Questions for the Citizen-Shareholder

It’s Sunday. Yesterday the powers that run the New York Stock Exchange announced that their weekend testing had gone well and that the markets will begin trading on Monday as normal.

Well, maybe not normal. There’s a great deal of uncertainty about what will happen to the big indexes on Monday morning. Specifically, there is a great deal of fear, in some quarters at least, that they will plummet. What if they do? What would that mean? These questions have a special significance, it seems, in the era of the citizen-shareholder. We’re hearing more and more that the direction of the stock market is, at its root, a patriotic issue.

The morning after Tuesday’s horrific incidents, a friend of Moneybox told me about one of what has turned out to be a cluster of grass-roots e-mail campaigns encouraging Americans to buy stock when the markets reopen, to counterbalance the high number of sell orders that some anticipate. Later, Cisco announced that its board had authorized a big $3 billion stock buyback, a move the Wall Street Journal said “recalled International Business Machines Corp.’s buyback announcement in October 1997 during the Asian financial crisis.” The Journal recalls that announcement as having inspired a 337-point jump in the Dow. The Washington Post on Friday reported that “major securities firms and corporations have reached an extraordinary agreement to prop up prices by buying shares if a flood of sell orders threatens to send the markets into a free fall.”

What’s going on here? Is it really possible to “prop up” stock prices in this way? And if it is, would doing so actually be patriotic?

Let’s look at the second question first. If it’s patriotic to buy stock and keep and the market from falling, where exactly do we draw the lines? Is it OK to let some stocks fall but not others, or should all stocks be prevented from falling? What about ones you think were overvalued before last week? What about airline stocks? They’re likely to get hit the hardest–should we try to prevent that? Even though several airlines have already announced bad news about their earnings prospects? Is it actually unpatriotic of those airlines to admit such a thing? What about an analyst who downgrades those stocks–unpatriotic?

I’m deeply suspicious of the rhetoric of whipping up a patriotic stock rally. Partly this is because I don’t think there’s any need for it. Maybe the market will get off to a bad start in the morning, but in the long run it will be back, so long as corporate earnings recover, which, over time, they will. (I might be more pessimistic about how long it would take if the indexes were at the levels of 18 months ago.) It’s one thing to argue that we should have confidence in our economy. But what some of these citizen-shareholders seem close to advocating is pretending that we have confidence.

Which brings us back to the other question: Could this stuff work? I doubt that in raw technical terms the various proposals would actually have much effect, at least in any across-the-board way. How, really, would the buy orders find their way to the stocks most overwhelmed with sells? And at what point would the patriotic buyers figure that they’d done their part and cash out, which might simply drive a given stock down later?

OK, what about the efforts of the big boys, and their “extraordinary agreement to prop up prices”? For starters, I think the Post oversold a bit on this. The main change that regulators are letting happen is that corporations can execute stock buybacks early in the day, which isn’t normally allowed. I don’t think that’s as wild as the Post does. The paper also basically had to recant its suggestion that short-selling would be restricted, saying in a follow-up story that it won’t be. Anyway, high-profile buybacks can provide a psychological boost, as IBM’s might have done in 1997, but as a practical matter, the strategy has mixed results in actually affecting a stock’s future performance.

Having said all that, I don’t think the actual effectiveness of these measures–either from the grass-roots or the powers that be–is really the point. The point is to influence market psychology–to give the strong impression that the market will not collapse, and perhaps even to shame investors who don’t want to have to admit at cocktail party that they committed market treason by liquidating their portfolios. (On the short-selling front, there is supposedly informal peer pressure among hedge-fund managers not to short at the open, and you can almost imagine those managers wanting to avoid bad publicity about hedgies shorting America.) The real goal here is not to put these various measures to the test, but to create an environment in which they don’t have to be put to the test. In other words, if we don’t end up actually having to find out whether this strategy will work, then we’ll know that it did.