The percentage fall in the valuation of the stock market is, pretty much by definition, lower than the percentage fall in the enterprise value of America, Inc. And the more levered that America Inc was, the greater the difference between the two numbers.
But with a lot of high-profile stocks now trading in the low single digits (Citi, Ford, GM, airlines), and even General Electric trading at just $13 a share, the optics of what’s going on, especiallly among retail investors, are atrocious. I just got an email from Portfolio’s travel guru, Joe Brancatelli:
I’ve noticed people get REALLY nervous when shares of a company start costing less than a cup of joe at Starbucks. It’s sort of the dumb-guy’s-guide to the market. If I can buy shares for less than coffee, things are bad.
Well, yes, when a multi-billion-dollar corporation sees its equity wiped out, things are certainly bad. And nominal stock prices do matter, for reasons I don’t fully understand: somehow it’s worse that Citi’s gone from $35 to $5 than it would be if it had gone from $105 to $15.
But the whole leverage aspect I think is not well understood by the public. They know that if they buy a house with little or no money down, that means they have very little equity in the house and that equity can be quite easily wiped out, even if the house is still worth something. But they don’t look at stocks the same way: they don’t think of shares in Citigroup as equity in a house with a 90% mortgage while Apple, say, bought its house for cash.
If enough stocks go to zero during this stock-market downturn, that might change. Especially if and when companies start emerging from bankruptcy in listed form, the public might start to realise that companies don’t necessarily die along with their stocks, it’s just that their owners change. But for the time being, and for the foreseeable future, the news is likely to get worse before people start to see through to the other side.