Whew. As of Friday, the Standard & Poor s 500 was down 42% in the last 12 months. At 899, the broad stock index was down 39% in the calendar year, 27% in the last month, and 18% for the week.

No one knows what will happen after today s rally. But what s been happening on Wall Street is a panic no less irrational than the dizzying speculation that preceded it on the upside. People wanted out and they wanted out at any price. Jim Cramer, the unforgivably myopic stock guru, said on television that people should sell everything now and apparently some folks are doing it. No matter that six months from now (or maybe in six weeks, or maybe in six hours) Cramer will be saying buy everything.

Investing is a fool s game sheer speculation except when it is tethered to an appreciation of underlying value. If you are just trying to anticipate or even worse, follow Cramer s rants, you shouldn t invest in anything ever.

Even with the banking system greatly wounded, the value of American business has not evaporated. People will not stop shopping for clothes, though they may do less of it this year, nor will they stop seeking medical care or dining out. And the companies that provide those goods and services will, for the most part, earn a profit.

The intrinsic value of their equities, now and in the future, derives from that profit. Therefore, equities do not merit selling at any price. The only sensible basis for buying stocks or selling them is one that relates the price of shares to their underlying worth, meaning the present value of their expected future cash flows.

Using Friday s closing prices, The Wall Street Journal reported that more than 800 stocks were priced at less than their per-share holdings of cash. This is the equivalent of a Wall Street fire sale. If the cash on hand equals the investment, you are getting the business for free. Jim Cramer isn t thinking about that, and neither are the people calling their mutual funds to sell.

The present credit distress, the refusal of banks to lend, is perhaps unprecedented in our lifetimes. The disappearance or the forced rescue of so many proud names (Bear, Lehman, Fannie, Freddie, Merrill, A.I.G., Washington Mutual, Wachovia) in such a short span has no precedent ever.

With the private banking system frozen, the government has been forced to play banker to the entire nation. In announcing its willingness to buy commercial paper, the Federal Reserve is bypassing the banks and preparing to loan directly to corporations. This is an extraordinary event. The free-market system that was once the envy of the world is now the humbled ward of the state.

But we (or our ancestors) have lived through many previous credit contractions. All of them ended; this one will, too. When it does, the vast majority of the corporations on the stock market will still be there.

No one really disputes that stocks are cheap. The money managers I talk to, the brokers, the individual investors agree that values are anywhere from fair to compelling. But they are gripped by fear and paralyzed by uncertainty.

This time these problems, our current woes they say, are different. And so they are. But even if the particular circumstances differ, the condition of despair, following so soon on that of prosperity, is very familiar. Just six years ago, in the aftermath of the tech bust and of Enron, the S&P 500 fell to only half of its previous high. And a generation earlier, the Dow, having topped 1,000 in 1972, plummeted to 577 in 1974. Describing that latter period (in a biography of Warren Buffett), I wrote that stocks fell from the sky and sat like overripe fruits. Fund managers who had been eager to buy stocks at eighty times earnings disdained from investing when those self-same stocks were trading at five times earnings.

Some of the problems they faced a seeming dearth of business initiative, epitomized by aging, bureaucratic and soulless corporations today no longer seem relevant. However, we can relate to the soaring oil prices of that era, and we suffer from a worse real estate collapse than did our distant, pre-digital-age ancestors (though they had a real estate collapse, as well). But to them, the problems of that era seemed like the end of the world.

Addressing a doleful audience at Harvard Business School, in 1974, Howard Stein, chairman of Dreyfus, a prestigious investment firm, urged caution with regard to common stocks even though he admitted that stocks were cheap. He was obsessed with the enormity of the problems confronting us. As we are today.

Buffett did not have a solution to those problems. But he knew that a reasonable level of prosperity and with it, a mindset of optimism would eventually return, at which time stock prices would recover, both because the underlying companies would be earning more, and because the stock market would value their earnings at a higher multiple.

Also, he understood the fallacy of waiting until the fog dissipated and that far-off, happy shore could be glimpsed. You pay a very high price in the stock market for a cheery consensus, he advised, meaning that when prosperity is evident to you, it will also be evident to many others consequently, the bargains will be gone.

Investors then, like many now, lost hope that the cycle would ever turn. Speaking earlier this month at Columbia Business School, Ezra Merkin, President of Gabriel Capital Group, observed more sagely than had Stein, People think cycles are repealed at the top. They also think cycles are repealed at the bottom.

Merkin was at Columbia to help commemorate the reissue of Security Analysis , the investing primer written in 1934 by Benjamin Graham and David Dodd. The authors, writing at the depths of the Depression, when 25% were unemployed, when steel and auto production had fallen 75%, and the stock market had fallen 89%, made the point even more poetically: That enormous profits should have turned into still more colossal losses, that new theories should have been developed and later discredited, that unlimited optimism should have been succeeded by the deepest despair are all in strict accord with age-old tradition.

How true this rings today. New theories abounded concerning the practice of lending, both to mortgages and other forms of credit; new theories justified the spread of opaque derivatives as well as the bizarre increase in Wall Street leverage all, as Graham and Dodd foretold, later discredited. So it was in Buffett s youth.

Yet when I entered the field of financial writing, the 70s were recalled as a halcyon time before investing became a national sport, when stocks traded at single-digit earnings multiples and bargains were there for the taking. So widespread was the fear of stocks in the 70s that equity mutual funds suffered negative flows for eight straight years. But of course, people such as Buffett who invested in that period made fortunes. And managers who were slightly younger, or slightly more timid, later regretted they would never see such bargains again.

At Friday s closing prices, Goldman Sachs was trading at 89% of book value. The market was saying that $1 invested with Goldman is worth only 89 cents the talent, the franchise value, the reputation and skills and brains of Goldman are now worth less than zero. Microsoft (a stock I own), which has increased per-share earnings at a rate of 22 % a year for five years running, was at 11 times trailing earnings. Pfizer is trading at about six times anticipated earnings.

The S&P as a whole is trading at approximately eleven times projected earnings. No doubt, companies will fall short of their projections this year. More fairly, the S&P is trading at eleven times its eventual earnings power. That is cheap.

No one can say when the stock market will recover, though I would bet it will be well before residential housing markets do. Nor can one guess when credit markets will unfreeze, nor should one doubt that still much turmoil lies ahead. And one should not expect, even when the turn comes, that Wall Street will resemble its prior self. Limits on leverage will perforce mean limits on its profits.

Finally, no one can say that this moment is a bottom that next month will not be cheaper, nor the month nor even the year after that. All we know is that stocks look cheap now. And when the market turns, and 24-hour stock jockeys are screaming buy, people who failed to take advantage will regret it.