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  Jerry Knight on Wall Street's Wild Ride

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Thursday, August 13, 1998

Lower corporate earnings and Asia's financial crisis have contributed to Wall Street's roller coaster ride this past week, sending the Dow Jones industrial average tumbling by as much as 200 points in a single day. Jerry Knight, who has covered business and the markets for The Post as a reporter, editor and columnist since 1977, took user questions today on the market's behavior and what lies ahead.

The transcript of our live chat follows.

Fairfax, VA: Tech stocks took a big hit the other day. Was it a much-needed correction of grossly overvalued stocks (Yahoo, AOL,, etc.)?

Jerry Knight: This seems to be an over-all market move, a top-down event, rather than a change in the valuations of specific companies or industries that is driving the broader market. But its hard to tell the tail from the dog. I think the market is wagging the tech stocks rather than the other way around. Tech stock lovers still are willing to pay what I consider whacko multiples for their favorites. When that changes, you'll see a real hit.

Washington, D.C.: Little seems to have changed in the U.S. economy that explains the sudden drop in stock prices. What factors explain the recent market drop?

Jerry Knight: The US economy isn't the problem. The economy of Asia, and my economics colleagues say, Russia,are getting worse. Sooner or later that's gotta hit the U.S. The market's anticipating that day.

NY,NY: Do you think that what the President announces on Monday re: Monica could affect the stock market on Mon.? If his statement is perceived as "bad news" do you think it could take the market down to test support at 7900?

Jerry Knight: The Monica Market is an amazing phenom. I talked to seven Wall Street hotshots last week when the market tanked and five of them blamed Monica. The kid's got a lot to answer for, but not this. But there is this theory that instability in Washington is bad for business. Personally, i think the fact that its August and investors and traders are at the beach is a bigger factor. Fewer players means the market swings up and down more erratically.

Washington, DC: Do you think now is a good time to buy stock in The Washington Post? Doesn't all the money it's spending on its website take a big bite out of Washington Post profits?

Jerry Knight: The thing you need to know about Post Company stock is that all the other big newspaper companies are off just as much or more. New York Times stock is down about 25 percent from its peak only a couple of months ago. Click on Gannett. Same thing.

Falls Church, VA: What is the definition of a market "correction?"

Jerry Knight: A correction is supposed to be a drop of 10 percent from the peak. Been there; done that. Analysts and trend watchers are starting to use the B word. As in Bear Market. Nobody's quibbling about whether this is a correction any more. The question now is whether investors are gonna get punished as well as corrected.

Portland, OR: How much effect do you think increased direct market participation by smaller investors (e.g. through web trading) has on keeping valuations high?

Jerry Knight: My guess is that direct trading can be a big deal for little companies, particularly what I call "sucker stocks" that have a big net following. Small investors can drive those shares, but its the institutions who determine the price of real powerhouses, like AOL and the Dow companies.

Washington, DC: I am concerned about the media's impact on the market. How much has "hysterical reporting" impacted the market? I heard that CNBC has been attributed to falls in stock prices...

Jerry Knight: Don't blame me. I work for a newspaper. CNBC viewers are victims of themselves.

Philadelphia, PA: What do you see for the short and long-term future for regional bank stocks?

Jerry Knight: Bank stocks have taken a pretty good hit, because the takeovers have slowed down. But all kinds of smart investors are staring new banks, counting on selling out in three to five years. They seem to know what they're doing. I'm personally a whole lot more comfortable with bank stocks that exotic tech companies.

Germantown, MD: With current market uncertainties, mainly Asia, people are looking for alternatives to the US stock market. Why would some analysts suggest investing in foreign markets when they are suffering similar uncertainties?

Jerry Knight: Because they're touting foreign stock funds. You think the US market is hard to understand, try the rest of the world. I think this is a terrible time to take a flyer on foreign stocks.

Gaithersburg, MD: I'm in my late 20's, and I'm just about to invest a small nest egg in a mutual fund. In a market like this, what should first-time, long-term investors be looking for?

