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Crash Raises Fears of Recession in County : Chapman Economist Says Long Stock Slump Could Depress Economy

October 25, 1987|JOHN TIGHE and JOHN O'DELL | Times Staff Writers

Peter Churm lost $333,000 Monday, and things didn't get any better the rest of the week.

By Friday, Churm was down $626,040 on his 333,000 shares of Fluorocarbon common stock, and the total market value of Fluorocarbon--the high-tech rubber and plastics company he heads--was off $8.1 million.

Not only that, but as he watched in horror Monday as the Dow Jones Industrial Index plummeted a record 508 points, Churm also saw a hoped-for business merger crumble amid the crash.

Variations on Churm's story--with dollar amounts and missed opportunities both considerably larger and considerably smaller--were being told all over Orange County as investors, business executives, stockbrokers and even those who have never owned a share of stock tried to come to grips with one of the most unsettling weeks in U.S. financial history.

A lot of money was lost, business deals were canceled or delayed, and the investment habits of thousands of people were changed.

But the real impact on the county's economy is still to be felt.

Economist James Doti, acting president of Chapman College and head of its school of business, said: "The real question is whether this will be a long-lived crash. . . . Things could come back next week. But if the market stays around 2,000 for the next two months, it will have a significant effect on the economy.

"Economists talk about the 'wealth effect,' which largely determines retail and investment spending," Doti said. "If people perceive themselves as poorer or less wealthy, they will cut back" on spending, and businesses are no different.

If the wealth effect were measured now, it would likely be as depressed as the market.

In Orange County, an estimated 500,000 people--those with direct investments in stocks and mutual funds--were affected by the week's stock market gyrations.

Watched Shellshocked

They watched shellshocked as the Dow index dropped 508 points on Monday and alternately cheered and winced as it rose Tuesday and Wednesday in seesawing hourly spurts. But hopes for recovery from Monday's debacle fell with the market on Thursday, and, after Friday's paltry one-third point increase, the Dow ended the week down 296 points, or 13.2%, at 1,950.7.

Based on data developed in a New York Stock Exchange survey of individuals and their direct stock investments, Orange County shareholders are believed to have lost about 13% of the value of their portfolios, or about $445 million for the week. That does not include losses in individual retirement accounts and company-sponsored retirement plans.

And Orange County's 100 largest publicly traded companies, Fluorocarbon among them, did not fare any better.

The gross market value of the companies was $14.7 billion when the market closed Oct. 16.

It dropped to $12.7 billion by the close of trading Monday and ended the week at $10.1 billion--a 31.3%, $4.6-billion decline.

But as disastrous as the numbers sound, they don't mean much all by themselves.

A loss of $4.6 billion--even $445 million--is a lot of money. But most of it was a "paper" loss--the eroding of stock profits accumulated as the market rose over the past five years. Even after the worst week in market history, Friday's closing Dow Jones average of 1950.7 was more than double the 777 points recorded on Aug. 11, 1982--the date the longest bull rally in history began.

Repercussions for Years

But while a number of business executives said their confidence in the economy is unshaken, they also said the week's market activity will have repercussions for business activities in the county for years to come.

With depressed stock market prices, Orange County's young, growth-oriented companies might have trouble finding the money needed to expand development and marketing. Such companies have traditionally been able to raise money by selling additional shares of stock on the market.

"The stock prices are too low to raise much money, and investors are going to be afraid of buying new issues," said Walter W. Cruttenden III, chairman of Cruttenden & Co., a Newport Beach investment banking firm.

Executives said that with fewer companies raising money through equity offerings, demand for loans to finance operations is likely to grow significantly. The resulting rise in interest rates could choke business.

"Especially after the next election, there could be a difference in policies, which could send rates up," said Robert Gumbiner, chairman of FHP International, a Fountain Valley health maintenance organization. "Businesses are going to take a second look at expansions."

Companies also might postpone expansion as they monitor consumer confidence following the market collapse.

'Got to Be More Cautious'

"It could have a major impact on demand," said A.J. Moyer, chief financial officer at Irvine-based Western Digital, a company whose stock was especially hard hit during the week, falling 29.5% to close Friday at $15.625. "A half a trillion dollars (in U.S. stock value) was taken out, and a lot of wealth disappeared."

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