STOCKS AREN'T LIKE

houses. When no one will meet a homeowner's price, he can choose not to sell and pretend that the property is still worth whatever. But the stock market brooks no denial and at the moment the ticker's undeniable message is that something has gone badly wrong.

What might that be? While the market rout has taken on the proportions of the February nosedive, there are some important contrasts as well. Earnings are not an issue this time, at least not for the quarter that's just ended. Nor can we blame this misfortune on China, much as some would like until today's global margin call, emerging markets had held up remarkably well.

This time, the problems lie considerably closer to home, starting with an excessive backlog of unsold U.S. homes that may not return to normal until 2009, if then. By the time that's cleared up, we may be looking at a correction of 10% or more in home prices no big deal from a long-term perspective, but highly inconvenient at the moment all the same.

It's most inconvenient for investors holding securities derived from housing debt. These layer cakes of promissory notes got sliced and priced based on historical performance patterns that appear to have been out of date. The people who did the pricing and the slicing are now at their beach houses, and no one in their right mind is buying the stuff they left behind at anything like its face value.

One historical pattern that does seem to be holding is that it's harder to find a clearing price for a security that's a little different from any other, and harder still to sell it at a time when there's every expectation that it will be even cheaper in a few days.

This slicing and dicing of debt a key financial innovation drew an international crowd of investors who in the past had stuck to dull, safe Treasurys. Now these income seekers have rediscovered the safe-haven appeal of government debt, at the expense of less-powerful borrowers.

So in addition to our rickety real estate we're left with colicky credit markets as well. Chrysler's LBO debt awaits better days on its bankers' books. Ditto for Countrywide's lines of home equity to supposedly "prime" borrowers. Having lenders hold on to the loans they made is not exactly a revolutionary concept. But it's been years since anyone has had to do that, and there's no going back without significant damage to our heavily leveraged economy.

Don't be fooled by the "business as usual" propaganda on cable. Problems with selling debt derivatives amount to an effective hike in interest rates on the businesses that need the money most. Unless the Federal Reserve quickly cuts rates and there's little reason to believe that it will the credit scare will turn into another headwind for the already struggling U.S. economy.

After-tax profits are at a modern-era high of more than 10% of GDP, and liable to revert to the less flattering mean sooner or later. Between the credit crunch and growing consumer unease with the price of gas and the trend in housing, I'll take sooner, and I'm not alone on that one.

And, by the way, productivity growth isn't what it used to be, now plodding along at just 1%. "There is evidence out there, still fragmentary, that our rate of innovation, which had been surging during the 1990s, has slowed down really quite dramatically," Alan Greenspan said at the Treasury forum this morning. The Fed is worried, too.

We know where slowing productivity leads: to inflation and also to layoffs. And while the monthly payroll surveys are still pointing to sunny skies, its household counterpart and earnings reports like WellPoint's suggest that quiet bloodletting has already begun in the economy's darker corners.

I hate to rehash so much bad news, because the world is still growing richer faster than ever before, and valuations are reasonable assuming no collapse in earnings. But it's a fact that the biggest and richest economy of them all has been eating seed corn for years now, and now heads into a slowdown with low reserves of everything except debt and electronic gadgets. The risks to the global growth story are growing.

I've written recently about not being able to find attractive stocks, though it's now clear that my summertime pick, Goldman Sachs, will remain cheap and deservedly so for at least one more season. I've also been raising cash of late, though this effort has been slowed by an unwillingness to let go of core holdings that I still see as long-term winners. I'm not selling my international exposure, or bets on energy.

Today, of course, was not a good day to sell anything at all and tomorrow morning's probably not the best time either. But it's a great opportunity to assess which stocks to dump the next time the Pollyannas claim the coast is clear.