The Market Perspective

An Historic Perspective

Monday Oct 29 2012

Several readers have favorably commented on our attempts to accurately portray the financial meltdown of the 1970s. This weekend I attempted to write on article on Ross Perot's influence at duPont Waltson. The first attempt  was too heavy on factual detail about duPont. The second attempt focused more on Ross but at 1200 words did not accomplish what I was trying to show. I was trying to emphasize the massive positive social expectation, a Ross Perot venture cannot possibly fail, baked into the cake. Fail it did and that was precisely the point of writing the piece. 

I am coming to realize that the period deserves a good deal more detail as a parallel to this period. I will attempt to break this down further into recognizable parts that do Justice to the massive transitions of that period, 1966-1984, with this period 2000-2018.

Just thinking out loud.  

The Fiscal Cliff

Weekend October 13, 2012

A Wall St Journal columnist has a good explanation of the Fiscal Cliff here

Tom McClellan plots a 40 Year cycle. That is close to two 18 year cycles that I have described.  Importantly he notes that we are now 40 years from the start of the 1973-74 bear market that destroyed 50% of major stock values. Many other stocks and stock brokers disappeared altogether. Frankly this is my analog for what is about to happen again. See the next post for a partial look back by yours truly at that era. 

Michael Gayed echoes my concern expressed here yesterday. When the world counts in trillions, Bernanke's billions don't amount to much. We address precisely that concern today. 

This optimistic report  is the same sort of thing I was reading forty years ago as I graduated from the duPont Glore Forgan six month training program in April 1973. The major firms were wrong then, horribly so, and I expect this report is similarly inaccurate. 

US Stocks End Worst Week in four Months While one can attempt to take this as a contrary indicator, down is down, as Tom Wolfe noted in The Right Stuff, lots of capable fighter pilots have flown their plane into the ground while focused on the instruments, never looking outside the cockpit. I am changing my view that we reached a short term oversold condition this week. It is beginning to look more like the market is rolling over. 

Here is another natural gas story.  This is actually deflationary for oil  prices, something we noted yesterday. 

Overall

Day after day the markets offer a tepid up move only to collapse into sell mode by the end of the day. I suggest this is the pros running prices up so they can sell into a mini-rally. That explains the poor end of day performance. Bob Prechter has made the point that yes there will finally be terrific inflation but only after a deflationary collapse. We have noted the renewed interest in Real Estate with the WSJ reviving its Distinctive Property section now re-named Mansions. Coupled with massively optimistic projects from the Kingdom Tower to the F1 racetrack in Austin, TX, we have widespread ositive social mood which usually accompanies market tops. 

For new readers we exited our long stock positions early morning September 18. Markets have gone nowhere since. 

I originally had my historic perspective in this post. But as the length grew to over 2,000 words I decided that was a bit too lengthy, so I made it a separate post. See What Could Go Wrong nearby.  

Okay now to the regular analysis. If you enjoyed the historic perspective in the next post I would appreciate hearing from you at dennislelam@gmail.com.

Internal Indicators

I logged onto my stock charts page and perhaps this is a better view than any one or several of the charts. 

As you may have guessed, the red bars mean the indicator closed down....Shall we just quit right here?

Daily New Highs New Lows

The uptrend from the low June 1 has been broken. the indicator is below all three moving averages but well above the last great buy point. if you have not read Gayed's column in our introduction this might be a good time to do so.  His point was that the $40 B Bernanke is putting into the markets each month may not be enough to stem the tide of what is clearly some net selling. Okay, one more internal indicator.

NYSE Summation Index

I did not draw the uptrend line but one can easily eyeball and see the uptrend from June 1 here as in the High Low chart has been broken. MACD has returned to the zero line in the bottom panel. This certainly looks like a distribution pattern to me. A distribution pattern means that the smart money keeps the market aloft with periodic buy programs allowing them to dump stocks on the last to arrive. Once that pattern of buying and then selling is complete, the market is in for a collapse. 

XLF The Banks Weekly Long Term View

Most financial crises are a banking crisis. The banks in a  burst of Greenspan irrational exuberance make loans at the top of a market, the economy collapses, the collateral loses value and the bank capital disappears.  Bernanke's throwing money from helicopters  plan has managed to return the XLF banking index to its prior highs. The XLF failed each time at this level. I would mention that there is a decent head and shoulders pattern here. The head occurred at the highest point in early 2011. Let's take a closer look shall we?

