Lost in the intense focus on the current financial crisis is a major new market risk that appears to be developing — investor capitulation, a situation in which many investors, fed up with mounting losses, say enough is enough and throw in the towel. While such capitulation helps clear the air, over the short term it’s often a forerunner of big declines in stock prices and even market crashes.

“There’s a very real danger we’re in the early stages of it,” a veteran San Francisco money manager, Gary Wollin, says.

Giving credence to the argument, many investors have recently embarked on an accelerated selling binge, dumping more than $16.7 billion worth of equity mutual funds in the two weeks ending September 10, according to West Coast liquidity tracker TrimTabs Investment Research. On top of this, fearful investors unloaded an estimated $11 billion of these funds on Monday alone, when the Dow Industrials tumbled 504 points. That number reached $17.8 billion for the five trading sessions ended Wednesday.

Wall Street is learning the hard way that Bank of America’s $50 billion purchase of Merrill Lynch and the Federal Reserve’s $85 billion bailout of insurance giant American International Group are not a panacea for the market’s problems, Mr. Wollin says. “It’s also beginning to realize the Fed is not really curing the disease, but just addressing the symptoms. To really get this market going again, you have to stop housing values from going down — period,” he says.

Mr. Wollin, who manages nearly $100 million of assets under the banner Gary Wollin & Co., says he is alarmed that we’re seeing the same kind of volatile swings, though on a lesser scale, that typified the market’s behavior just prior to the crash of October 19, 1987. That date is often referred to as Black Monday, a day on which the Dow Industrials suffered a vicious decline of 22.6%, or 508 points.

Mr. Wollin characterizes this past Monday’s 504-point skid as a signal it’s going to get a lot worse over the short term. “There may be a bounce-back rally” — the Dow did rise 410 points yesterday — “but it won’t last because the bleeding hasn’t stopped,” he says. “The problem is every time you put your finger in the dike, there’s another hole.”

He says he’s especially concerned about housing, which he contends is still overvalued. “The people who own homes just don’t get it when they try to sell,” Mr. Wollin says. “They believe Wall Street may be a bubble, but never real estate.” He says rising unemployment, now at 6.1% and heading to 7.5% before year end, he predicts, also disturbs him because he sees it playing increasing havoc with the economy. The prospects for many earnings disappointments and the uncertainty about what actions a new administration might take to clean up Wall Street are also of concern, Mr. Wollin says.

As for banking’s crisis, he says he views commercial real estate as the next bombshell. Presently, there are 117 problem banks on the Federal Deposit Insurance Corp.’s watch list. Given broad bank exposure to commercial real estate loans, Mr. Wollin says, the number could easily swell to 500 to 600 if that business should experience the same woes that befell residential housing.

The last time we spoke, the Dow was trading in the 11,600s, and Mr. Wollin predicted a drop below 11,000, which subsequently occurred. Given his fears, he now says he sees a 10,000 Dow sooner than later, and he hopes this will mark the bottom.

His bearish 10,000 forecast is actually downright bullish when compared to the ultragloomy outlook — a further plunge in the Dow to 7,200 — of veteran Florida investment adviser Martin Weiss, whose firm, Weiss Research, alerted its clients early to the impending financial problems of the banking and real estate industries.

“The financial failures we’ve seen so far are just the tip of the iceberg,” he says. He envisions even bigger financial troubles in the banking industry, including not only names in the news such as Washington Mutual and Wachovia, but also Citicorp, HSBC, and even Bank of America.

Mr. Weiss says he feels Bank of America is making a “horrendous mistake” in acquiring Merrill, as it’s already bogged down with its earlier purchase of mortgage-lending giant Countrywide Financial, which he describes as “a classic pig in the poke.” Now on top of that bad move, he observes, Bank of America is taking on all the debts and risks of Merrill.

Given the 504-point Dow decline, the death of Lehman Brothers, and the sale of Merrill, Mr. Weiss notes that some Wall Street pundits argue this is the “climactic capitulation” that will end the decline. “Don’t fall for it,” he says. “The Dow, not far from its peak, has further to fall.”

He further notes that a recession is still in its early stages, that the government will not be able to turn around soon, and that America’s oversize debt pyramid, which will take years to clean up, is just beginning to wind down. So, his advice to investors: Sell half of your stock holdings immediately.

dandordan@aol.com