The Great Unraveling

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THE PLANK NOVEMBER 20, 2008

The Great Unraveling

I’ve been doing some research on the explosion in U.S. capital around the turn of the last century; it’s pretty amazing. In 1897 the total capitalization of all companies with a book value of over $1 million was $170 million; in 1900 it was $5 billion, and in 1904 it was $20 billion. It’s not exactly a parallel, but I remembered those numbers this morning while reading a frightening Reuters article (hat tip to the New York Times’ incomparable Andrew Ross Sorkin). It notes that as of yesterday 101 stocks in the S&P 500 are selling for below $10 a share, far outpacing the 59 stocks that fell below the $10 mark in the last recession and the 35 that tanked in 1987. A mere five firms had stock prices over $100, and more than a third of the S&P 500--186 companies--have dropped below market caps of $4 billion, the line for inclusion on the list.Normally, this would be a great moment for buyers, with the potential to boomerang the market upwards. But there are a few reasons why it’s a little too early to expect such an outcome. First, as the Reuters article notes, many institutional investors are barred from buying stocks below $10, which means some of the only people left with cash on hand are unable to participate. Second, we’re moving into the end of the year, the time when investors will be looking to unload stocks to take tax write-offs, and with the S&P 500 off 45 percent this year, a lot of blue-chip stock will be up for sale. Of course, they could use the proceeds of those sales to buy cheap blue chips, the so-called “January effect.” But given the aversion to risk that has overtaken even the savviest of investors, I’m not hopeful that a lot of that money will be coming back into the stock market. Of course, this is all idle speculation; I’m no Jim Cramer (and I thank God every day for that little bit of grace). So, readers--what do you think? Anyone gearing up for some deals?--Clay Risen

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