Weekly XLF

Now notice that the XLF peaked in early Sept, gee we got out two weeks later! Since then we have a pattern of lower highs.. This is the inverse of the pattern of higher lows in the VIX we showed in the Friday report. Again this is the way things turn around, in a quiet manner such that no one really notices. 

Wells Fargo Weekly with Parabolic Overlay

In the Friday update I mentioned that we would have the more valuable weekly charts update by today. After looking at the XLF I ran through the charts of all the big banks C, BAC, JPM and WFC. Frankly I am amzed the XLF looks as good as it does. Since we used a WFC report in our opening, I put the Weekly Parabolic on WFC. Well look at that!  After an A B C corrective move up from last October, WFC registered a weekly parabolic sell signal. See the purple dot above the long red OHLC bar at far right?  That is another confirmation of our decision to sell Sept 18 now that I think about it. As you can see, weekly PAR SAR signals tend to be reliable, WFC dropped significantly on the last two in Agust of last year and April of this year.  

TLT a Buy Signal on the Daily PAR SAR

I promised readers open honesty in these posts. When I am right great, when I am wrong, I will admit it. I have read many investment letters over the years. Most writers either gloss over their errors or toss them off as missed opportunities or break even trades or some such. Last week I thought TLT would continue down in its channel. It hit resistance then at 125 and would surely continue down to 115. I was wrong, that did not happen. My puts are worth kaput on TLT. But that did limit my exposure. And now the daily PAR SAR has issued a buy signal. And note that TLT made a slightly higher low than the low in mid August. Hmm is that a reverse head and shoulders pattern?

Let's connect the dots. On the same day we get a sell signal in WFC, a major bank and a buy signal in a long term bond fund. Ben B. are you reading TMP?

GOLD

On the daily chart Gold generated a sell signal on the same PAR SAR indicator. The evidence mounts that a sell off is near.  Let's look at the Cohen and Steers I share on Real Estate . 

ICF

Aha!  We have another PAR SAR weekly sell signal in the ICF. Didn't the WSJ introduce the Mansions section just two or three weeks ago?  In other words they re-introduced it simultaneous with a top in a major real estate index. Recall the skyscraper theory, the Kingdom Tower, the Austin TX F1 racetrack, the WSJ Mansion advertisements on real estate. Now all we need is another Donald Trump tv show and the bear market check list for real estate will be complete. 

Ramki analyzes MTGE  and reaches a simialr conclusion. 

A word on real estate. Real Estate investment Trusts are mutual funds of rented real estate. The REIT manager pays out 90% of the earnings so the REIT pays no income tax. Here is the problem in a downturn. As the economy worsens, business looks for ways to economize. Now short term rental offices and executive suites are available as well as work from home on the computer.  These are viable alternatives to a long term lease.  In a downturn businesses are reluctant to renew leases. Once the building or shopping center or whatever falls below 75% occupancy, the project is likely failing to cover all its costs. Then the dividend is completely elimnated. This caused the values of many REITs in the 1973-74 debacle to collapse. I expect the same thing to happen over hte next two to three years. 

HDGE

Hedge is a fund that shorts individual stocks. This is unlike most bear funds that attempt to replicate markets using futures or options. Hence there is no time decay or price erosion as the fund re buys each month.  It has pulled up, close but no buy indication yet. I am thinking this might be a good time to begin accumulating HDGE.

The Bottom Line

Parabolic sell signals in real estate shares, Wells Fargo bank, and gold suggest a top here of some significance. A buy signal in TLT suggests defensive action by many investors. Longer term the XLF looks very toppy as we anticipate a long term top dating from the March 2009 low. Remember all markets do not top simultaneously. Again we rate the probablility of a long term top forming within the next few months as THE most likely outcome for the markets. 

Socionomics

I'd Never Belong to a Club that Would Have Me as a Member - Groucho Marx

On Page A 11 of the weekend WSJ the New  York Sun notes that the Norwegian Nobel Committee gives the EU the Peace Prize for 'peace and reconciliation, democracy and human rights.'  Now the god part-Norway is not part of the EU. As a well to do country why would they want to have to send money to Greece et al?

