View From New York: Wall Street haunted by fear of creeping crash

Amonth after the Federal Reserve reversed the trend in US interest rates, is the resulting 'correction' coming to an end? Or, as many here seem to fear, is Wall Street simply in the early stages of a 'creeping crash' that will leave the Dow Jones average at 2000 by the end of next year?

Worries about inflation, trade war, new taxes and financial speculation all seem to have coalesced in the past week, giving rise to predictions not of a 1987-style crash, but of a gradual sell-off that might last two years - 'the financial version of Chinese water torture', as the New York Times put it this week.

If anything, economists say, a long, grinding bear market - like the one that halved the value of US companies during the mid-1970s - would be far more destructive, retarding real economic growth in the United States.

By the time the Fed announced the first upward move in rates in five years on 4 February, most economists here were agreed that the bull market - which had survived almost as long - was due for a rest.

The Dow average immediately fell almost 96 points, and the consensus settled on a short-term correction in US share prices of about 5 per cent.

As of this week, the decline has been just over 4 per cent, and there's little sentiment around to suggest the selling will stop. Shares have become hideously expensive by just about any measure, mutual funds appear to have absorbed every available household investment dollar, and rising interest rates will mean bonds may soon offer buyers comparable returns.

To make matters worse, Wall Street is already experiencing serious competition from overseas markets; half the money that poured into mutual funds last year was earmarked for offshore 'growth' investment.

As a result, the self-correcting mechanism that has allowed Wall Street to recover from each scare of the past decade - the willingness of American investors to 'buy on weakness' - simply did not apear to have clicked in during February.

Program-trading 'circuit breakers' and the Fed's willingness to provide liquidity during market meltdowns may have succeeded in taming the volatility of the 1980s markets. But they will do little to prevent - and might even encourage - the sort of protracted, destructive bear markets that characterised earlier cycles.

Multi-media bubble did not burst

The absence of a precipitating event behind Wall Street's decline - like the collapse of the United Airlines buyout that touched off the 1989 mini-crash - also has some on Wall Street troubled.

The failure of Bell Atlantic's merger with Tele-Communications Inc - the defining deal of the interactive media revolution - might have filled the bill, coming as it did in the midst of the bond market sell-off.

Concern about the high valuations being placed on expected demand for unproven services had already been festering for several weeks, and was reflected in slumping prices for all players involved in the three big 'convergence' mergers, Bell Atlantic-TCI, Paramount-Viacom-Blockbuster and AT&T-McCaw Cellular.

But instead of the 'multi-media bubble' bursting in the wake of the 23 February announcement, the speculation has continued apace.

A number of communications companies did use the deal's collapse as a pretext to slow development of some their own costly re- wiring projects. Time Warner, for example, has delayed the roll-out of its high-profile 'full service network' in Orlando, Florida, by six months, until the end of the year. And TCI and AT&T took advantage of the announcement to extend trials of video-on-demand and other pay-per-view services in Colorado until midsummer.

But the 'merger mania' aspect of the business seems hardly to have been affected. MCI, BT's transatlantic telecoms partner, announced on Monday that it planned to spend some of the dollars 4.3bn it received from BT buying into NexTel, a start-up mobile-radio company that is suddenly worth more than dollars 5bn.

Both Sony and Matsushita are also said to be shopping their Hollywood studios around Wall Street, looking for multi-media partners.

More surprising still, Time Warner - the world's largest multi-media company - last week found itself under seige by a potential hostile bidder. Seagram, the big Montreal-based distiller, took advantage of the slumping share market last week to increase its stake in the cable, film and publishing giant to 13.1 per cent from 11.7 per cent - despite the adoption of a poison pill that limits holdings to 15 per cent of the company.

Seagram, which now owns almost dollars 2bn worth of Time Warner shares, has been practising what one analyst calls 'creeping ownership' - buying more of less continuously since last summer, for reasons that remain unclear.

A tender offer for the company seems out of the question - buying all its shares would cost some dollars 20bn, and would entail assuming the dollars 12bn debt left over from the controversial merger that created the media conglomerate four years ago.

And a drinks company - despite what Hollywood's critics might suggest - has little to offer the entertainment business in the way of synergies.

Instead, Seagram - in a particularly poignant reminder of the last bear market - appears to be speculating on the information revolution, much in the way big companies speculated on the energy crisis at the end of the 1970s.

'Prospecting for oil on Wall Street' was the way it was described at the time; Seagram itself walked away from the merger mania of the day with a 24.3 per cent stake in the petrochemical giant DuPont, and a claim on its earnings that totals almost dollars 300m a year.

Is there more money to be made hitch-hiking - or for that matter, car-jacking - on the information superhighway than on re-paving it? US cable companies, Japanese electronics firms and others anxious to cash in on their multi- media investments seem to agree with Seagram that most of the interaction is instead going to take place in a narrow lane in lower Manhattan.

It should hardly be surprising then that Wall Street's advice to investors last week on Time Warner was: 'Buy on weakness.'