Phil Brennan
Wednesday, July 17, 2002

Let's say that it never occurred to me that the car was worth less than I thought it was – and that when I finally got around to trading it in for a newer model I had convinced myself it was worth not a penny less than $6,000. If I were to put together a statement of net worth, I would certainly have added that imaginary $6,000 asset to it.

But the dealer didn't agree. To begin with, it not only burned oil but also leaked it profusely. The fabric on the driver's seat was torn. The 11-year-old car was worth about $1,000, but using that peculiar arithmetic dealers use, he allowed me $2,000.

Not the $6,000 I thought it was worth. My net worth statement would have been hiked by a phony $6,000 – an asset worth a mere $1,000. At that price it was vastly overvalued. I got what it was worth on the used car market. Economic reality had conquered irrational emotion.

Now you know what's happening to the stock market.

Like my beloved Toyota, it was vastly overvalued. Economic reality has set in. Stocks are going to be valued for what they are worth, not what investors were willing to pay for them, which over the last decade was absurdly far beyond their true value.

Now, this should come as no surprise. A lot of levelheaded people have been warning for a long time that the market was a huge bubble waiting to burst. How long ago was it that Mr. Greenspan warned that "irrational exuberance" was ruling the market, that investors were paying wildly inflated prices for their stocks – prices that bore no relationship to their actual value in dollars and cents?

The current debacle is not all the result of the corporate crooks who were cooking the books, trying to hike up the price of their companies' shares to increase the value of their stock options and their personal net worth.

The revelations of their malfeasance helped spark the Wall Street panic by revealing the house of cards upon which the stock market economy has been resting, but the root cause of the ongoing market crash is just a plain old "correction" – albeit a very painful one.

The longer you put off corrections, the worse they're going to be. This one has been put off far too long. The crooks who mercilessly hyped stocks played a very large part in this, but the real villain of the piece is the refusal of the investing public to recognize a bubble in creation when they saw it. Or to understand that all bubbles must burst eventually.

Sooner or later the old car would have to be traded for what it was worth, not what I wanted it to be worth.

What created this bubble was partially the billions being invested weekly as the result of mutual funds with mountains of money to invest and partially a need to find someplace to put it – 401(k) plans and other pension funds that had to be invested. It all added up to too much money chasing too few investments. That helped drive prices up.

It didn't matter that with many of the securities the prices were being jacked up far beyond the value of the institutions they represented. What mattered was to put those billions to work.

It seems as if the investing public had forgotten what the stock market is all about. A company is owned by the stockholders. Their shares should reflect the nuts-and-bolts value of the company, how much its profits are after expenses, how much the dividends are and its immediate prospects, not pie-in-the-sky projections of where the company hopes to be in the future. The price of their shares should be a true reflection of these factors.

Once upon a time, most prudent investors bought stocks for the dividend income they provided. In recent years dividend income has shrunk, in many cases to 1 percent of the value per share and below. Investors began looking to profit from increases in the value of their investments rather than for income. You bought stock in the XYZ company because you were betting it would go up and up and up in a market where the Dow Index seemed bound to keep rising and your shares along with it.

There's a word for that, and it's not "investing." It's called "gambling." No longer able to get a decent return on your investment through dividends, the only reason now to buy stock was to bet it would increase in value. That bet is now turning out to be a losing one. A big loser.

But there's more to the story than the fact that stocks were vastly overvalued and that we are now seeing that problem painfully corrected. There is also the serious hanky-panky that's been going on in corporate boardrooms, Wall Street brokerage houses and auditing firms.

The most trustworthy rater of companies in America, Dr. Martin Weiss, who heads Weiss Ratings, has been warning about a pending stock market debacle. In his best-selling book "The Ultimate Safe Money Guide: How Everyone 50 & Over Can Protect, Save and Grow Their Money," Dr. Weiss showed how what he called the Great Stock Market Scam would bring on a stock market crash – the crash that began to gather steam shortly after his book was published.

In a paper submitted to the National Press Club, Weiss Ratings explained one reason why Dr. Weiss is predicting that we haven't seen anything yet. For example, he warned the Dow would reach 8,200 and then drop to 7,200 and then fall all the way to 5,000. The NASDAQ, he said, would hit 800.

Here is a summary of that paper – a shocking indictment of Wall Street.

"A crisis of confidence is shaking Wall Street to its core, as investors, already shell-shocked by deep market declines, realize that a series of deceptions by many institutions they trusted may have played a significant role in their losses.

"A deeper understanding of the crisis can be achieved through an analysis of 'buy,' 'sell,' and 'hold' ratings issued to companies that have gone bankrupt this year – a total of 50 investment banking and brokerage firms issuing ratings to 19 companies that filed for Chapter 11 in the first four months of 2002. Among these, the results show that:

1. Ratings publicly available from 94% of the 50 firms continued to indicate that investors should buy or hold shares in failing companies right up to the day these companies filed for bankruptcy.

2. Among the 19 bankrupt companies, 12 continued to receive strictly "buy" or "hold" ratings on the date of bankruptcy filing.

3. In response to these and related investor abuses, a rapid rise is expected in the number of investor legal actions against brokers. Even before the latest revelations, the number of arbitration filings surged by 24.4% from 2000 to 2001, and by 17% in the first three months of 2002, as compared to the equivalent period one year earlier. Several brokerage firms, targets of the most legal actions between 1997 and 2001, are likely to be among the targets of the most frequent future legal actions as well.

4. Among the 20 largest brokerage firms, 13 may become financially vulnerable if their conditions deteriorate further, while seven have the financial wherewithal to withstand a severely adverse business environment. It is possible that failures in the brokerage industry could emerge as an important future challenge for investors, legislators and regulators.

"To address these issues, the power and will of government is limited. Instead, the best regulators and dispensers of financial justice are investors themselves. They cannot exercise this function, however, in the current environment of uneven disclosure, secrecy and even duplicity.

"In order to help investors make constructive, informed decisions in the selection of a broker and brokerage firm, brokers should disclose significant data on stock ratings, past legal actions, and the financial stability of each firm. The disclosure must be accompanied by more complete education on the risks associated with specific investments and with the failure of a broker-dealer. Disclosure questionnaires and procedures are offered to help investors protect themselves against future abuses."

What America is now enduring is a total financial system failure. Looking for somewhere to put the blame is an exercise in futility – the blame is too widespread. Putting the Wall Street and corporate scoundrels in the slammer, while it will make us feel good and is the right thing to do, isn't going to help dig us out of the hole that greed has dug.

What we have to do now is get ready to pick up the pieces and get on with our lives. The binge is over. Now comes the hangover.

Please pass the Alka-Seltzer.

Phil Brennan is a veteran journalist who writes for NewsMax.com. He is editor & publisher of Wednesday on the Web (http://www.pvbr.com) and was Washington columnist for National Review magazine in the 1960s. He also served as a staff aide for the House Republican Policy Committee and helped handle the Washington public relations operation for the Alaska Statehood Committee which won statehood for Alaska. He is a trustee of the Lincoln Heritage Institute.

He can be reached at pvb@pvbr.com.

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