You Can Run but you Can't Hide Department

On Page A 12 NML Capital claims Argentian's ARA LIbertad, a naval schooner docked in Ghana. It seems NML owns some of hte defaulted Argentine bonds from 2001. A court in Ghana backs up the claim. 

President Kirchner like Hugo Cahvez has been expropriating assets and limiting currency exchanges. It seems there are limits after all. 

Libya

President Biden claimed the State Dept never told he or the President that the Embassy in Libya wanted more protection. This is contrary to sworn testimony by the State Dept earlier this week. No doubt Hillary will be blamed as the Secretary of State. This incident has precedent with the Iranian Embassy take over that crippled Carter's re-election changes in a similar era of discontent. Social mood repeats in similar ways across similar eras. 

Thanks for reading The Market Perspective

Dennislelam@gmail.com

 

 

The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks.  Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned.  Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital.  No guarantee can be made to the accuracy of text or charts.

 

 

What Could Go Wrong, an Historic Perspective

Weekend October 13 2012

This is something different. I have gone into some detail to provide those of you who did not live or invest during 1973-74 a bit of historic perspective. Let me know if you find this interesting. Would more historic perspective like this be of interest?  I have not gone into the detail of the actual broker school. That actually would provide a lot of insight as to how brokerage firms positioned themselves and how they thought about, as the saying went, The Business. 

Dow Industrials 1972-1975 an Historic Perspective

I completed my MBA at the University of Texas at Austin in August 1972. I  quit my secure job at the City of Austin, having learned a great deal in two years as an internal auditor and then a budget analyst. Oddly no one at the City urged me to stay though I was in good graces as far as I could tell. But then business rarely values intellectual capital.  Yes friends, Ross Perot, back than a Bill Gates and Warren Buffet billionaire rolled into one person, brash self assured and filthy stinking rich was going to show Wall Street how it was done, And I was hired into Broker Group 72-2. Then one had to be in training for six months before being unleashed on the public. All other firms had you as the office go-fer making coffee and running errands, perhaps helping the guy in the wire room send orders. A three week stint in New York would visit the Stock Exchange and feature a crash course in passing the required Series Seven exam. 

Ross of course was not doing it that way. As he proclaimed on the Today Show, live and in person no less, we wold see who was better, himself or the Merril Lynch HR department. (Okay so right here the story loses impact as we know how that prediction turned out....but how was I to know then?)

I drove from Houston to Los Angeles, cruising right into the correct apartment complex thanks for extensively mapping the trip. Some 42 of us began a six month training program; 25 would complete the program. it was rather like Officer Candidate School or so those that had been in the military said, and there were plenty of them in the program. We did sales technique half the day and stock and commodity markets the other half. Well to be correct we heard from individuals in banking, brokerage, bonds, etc but never studied the history or patterns of stock market prices, something this blog does with every post. 

EDS was running the back office, Ross Perot was at the helm, we would be the best rained broker group in history, Nixon had carried all but two states in the election, he and Kissinger would win the War in Viet Nam, the Dow was back at 1,000, I had won both awards that the UT Finance Dept bestowed at my BBA graduation, both the Wall Street Journal Award and the Finance Faculty Award along with membership in three honorary academic fraternities. (The latter is not indicative of  understanding and knowledge, just good grades, as I would soon learn, my real world education lay just ahead). I mention this not to brag on my college accomplishment but to put both my and Ross's level of confidence at the time in perspective).  I mean what could go wrong?

The answer to that question is in the graph above. Nixon would become entangled in Watergate, as he put it , a third rate burglary. Congress had no more stomach for the Viet Nam War.  Inflation continued out of control. Then as in the 1930s and 2008, Real Estate Investments went south, big time. duPont Glore Forgan was in violation of the then mandatory 10% capital rule. Ross managed to persuade the SEC to 'extend' the June 30 deadline into July of 1973 as he grabbed Walston and Company to rescue the firm. All that did was hasten the demise of both firms. As I have previously noted those two years saw the merger of many old line firms. Merrill gobbled White Weld and finally entered the investment banking business. Even venerable Loeb Rhoades was acquired by Shearson, a mere upstart wire house taking an investment bank, the horror of it all. 