Jerry Knight: The best way to get into investing is through your company's 401-k, if you've got one. If not go get an index mutual fund. S&P 500 funds are my favorite. You 20-somethings are the perfect age to buy when the market is falling. You've got half a century for things to go back up.

Bethesda,MD: What effect will the Year 2000 computer glich will have on the stock markets?

Jerry Knight: The biggest thing Y2K has done is drive investors into a bunch of companies whose business will vanish after this bug is eradicated.

Belgravia, London, UK: If Asia keeps sinking, is there any way American markets can avoid doing the same?

Jerry Knight: Nope.The US market will go down as fast as real estate prices in your neighborhood when Asia plays itself out. It'll be a great time to buy a London apartment. Or U.S. stocks.

Arlington, TX: do you feel that the stock market has bottomed ? also do you feel that the will reach new highs by the end of the year?

Jerry Knight: I don't know anyone who thinks this is the bottom. But I know some people who think it's not the top, either.

Los Angeles, CA: I have looked up some newspaper story archives from the summer of 1929, and they are eerily similar to today's.
Do you see any parallels?

Jerry Knight: I'm old, but I'm not that old. The market technicians who ignore fundamentals and look at nothing but charts of market indicators think there are parallels. Checkout the website for WheatFirst Securities in Richmond. Their daily market commentary a couple of days ago went through the argument. We're halfway through our chat with Post business reporter Jerry Knight. Please continue submitting questions until 2 p.m. Thank you.

Leesburg, Virginia: Has demographics – baby boomers saving for retirement – pushed this market into a speculative bubble, and if so, when it bursts won't all investors take heavy losses?

Jerry Knight: Absolutely. Those of us who've finally gotten around to saving are buying stocks and demand drives up the price. So its our fault stocks are overpriced. It'll be really interesting to see how all us boomers react if the market takes a major hit. Lots of people have never been through a downturn. I'll say this: the "correction" has already scared a lot of people away from the idea of investing Social Security money in the market.

Arlington, VA: Japan's Nikkei hasn't fluctuated that much in the last few years, staying within the 14,000 to 15,000 range. Do you have any reason to believe the Japanese economy may finally be hitting bottom and this would be the time to invest in Japanese stocks?

Jerry Knight: My colleague Paul Blustein, who knows the Asian market better than anybody here, just rolls his eyes at your question. You won't find many reporters optimistic about Asia in this newsroom.

Falls Church, VA: My friends think I'm kidding, my parents think I'm being morbid: I'm thinking about buying stock in one of these assisted living-type places, since I see them on every street corner. Is this a growing market?

Jerry Knight: Yeah, grave dancer, get into nursing homes. They're down recently, along with most real estate investments, but we're all gonna be sitting in the rocking chair someday. Take a look at several of the stocks before you buy. checkout Sunrise Assisted Living for a local player. this is not an endorsement, remember, just a place to start looking. You can see them on every corner.

Walnut, CA: What is the economic implication of the recent flood in China to the already battered Asian economy? What is the perception of foreign fund managers with regards to the new Philippine presidency?

Jerry Knight: Blustein (my Asian brain) sez it puts pressure on them to devalue their currency, which would be very negative. You're too esoteric for me.

Fauquier County, VA: It can take years if not decades for the market to return to its previous high after a downtown like that in the 20s or 70s. Wouldn't this be a good time to forget about the stock market and invest in a place where you can grow your own food?

Jerry Knight: You're already living in the same county as Washington Post gardening columnist Adrienne Cook, where else would you go to grow your own? And how far do you think this market is gonna come down? I'm bearish, but not that bearish. If you think things will get that bad, maybe Clark Brothers gun store on Route 29 would be a good place so invest.

Washington, D.C.: You have been covering the roller-coaster stock market like a blanket for months, and if you were a broker you could be accused of "churning" the market for commissions. Radio station WTOP (I know you are in print media, not radio) even has a segment early in the morning with pre-opening indicators giving a little idea of what the market will do at the opening bell. Is all of this simple coverage, or are reporters a little clubby with the market itself and doing a little churning for coverage in a long, hot summer with nothing else going on but Monica (and, of course, her influence on the stock market).

