Capitalists’ War on Capitalism Creates Bargains for the Brave

Karl Marx was right: Routinely, it’s capitalists who turn out to be the greatest enemies of capitalism.

When the Dow Jones industrial average sank 14% in the week ended Sept. 21 of last year, the blame was laid on shadowy Islamic terrorists who were out to destroy the American way of life.

But this summer, as the Dow has fallen 20% in 10 weeks, many investors believe the culprits occupy corporate boardrooms right here in the homeland, rather than drafty caves in Afghanistan.

Stocks rebounded in the fourth quarter of last year as the market came to conclude that the terrorists ultimately would fail to destroy the U.S. and what it stands for.

Likewise, Wall Street’s rebound late last week was largely attributed to the idea that the current nest of alleged saboteurs had been uncovered and was being dealt with accordingly.

The Dow rocketed 488 points Wednesday, its best one-day gain in 15 years, after Congress reached a deal on legislation to sharply boost penalties for white-collar fraud--the federal response to the avalanche of corporate financial scandals that began with Enron Corp. in December and since has immortalized such names as Global Crossing Ltd., Adelphia Communications Corp. and WorldCom Inc.

Also Wednesday, an image that three years ago would have mortified investors instead appeared to cheer many of them: the footage of cable TV pioneer John Rigas and two of his sons arrested in New York and led off to court, to be criminally charged with looting now-bankrupt Adelphia.

Whether Congress and the handcuffed Rigases together managed to end the nearly 29-month-old bear market won’t be known except in retrospect many months from now, of course.

Given the unprecedented trading volume of the last few weeks, and with many stocks at their lowest levels in at least five years, the sell-off simply may have reached a point of temporary exhaustion.

For the week, the Dow gained 3% to finish at 8,264.39, while the Standard & Poor’s 500 edged up 0.6% to 852.84. The Nasdaq composite recorded another losing week, falling 4.3% to 1,262.12, but that was at least up from its closing low of 1,229 reached Tuesday.

There is precedent for believing that a federal act aimed at cleaning up corporate America can restore investors’ shattered confidence in the stock market.

In 1934, the passage of the Securities Exchange Act, creating the Securities and Exchange Commission, was followed not long afterward by a rally that lifted the Dow from 90 to about 200 by early 1937.

As historians have noted, President Franklin D. Roosevelt’s push for serious regulation of the securities markets in the aftermath of the 1929 market crash and the onset of the Great Depression was all about saving capitalism from capitalists.

The abuses visited on workers and investors by Wall Street and corporate America in the 1920s boom years threatened to turn much of the nation against the free-enterprise system in the 1930s. Roosevelt saw the threat and realized he had to meet it head-on with laws that punished wrongdoing and limited the potential for new abuses.

This time around, despite the worst stock market decline since the Depression (at its low point last week, the S&P; 500 was down 49% from its 2000 peak), only a hopelessly romantic modern-day Marxist would try to argue that the nation is on the verge of renouncing capitalism.

But there is no contesting that Americans are angry, are sickened by the continuing revelations of outsized corporate greed and chicanery, and that many are questioning whether the markets have been rigged against them.

Even if share prices have bottomed, the question is whether millions of people who previously saw the market as the best long-term investment vehicle no longer are so sure, and will be reluctant to funnel their savings into stocks in coming years.

Without faith in the financial system--including trust in corporate accounting and a belief that management can be counted on to act in the best interests of all shareholders, not just for itself--there is no justification for investing in stocks. Better to just leave your money in an insured bank account, where the worst that can happen is that your returns won’t keep up with the inflation rate.

In fact, large numbers of people have chosen the bank option over the last two years, and now look brilliant for doing so. Deposits in basic savings accounts have soared from $1.8 trillion in mid-2000 to more than $2.5 trillion.

Others are falling over themselves to buy Treasury bonds at yields that are the lowest in a generation. The yield on the five-year Treasury note fell to 3.39% on Friday, down from 3.57% at the start of the week and the lowest since the government began regular auctions of the securities in the 1970s.

It sounds odd to call the hunger for absolute safety a mania, but a chart tracking the increase in bank deposits since mid-2000, and especially in recent months, looks a lot like the price charts of technology and Internet stocks from 1998 to early 2000.

If the masses were wrong to put every last dime into tech stocks in the late 1990s, are they wrong today to shovel hard-earned dollars into bank accounts that are among the lowest-paying savings alternatives?

For those investors who have no faith in the stock market, the bank or bonds still make perfect sense. Ditto for those who own stocks but have learned the hard way about the perils of being undiversified and now are trying to rectify that.

But for anyone who still has the means, and the intestinal fortitude, to have money in equities, it’s important to remember that every momentous stock market decline creates bargains.

That’s the nature of the market: When panic hits, investors tend to throw everything out at once. Professional fund managers can wind up selling stocks they cherish, simply to meet cash-redemption demands from fearful investors.

Defense-related shares, for example, have crumbled with the rest of the market in recent weeks, even though there is little disagreement that the fundamentals of defense contractors appear very strong in a world that has become far more dangerous since Sept. 11.

Similarly, investors who had considered beefing-up the presence of small and midsize stocks in their portfolios earlier this year, but didn’t do so, should take another look now: The S&P; index of 600 smaller stocks has fallen 25% since mid-April. The S&P; mid-cap stock index is down 24% in the same period.

But what if the market hasn’t hit bottom? The problem with trying to pick the absolute bottom in a bear market is that even if you get it right with regard to major share indexes, individual stocks don’t all hit their nadirs on the same day, or even in the same month.

If you’re eager to buy, but you’re worried that you’re too early--a legitimate fear, given the price-to-earnings valuations of many stocks and all the other risks confronting the market--the solution is to take it slowly: Put money to work in increments rather than all at once.

If you imagine the market as a mythical angry god that is demanding sacrifices of those who had long worshipped it, there is no way to guess when it finally will be appeased. It already has consumed the early-retirement dreams of some, the college-funding hopes of others and the reputations of hundreds of corporate executives. But it may yet want more.

Tom Petruno can be reached at [email protected]. For recent columns on the Web, go to: www.latimes.com/petruno.