In December of 1973 duPont did 3% of all the business on the Exchange one day, and still was losing money. The end came months later. duPont had run through the money put up by Exchange members to keep it afloat. The better brokers had left, leaving those unable to move elsewhere and a few rookies like myself in some 100 offices scattered across America. The overhead was incredible. We occupied a ground floor corner office at Two Shell Plaza in downtown Houston. I moved to Paine Weber. Two weeks later duPont was liquidated, the offices were assigned piece meal to other firms. 

Nixon fired those assigned to investigate him, the liberal press loathed him and ran negative articles non-stop on Watergate. He finally resigned after Howard Baker and Goldwater told him it was that or face impeachment. There was never a crash, the Dow just sunk on low volume. It had fallen from over 1,000 in January 1973 to 577 by December 1974. Godfather II and The Exorcist, both negative themed movies,  were box office smashes, that was the social mood of the time. 

Whew, I hope readers found that interesting. We do not lack for similar analogies 40 years later.

• The country is viciously split politically.
• The country's finances are literally in peril with $16 Trillion in debt. 
• The Dow has returned to all time highs. 
• Viet Nam and the Embassy takeover 1978 have their parallels in Iraq, Afghanistan and now with the deaths in Libya. 
• Stagflation the combination of inflation and the unemployment rate were big news then. Now we have 47 million on food stamps and the slowest 'recovery' on record. Millions have given up looking for work, or work multiple part time jobs. I suspect we have many now in the underground economy juggling various welfare programs with cash only part time jobs. 
• Today we borrow 40 cents of every dollar the Federal Government spends. States and cities are on the ropes in many places just as New York City was in 1975. The realtity that entire states are now on the ropes or soon will be heightens the disAster potential  just that muchmore. 
• Three or four states may determine the election for all of us effectively disfranchising a majority of voters from having a say in what happens. 

 In the graph above note the bump up in the Dow after the November 1972 election. The same thing could happen now if Romney wins, or I suppose if Obama wins to the extent that uncertainty is out of the way. But the bigger picutre is one of the Fiscal Cliff no matter who wins. 

We break down the markets in  the prior post, The Fiscal Cliff. 

 

What Could Go Wrong - a 1973 Perspective

Weekend Sept 9 2012

It was 1972. I had completed my MBA that August as well as two years with the CIty of Austin. That's another story of a missed opportunity but it will wait for another time. I was restless to put some of this great potential UT Austin Assured me that I possessed to work. And so I heard that Ross Perot was taking over a  major brokerage firm. Back then computer tech was such that the Street was unable to cope with even a  ten million share day. In fact trading hours were shortened at least two days a week to curb volume in the hopes the Street could catch up on its paperwork and DKs -Don't Know the other side of the transaction. 

Perot's firm EDS had been brought in to straighten out the back office at duPont Glore Forgan, formerly F I duPont, a play toy of the Delaware duPonts. duPont was sent packing as the Nixon administration was concerned a major firm might collapse on their watch. In retrospect that's hilarious considering what did happen to Dick Nixon but...a collection was taken among the Wall Street firms and $100 M was injected to keep duPont afloat. 

Now let me take you back to the Fall of 1973. Back then

Ross Perot was the brash billionaire that had taken EDS public at a 191 P/E ratio, holding back 85% of the stock for himself. He had captured national attention by making a public issue of delivering Christmans presents to our POWs in North Viet Nam. No one had heard of Warren Buffet who was just then forming Berkishire Hathaway. John Templeton could be seen on Wall Street Week but who watched?  The US claimed to have reached the moon in 1969, there was no such thing as a personal computer. the Canadian financial newspaper was printed just once or twice a week. There was no CNBC or FNN or Bloomberg or cable tv stations for that matter. Information or quotations was the closely guarded ward of Wall Street, you had to be at a brokerage office to know what was going on. Perot decided as per usual, that Wall Street had it all wrong. He would stage the most expensive training program ever. We would spend six months in Los Angeles, as  far from NYC as possible.  Did I mention that commission rates were fixed, and high, and there was no such thing as a discount broker. 

Back then one had to be employed for six months before the firm could unleash the broker on the public. The usual routine was for a newbie to help in the 'wire room' run errands and such, and spend a few weeks in New York visiting the Exchange and undergoing a cram course to pass the Series Seven Exam. 