Jerry Knight: To tell you the truth, the only story reporters want to go away more than Monica is the market. Until it really does something meaningful, we gotta write the same stories every few days. A genuine crash would get us cranked up, but I'd guess that is about as likely as Bill Clinton telling us all about his sex life. And I don't want either.

Arlington, VA: The stock of Startec Global Communications Corp. (STGC), a company on the Post 100 list, dropped by 70 percent in May & June without one word in the Post. Why the silence?

Jerry Knight: Sounds like we blew that story. I'll take a look at it.

Bethesda, MD: How do you like doing stock reporting in Washington? Do you often wish you were in a place with more action, like New York City or the Silicon Valley?

Jerry Knight: You don't have to be there, except to do lunch. This is wired America. Distance has vanished. As long as the Wall Street and Silicon Valley gurus call me back, I'm cool.

Beltsville MD: It seems that there is some debate as to whether the decline in the stock market is merely an "adjustment", or whether it is foreshadowing a worse trend. Each viewpoint has its own evidence and reasons for its belief. Is there any way to be sure about this type of thing, or is it really just based on "educated guesswork". If there is a stronger viewpoint, which is the most credible to take stock in, so to speak.

Jerry Knight: Two answers: If you've got a 20 year horizon, it's probably a good time to buy regardless. But for the next six months, it looks very iffy. I've been awaiting The Big Correction for about two years. And I've been wrong. But I've still got money in mutual funds. (Post reporters who write about stocks can't invest in them. That's probably kept me from making a lot of dumb investments.)

Gaithersburg, MD: Is anyone on the techie side of the analysis business talking about the potential for nano-technology (small machines) and biotechnology (designer lifeforms)? Is there an expected time horizon when these should start adding to the GDP and growing in stock value?

Jerry Knight: I don't know of any local non-tech companies. I know some local nano-stock. Or maybe I should call them No-no stocks. Gaitherberg has more biotech per head than just about any other town in America. Check out your locals. Just remember that the big biotech boom has been just around the corner for about as long as the revival of the real estate market in fringe neighborhoods in The District. But there are some payoffs starting to show up. I personally think biotech is a very fun, very sexy industry. But you gotta be very careful.

McLean, VA: I know you watch financial services companies closely, and their stocks have been on a four year roll. Do you think we're at the point in the cycle where prices for these companies are bound to take a hit?

Jerry Knight: The banks are down significantly and the specialty lenders are in the middle of a shakeout. I'm sort of conservative, so I like banks. But you'll never find the next in banking. Companies that finance risky borrowers will get zapped when the economy cools down, so I'm dubious about them. And there are a fair number of flaky companies in that business.

Seattle, WA: Is it still advisable to invest in a mutual fund? I've heard lately that they are "losing popularity" because of the stock market uncertainty.

Jerry Knight: There really hasn't been a big bailout from the funds. Yet. But inflows seem to be slowing. What else are you gonna do? If you're interested in equities, funds are easier, safer than individual stocks. But if the market slumps, it won't make a lot of difference whether you own a few companies or a few funds.

Amarillo, Texas: I am the opinion the average investor does not know what they are buying. That equity investments are viewed by many as a commodity like gold or a get rich scheme like a lottery. There is no real linkage today between the stock being bought and its current price. All the buyer expects and anticipates is that its value will appreciate like real estate values did in the 80's.
Today's equity investor is buying appreciation, not ownership of a company which is what stock really represents. Now if everyone buys for the same reason, what happens to the equity market and prices when they all decide to "cash" out? The only real value any stock has is on the day and time it is sold for cash, that is liquidated. Thus, do you think that too many investors don't have a clue to what they are buying when it comes to stock?

Jerry Knight: The Texas real estate market is a valuable lesson. Overheated markets blow up. I don't think the market is as overpriced and overbuilt as North Dallas real estate was, but..... Our chat is now at an end. Thanks to you, Jerry, and to all our users for sending in so many questions. Look for a transcript of this chat on our site later today.

© Copyright 1998 The Washington Post Company

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