Wall Street aftershocks felt in California's economy
By Dale Kasler
The Sacramento Bee
Published: Tuesday, Aug. 9, 2011 - 12:00 am | Page 1A
© Copyright The Sacramento Bee. All rights reserved.
Wall Street's scary losing streak could put a dent in California's fragile economic recovery.
In some ways, it already has.
The huge downturn in the stock market, punctuated by Monday's near-record fall, is costing the state's public pension funds billions of dollars. It's putting a strain on tax revenues – and could throw the just-passed state budget out of whack.
The aftershocks are being felt on the street level, too. Some real estate purchases are being postponed or canceled. Financiers are wondering if they'll be able to fund promising new tech companies.
Even businesses that are expanding are doing a double-take of sorts as they try to fathom Monday's 634.76-point drop in the Dow Jones average, the worst sell-off in nearly three years. Monday was the first day of trading after Standard & Poor's downgraded the U.S. credit rating.
"I don't know how big this is; I don't know how pervasive it is," said Winters restaurant executive John Pickerel, owner of the Buckhorn Grill chain. "When we went through this (market crash) in 2008, it was immediate and abrupt."
That said, Pickerel said he's still going ahead with two new restaurants this fall, in Roseville and Pleasanton.
And despite the market turmoil, many economists and other analysts continue to bet against a double-dip recession. The previous recession was triggered by the real estate crash.
"There has to be a driver for a recession (to occur), and I don't see where the driver is," said Chris Thornberg of Los Angeles consulting firm Beacon Economics.
Yet the market gyrations will surely hurt the economy. Consumers, feeling less wealthy and less confident, will curtail spending.
"It's a herd mentality," said Sacramento financial adviser John Allen of Merrill Lynch. "We even see it with the wealthiest people."
The most immediate, concrete effect of the stock market's stumble is on stock portfolios – particularly the big ones.
The California Public Employees' Retirement System, the nation's largest public pension fund, has lost about $17 billion since the state's new fiscal year began July 1. Monday's loss alone topped $6 billion.
The past month of trading has erased more than 40 percent of CalPERS' robust investment gains from the previous fiscal year. Roughly two-thirds of CalPERS' portfolio is in stocks.
"It's not a time to panic," said Joseph Dear, CalPERS' chief investment officer. "Stay the course, apply the policies … look for opportunity."
But Dear acknowledged these are anxious times. His staff spent Monday telephoning the pension fund's outside money managers to get a sense of investors' outlook.
The response was an overwhelming lack of confidence in U.S. and European political leadership, he said. Until that changes, he added, "The market's going to be highly volatile."
State Treasurer Bill Lockyer issued a statement saying that California's government won't be affected by S&P's credit downgrade. But he said Californians should worry "about the continuing effects of the economic recession on jobs and the stock market."
State government could be affected if the stock market plunge blows a hole in California's budget, which relies in part on a projected $4 billion surge in tax revenue. That forecast, viewed skeptically by many independent analysts to begin with, now seems shakier as the financial markets weaken.
"It doesn't look real good right now for the budget projections," said Michael Shires, a fiscal policy expert at Pepperdine University. "The big danger to Sacramento is if the economy's slowing down."
Some business executives in Sacramento shrugged off the market's problems, arguing that investors merely confirmed the obvious: The economy has been weak for a long time.
"We never bought into the notion that we were in a recovery," said Steve Fleming, chief executive of Sacramento's River City Bank.
Still, for some folks, the market drop brought a serious wave of the jitters. Linda Friery, an agent with Lyon Real Estate in Roseville, said some homebuyers have backed out of deals in recent days.
One client had just been approved for a short sale on a $150,000 home in the Rancho Cordova area. "He said, 'No, I'm just not going to buy it.' He said, 'Call me in the spring.' "
Allen, the financial adviser, is also co-founder of the Sacramento Angels, a group that bankrolls startup companies. The Angels are looking at putting money into a tech company north of Sacramento, and now Allen hopes the funding will be available when the time comes to wrap up the deal.
"Capital becomes tight when portfolios go down in value," he said.
