Wall Street, a.k.a. Dodge City, Has a Housing Problem

The U.S. economy is a sizzling, $9.3-trillion machine. But the U.S. stock market, now worth more than $13.1 trillion, outgrew the national GDP years ago.

Maybe the market’s increasingly divergent performance today is, at last, an issue of elbow room. Think of Wall Street as the Dodge City of the old Western movies. Said the “new economy” stocks to the “old economy” stocks: “This town ain’t big enough for the both of us.”

The primarily old-economy Dow Jones industrial average plunged 2.3% on Friday to end at 9,862.12, its first close below 10,000 since April 6. The Dow now has tumbled 15.8% from its record high reached on Jan. 14. Another 5% or so to the downside and we will be in the first official bear market since 1990.

For the Dow, that is. In the new-economy Nasdaq composite index, meanwhile, the bulls remain large and in charge. The Nasdaq composite index, after soaring to a record high last Thursday, surrendered all of 27.15 points, or 0.6%, to 4,590.50 on Friday.

For Nasdaq, that was the equivalent of breaking a fingernail.

It’s too bad Fox Television is canceling development of more reality-based TV shows in the wake of the “Who Wants to Marry a Multimillionaire?” debacle, because the stock market would be fertile ground for ideas.

How about: “Who Wants to Admit They Know Nothing About the Tech Stock They Just Bought on Margin?”

Or maybe, “When Investors Attack: Angry Shareholders Roast, Then Eat Their Value-Stock Fund Managers.”

Ah, well. Maybe CNBC can pick up where Fox leaves off.

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The generally accepted reason so many old-economy stocks (heavy-industry firms, banks, energy companies, etc.) are sinking while new-economy stocks (in tech, telecom, biotech, etc.) continue to surge is that the former group is fading in importance relative to the U.S. economy’s future.

I’ll buy that on some level. America obviously doesn’t need 1,150 J.C. Penney department stores anymore. There are plenty of other places to shop, and consumers like a lot of them better than they like Penney--which is why Penney’s sales are slumping, and why the company last week said it will close up to 45 of its stores.

Amid growing competition from other, stronger retailers and from new Internet-based retailers, investors sense that Darwinism is hard at work, and that J.C. Penney’s time has come and gone. At $15.94 as of Friday, Penney’s stock is down about 80% from its 1998 peak.

But take a look at the damage among shares of some companies that are giants in fields that are obviously part of the new economy. For example, SBC Communications, parent of Pacific Bell and the largest local phone company, has seen its stock plunge nearly 41% from its 52-week high.

SBC is involved in wireless communications, Internet access, cable TV and long-distance telephony, besides running local phone companies. Does that sound like “old economy” stuff?

How about Wal-Mart? Retailing may be old economy, but people are always going to shop somewhere. Penney’s losses lately are probably Wal-Mart’s gains. And as for the Internet: The day may come when an Internet-based shopping service such as upstart Kozmo.com supplants Wal-Mart, but if you had to make a bet which company will still be around, and quite profitable, in five years, how would you bet?

Right now, many investors are fleeing Wal-Mart as if its sales are on the verge of collapse. The stock has dropped almost 37% from its 52-week high. If a 20% decline in the Dow would qualify as a bear market, Wal-Mart is already several hundred miles into bear country.

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Meanwhile, investors are throwing cash at money-losing biotech companies such as Incyte Pharmaceuticals, which supplies services and tools to researchers in the human-gene-study field. That sounds like the future, all right. But where were most of these investors in October, when Incyte stock sold for $17 a share? Now, with the stock at $280.50, no price seems too much to pay to get in on the Incyte story.

Let’s not bother with the question of whether investors are irrational. The market is neither right nor wrong at any given moment. It just is what it is.

How long can this split-personality market go on? Those investors chasing the hot stocks du jour ought to remember that when momentum leaves a hot sector, it can get cold in a hurry. Ask anyone who paid top dollar for online brokerage stocks a year ago, when they were the stars of the moment. National Discount Brokers, for example, peaked at $93 last April. Your price now: $32.94.

Still, the face-off between old-economy and new-economy stocks in general may not end soon. It is a size issue in more ways than one.

What appears increasingly clear is that the money flows generated by the hot economy, and earmarked for equities, simply aren’t big enough to accommodate very many stocks anymore, argues Tom Galvin, investment strategist at Donaldson, Lufkin & Jenrette Securities in New York.

In part, money flows are being choked off by the Federal Reserve, with its campaign to raise interest rates and tighten credit.

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But cash inflows to stock mutual funds, one very important source of demand for equities, peaked long before the Fed started raising rates. In 1997, investors poured a record net $227 billion into stock funds. Last year the total was $188 billion.

At the same time, many investors are shoveling as much or more cash into money-market funds as they are to stock funds--a sign, perhaps, that some people feel they already own more than enough stocks, thank you very much.

The money that is entering the market, meanwhile, is largely momentum-oriented. It wants the new hot thing, which this year is mostly smaller tech stocks, including (of course) initial public offerings.

The harsh reality, says Galvin, is that amid competition from IPOs, other momentum stocks and money-market funds, “there is little capital left to energize most stocks” today.

Before the Dow makes it official, maybe it’s time to say: Welcome to the first bear market of the new millennium.

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Tom Petruno can be reached by e-mail at tom.petruno@latimes.com

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What’s Your Definition of ‘Old Economy’

Investors supposedly are punishing “old economy” stocks whose businesses are fading in importance relative to the “new economy” of emerging tech, telecom and biotech. But how many of these leaders in their respective industries are likely to be gone in five years--or less profitable than they are today?

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52-week Fri. Drop from Stock high low close change high SBC Commun. (SBC) $59.88 $34.81 $35.44 --$0.06 -40.8% America Online (AOL) 95.81 38.44 59.63 --0.38 -37.8% Wal-Mart(WMT) 70.25 38.88 44.50 --3.38 -36.7% MCI WorldCom (WCOM) 64.50 40.63 44.94 --2.00 -30.3% Amer. Express (AXP) 169.50 102.75 124.75 --5.25 -26.4% Dell Computer (DELL) 53.94 31.38 41.25 --1.13 -23.5% IBM (IBM) 139.19 81.50 108.00 --2.50 -22.4% General Elec. (GE) 159.50 97.56 126.13 --4.88 -21.0% Citigroup(C) 60.13 36.44 48.00 --1.25 -20.2% Viacom A (VIA) 63.31 36.69 50.81 --2.69 -19.7% Dow industrials 11,723 9276 9,862.12 --230.51 --15.8% S&P; 500 1,469 1,225 1,333.36 --20.07 -9.2%

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Source: Times research