Not at duPont. No, Ross would interview each trainee personally, flying us to Dallas, TX from around the country. With 100 some odd offices scattered across the USA, that in itself was an expensive proposition. 

Nixon had just been re elected in a landslide over McGovern who only took two states. He and Kissinger had a 'plan' to solve the Viet Nam impasse. 

The Dow Jones had just vaulted past 1,000 to regain its 1966 high. I mean what could go wrong?

Well, as it turned out,  just about everything. 

Nassim Taleb  has become famous with his fooled by randomness mantra of the Black Swan. As it turned out Ross and the rest of us were attacked by an entire gaggle of Black Swans, a veritable D Day Invasion of them. And they would not relent for two years taking the Dow down from over 1,000 to a mere 577 by December 1974. Extreme social mood occurs at the very end of a market move. It is simply amazing that the DOW would be a mere 180 points over its 1929 peak some 35 years later but that is what happened. Indeed that era of stagnation rocked along with the Dow still mired at 800 by  7/301982.  The Dow jumped 100 points that following month and the bull market was on. 

the Reader's Digest Condensed Version went like this

-Nixon was quickly engulfed in the Watergate Scandal 

-Congress lost all interest ni supporting the troops in Viet Nam, we would leave the US Embassy clinging to helicopters

-the Arabs began an oil embargo sending gasoline prices over one dollar, unheard of at the time, well, over a dollar when one could find some for sale, gasoline was rationed by odd and even plate license plate numbers on certain days. 

-smelling blood in the water the Democrats threatened impeachment, the first such real threat since Andrew Johnson after the Civil War

Socionomics holds that extreme social mood is present at the end of market  moves, no kidding, this was an example for the record books. I got thrown out of some of the best offices in Houston trying to make cold calls. 

It was clear duPont could not make it by itself. As the market declined the better brokers left, rebelling at Ross's rules for dress and office attendance. The rookies and has beens left could not support the massive overhead of those days. Perot managed to get the SEC to wait to calculate duPont's capital ration until after the end of the quarter, July  3 not June 30 if 1973 yep that's right.  All this did was put the employees of both firms aboard the same sinking ship. The firm would close its doors months later with various offices taken over by other firms. 

I left for Paine Weber two weeks before that final collapse but was unable to transfer most accounts with me again the paperwork problems were more than the computers could handle at the time.

Now the reason I told you that story....is my sense that we are right there again. The markets approach a high amid world wide economic difficulty and outright war in many places. No doubt

-the student loan crisis will be come a full fledged national disaster just as sub prime mortgages did

-Club Med Europe collapses moving the real productive engine to East Europe and Turkey and Asia, France is already trading at 2009 levels

-speculation in real estate brought on by cheap Bernanke money  leads to collapse and deflation

-then horrific inflation eventually follows as a result of all the cheap money flooding the markets, we are seeing that already in this commodity rally. 

-North Africa and the mid East achieve true Chaos Stan extremes, as if they were not doing so already with 5,000 dead last month in Syria

 I thought  this might be a good time to prepare you, all of this will happen no matter who wins the election. One last thing, there never was a market crash then per se, just a long dogged decline, and on low volume. Elmer Kelton's famous novel is titled, The Time it Never Rained. This was

the Time it Never Rallied.

Come to think of it, it is not raining now either

Sarbox 404 Is Anyone in Charge at Knight Capital?

Monday August 6, 2012

Sarbanes Oxley Section 404 requires an evaluation of internal control risk. Internal controls are systems which should be in place to ensure that all functions are operating which would preclude unintentional acts form occurring. While this includes barriers to fraud, it also suggests that this is done to ensure that out of control risk takers are not emboldened to rig the system. 

To wit

1. identifying significant financial reporting elements (accounts or disclosures)
2. identifying material financial statement risks within these accounts or disclosures
3. determining which entity-level controls would address these risks with sufficient precision
4. determining which transaction-level controls would address these risks in the absence of precise entity-level controls
5. determining the nature, extent, and timing of evidence gathered to complete the assessment of in-scope controls

Now read SEC Nixed Knight's KGC Plea for a Do Over on the front page of today's WSJ. 