Others are vowing to forge ahead. Telefunken Semiconductors America won't pull back on its $80 million expansion of Roseville's computer-chip plant.
"We still have to do what we have to do," said Raj Johal, the company's president. "It doesn't change our plans."
The huge downturn in the stock market, punctuated by Monday's near-record fall, is costing the state's public pension funds billions of dollars. It's putting a strain on tax revenues – and could throw the just-passed state budget out of whack.
The aftershocks are being felt on the street level, too. Some real estate purchases are being postponed or canceled. Financiers are wondering if they'll be able to fund promising new tech companies.
Even businesses that are expanding are doing a double-take of sorts as they try to fathom Monday's 634.76-point drop in the Dow Jones average, the worst sell-off in nearly three years. Monday was the first day of trading after Standard & Poor's downgraded the U.S. credit rating.
"I don't know how big this is; I don't know how pervasive it is," said Winters restaurant executive John Pickerel, owner of the Buckhorn Grill chain. "When we went through this (market crash) in 2008, it was immediate and abrupt."
That said, Pickerel said he's still going ahead with two new restaurants this fall, in Roseville and Pleasanton.
And despite the market turmoil, many economists and other analysts continue to bet against a double-dip recession. The previous recession was triggered by the real estate crash.
"There has to be a driver for a recession (to occur), and I don't see where the driver is," said Chris Thornberg of Los Angeles consulting firm Beacon Economics.
Yet the market gyrations will surely hurt the economy. Consumers, feeling less wealthy and less confident, will curtail spending.
"It's a herd mentality," said Sacramento financial adviser John Allen of Merrill Lynch. "We even see it with the wealthiest people."
The most immediate, concrete effect of the stock market's stumble is on stock portfolios – particularly the big ones.
The California Public Employees' Retirement System, the nation's largest public pension fund, has lost about $17 billion since the state's new fiscal year began July 1. Monday's loss alone topped $6 billion.
The past month of trading has erased more than 40 percent of CalPERS' robust investment gains from the previous fiscal year. Roughly two-thirds of CalPERS' portfolio is in stocks.
"It's not a time to panic," said Joseph Dear, CalPERS' chief investment officer. "Stay the course, apply the policies … look for opportunity."
But Dear acknowledged these are anxious times. His staff spent Monday telephoning the pension fund's outside money managers to get a sense of investors' outlook.
The response was an overwhelming lack of confidence in U.S. and European political leadership, he said. Until that changes, he added, "The market's going to be highly volatile."
State Treasurer Bill Lockyer issued a statement saying that California's government won't be affected by S&P's credit downgrade. But he said Californians should worry "about the continuing effects of the economic recession on jobs and the stock market."
State government could be affected if the stock market plunge blows a hole in California's budget, which relies in part on a projected $4 billion surge in tax revenue. That forecast, viewed skeptically by many independent analysts to begin with, now seems shakier as the financial markets weaken.
"It doesn't look real good right now for the budget projections," said Michael Shires, a fiscal policy expert at Pepperdine University. "The big danger to Sacramento is if the economy's slowing down."
Some business executives in Sacramento shrugged off the market's problems, arguing that investors merely confirmed the obvious: The economy has been weak for a long time.
"We never bought into the notion that we were in a recovery," said Steve Fleming, chief executive of Sacramento's River City Bank.
Still, for some folks, the market drop brought a serious wave of the jitters. Linda Friery, an agent with Lyon Real Estate in Roseville, said some homebuyers have backed out of deals in recent days.
One client had just been approved for a short sale on a $150,000 home in the Rancho Cordova area. "He said, 'No, I'm just not going to buy it.' He said, 'Call me in the spring.' "
Allen, the financial adviser, is also co-founder of the Sacramento Angels, a group that bankrolls startup companies. The Angels are looking at putting money into a tech company north of Sacramento, and now Allen hopes the funding will be available when the time comes to wrap up the deal.
"Capital becomes tight when portfolios go down in value," he said.
Others are vowing to forge ahead. Telefunken Semiconductors America won't pull back on its $80 million expansion of Roseville's computer-chip plant.
"We still have to do what we have to do," said Raj Johal, the company's president. "It doesn't change our plans."
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