative on the economy, at least short term. There are some positive signs on the economy. All this government spending will stimulate the economy. The debate we heard in Washington coming before this about budget surpluses had to be preserved and Social Security lock boxes, that all has vanished.
MARGARET WARNER: Bob Walberg, there were a couple of things the government did just this week. I mean the Fed dropped interest rates by another half point. There was this $40 billion piece of legislation that passed. Did that have any positive effect?
BOB WALBERG: Well, it didn’t have much short-term impact on market psychology. That was overrun by all of the lay-off announcements and the threat of bankruptcy to the airline industry. But as Floyd mentioned, that has a very positive longer-term impact on the U.S. economy. So that gives us hope that if the consumer really kind of holds on here and doesn’t fall off a cliff in the next couple of months, that we could end up having a relatively short and shallow recession and that by the early part of next year, if the consumer again, if it holds up we have a decent holiday season, that we could begin to see a recovery in the U.S. economy and something approximating 2% GDP growth into next year. If we can do that, then I think you’re looking at a tremendous opportunity being created right now in the U.S. stock market for investors who can look beyond the short-term weakness.
MARGARET WARNER: But going back to this week, what did you find in terms of who is selling?
BOB WALBERG: Who was selling was largely institutional people selling. Again I agree with Floyd that a lot of the individuals kind of rallied around the flag, weren’t doing much selling. That was kind of the impression we got from our sources and our contacts and clients. But a lot of institutionals, portfolio managers whose business it is to protect assets for people, they were doing more of the selling.
MARGARET WARNER: And, Floyd Norris, where were people putting their money?
FLOYD NORRIS: I’m not sure they were putting it anywhere in particular. The selling was not that huge compared to the size of the economy. A lot of money just vanished. To the extent people were buying….
MARGARET WARNER: Explain that. Explain that concept: A lot of money just vanished.
FLOYD NORRIS: You own a lot of stock. You own some stocks I assume. I do. They’re worth less than they were two weeks ago. And that may be reflected in how much we spend. But we didn’t put that money anywhere. People who were selling — a lot of the money went into short-term instruments, Treasury bills, short-term Treasuries, one or two years. The prices went up and the yields went down. Currently if you want a really safe investment, a Treasury security that matures in two years, you’re going to earn 2%-plus. And that’s down from 3%-plus just a week ago.
MARGARET WARNER: And, Bob Walberg, what would you add to that, where people put their money if they did sell?
BOB WALBERG: Well, that’s certainly where they were putting their money in short-term instruments. And, you know, I think you’ll also see investors starting to look at putting their money as they have done over the last few months prior to the incident on Tuesday into real estate, whether it be in a real estate investment trust or whether it’s going to be in their homes or simply paying down their mortgages early. At this point it’s certainly a better investment than right now the U.S. stock market.
MARGARET WARNER: And finally, Bob Walberg, what about the role of psychology in all this? Do you think, for instance, when investors call you, call your firm, and they say they want to sell, I mean, do you think they’re being… Is this a panic? Is this panic-driven? How would you describe it?
BOB WALBERG: I would say for the first time in quite some time we had hints of panic in the marketplace this week. We had a lot of investors that anticipated that opening sell- off on Monday even into Tuesday but they were expecting some type of recovery rally by Wednesday and Thursday when that didn’t happen when we continued to go down, there was panic selling. There was just almost a capitulation on the part of some investors: Just get me out. That certainly I think weighed on the market over the last couple of days and could weigh on the market again next week if we don’t see early in the week some sight of recovery rally.
MARGARET WARNER: All right, Bob Walberg and Floyd Norris, thank you both very much.