A software glitch unleashed a wave of erratic trades on Wednesday leaving Knight holding at least $4.5 of securities it had not planned to buy. The SEC nixed cancelling the trades and once the securities were unloaded, Knight had lost $440 M real cash money. 

The rules have evolved since firms were allowed post flash crash May 2010 to say, King's Ex, didn't mean that, and got out of the trades, to the chagrin of the counter-parties who thought they had a trade. 

All this of course speaks to the integrity of the markets and whether one can believe or rely on them. And  so the SEC said no. Clearly the intent has been to force firms to take Step 4 above, seriously. Clearly KGC put a new system in place without proper testing. 

Now a bit of history to show how far we have come. 

A commission investigating the 1929 stock market crash concluded that trades should not be accepted by telephone order. People could trade too quickly and emotionally. Rather they should come to the brokerage office in person. Back then telephone trading and Edison's stock ticker had created a brave new world of what would eventually become electronic trading. Note the human voice and the the stock prices had been electronically translated over wires to the exchange. 

By the 1970s. even with ten million share days, the Exchange was overwhelmed. Trading hours as I recall on Tuesday and Thursday were shortened to decrease the volume so to ease the back office crunch. At the end of any trading day, brokers are required to report DKs, which stand for Don't Know teh other side of the trade. There were a lot of those. This is why Ross Perot's EDS firm was hired at F I duPont and how Perot was called on to head the firm.

Perot lasted about 18 months, eventually taking Walston and Company down with it. The offices were finally sold piecemeal and accounts transferred to the buyers. I had moved to Paine Weber shortly before the collaspe. But, and this is the important part, I was unable to get my accounts transferred to my new firm. Gridlock ensued. 

The same genius cabal that DKes trades in 1972 participated in 'program trading and portfolio insurance. This was cited as a cause of the 1987 crash. Are we seeing a pattern here?

Now just to validate a bit of my qualifications to comment I have held licenses as both an NASD Securities  Principal and Registered Options Principal. These are required to head a securities office or as it was known an Office of Supervisory Jurisdiction. Back in the paper trading days when I took the exam, the Principal in the office was supposed to examine and sign off on all the tickets traded in the office each day. The idea was to insure that a third party was assuring that these trades reflected the risk tolerance of the client. 

Now, do you supposed Knight's  Thomas Joyce was able to sit at his desk and examine $4.5 B of trades apparently made in a matter of minutes as his HAL computer spits out trades, with no human interaction whatsoever?  Of course not. 

Interestingly science fiction movies saw this coming. 

In 1983's War Games the WOPR War Operation Plan Response computers take the human factor out of the equation, the war equation that is, with near disastrous results. 

In 1968's - 2001 A Space Odyssey  the HAL computer locks astronauts out of their ship when it lip reads their intention to shut HAL down. 

Well, this is all rather ridiculous and we have had several real and science fiction versions as a preview of what is finally liable to happen. Come to think of it, in one of the last Tom Clancy Jack Ryan novels, the firm that distributes dividends, is hacked and the result is to reverse the trade.

Will the rest of the street learn from Kinght's misfortune?  KGC was too small to be saved or small enough to fail.  After Lehman, Bear, and Merrill Knight still did not get it. As I mentioned in a post this weekend, is your money safe?

The only thing that kept this from being a  full blow crisis is that mood shifted to positive and the markets, as I mentioned are overlooking the lack of oversight and internal control. Where was the 404 IC report by KGC outside auditor?  Will that auditor be taken to task?  Okay, the last audit did not cover this new system but IC controls should have required extensive system testing. 

Ah well, the Panic of 1837, 1907, 1929, 1973-4 (slow motion panic), 1987, 2002, 2008, flash panic of 2010, 

And dating back at least 3,000 years

Ecclesiastes 1:9

New International Version (NIV)

⁹ What has been will be again,
    what has been done will be done again; 
    there is nothing new under the sun.

 

Fail to Deliver

Tuesday April 17, 2012

A bit of History

Back in the Day, membership in the Wall Street community was a privilege extended to elites. It was rather like  Yale's Skull and Bones Society.  First one had to possess a membership, called a Seat, on the New York Stock Exchange. Then one had to amass enough capital to handle th the trades. Exclusivity was insured as access to trading data and information was expensive. After all, if one had an NYSE seat, one would hardly want to spoil the experience by letting the rest of the retail rabble in through the back door so to speak. Edison invented the original stock ticker but the NYSE kept access to its software, the reporting of trades, expensive and exclusive. 

As recently as the 1960s, firms were still partnerships. See what I mean about exclusivity?  One did not just buy stock in the thing, one got voted in as a Partner. 

Ah those were the days. The Firms restricted membership and information, admission was by permission and it was expensive, What else could have been done to keep Fraternity Row in business?  Ah yes, tell you what, let's fix the commissions, and set them high as well. As recently as 1973, commissions were fixed. None of this $7.95 Wal Mart stuff indeed. Back then doing your first 100, was a big deal. That meant you had recorded $100,000 in commission in one year. With the standard Merrill payout at 28%, you got $28,000. That's a fast food manager's salary today but good money back then.  There was no dickering, and the NASD suggested a percentage limit on trading costs. 

But, if the firm made a market in a security, or claimed to, it functioned not as an agent. Functioning as an agent meant that the actual commission was printed on the confirmation, no fun in that!  If the firm could claim to 'make a market' which usually involved parking no more than a few hundred shares in the firm account, then the commission was not shown on the confirm. Now we're really having fun as a fraternity!

Offices were staid affairs often looking more like a British men's club than a retail trading center. All were downtown. The trend to suburban offices was just taking hold in the early 1970s. Downtown was harder to get to, but closer to the luncheon clubs atop the skyscrapers, we're exclusive don't you see. Houston, Texas even sports a street just for the purpose of conveying the Anointed from River Oaks to downtown, Allen Parkway it's called. Back then to get to the Lehman office atop Alen Center, one had to take not one but two elevators to get to the office on high. Just to re enforce the image, there were less than 100 Lehman brokers in America (Mr. Pigeon I can get you size!). And they sat in leather upholstered chairs crafted from seats in, yes, Citroen automobiles. Remember, exclusive.

Women on Wall Street were like women at Yale, there weren't any until 1969 or in Skul and Bones until 1992. It was pretty much a guy thing. Recall that women were only admitted to Rotary Clubs in the late 1970s, or was that the early 1980s?

The Big Firms sported legendary Wall Street names-Loeb Rhoades, E F Hutton, Smith Barney, Lehman, and so on. Ever heard of Reynolds or Spencer Trask or  Bache or F I duPont (yes the Delaware duPonts, not all were in the chemical business). They are al gone now, taken over or merged into larger entities. 

My manager in Houston, Texas with duPont Walston had been a 3% partner at Goodbody. By the time the Dow cratered to 577 in 1974, he was reduced to a desk and a phone at Rauscher Pierce.

 But when a firm failed then, the SEC NASD et al would move customer accounts elsewhere, no one had ever lost money due to firm negligence.

The real horror show debuting in America toay is not Hunger Games but MF Global and now 

Options Xpress.  MF Global was check kiting and using customer money. Options was as Jesse points out, stock kiting. 

The horror is that now one can lose money and not be compensated for firm negligence. Jon Corzine walks free today. As Jesse points out, breaking the rules is only for the To Big to Fail or campaign contributing hedge funds. 

In 2008 firms evaporated once again, just as they did from 1972-74. Bear, Lehman, and if another hour had passed, Merrill before John Thain quickly inked a deal with Bank of America. 

Bob Precther has a 400 target on his monthly newsletter. That was there a couple of decades back. In the big run up of the 1990s, he quietly removed it. Now its back.  Don't laugh too hard. The DOW was 577 in 1974. 

Such a number would probably require a bankruptcy of some Dow firms, come to thnk of it, didn't GM and EK both former Dow components go bankrupt?  Chrysler too. But as I say the real horror would be counter party risk. One might be right on the direction of the markets, but would there be any one to pay off on your SPX put at the bottom?

Customers of MF  Gobal are asking that question right now. 

(I had originally planned to write more about the 1970s time period and how things have changed. If you find this narratie interesting, let me know).

 

 

Dances with Wolves

Saturday Nov 19, 2011

Kevin Costner's movie Dances with Wolves featured a dramatic recreation of a buffalo hunt. A few Indians on horseback stampede a giant herd of buffalo, killing a few in the process. The remaining hundreds of buffalo run for their lives. 

What's wrong with that picture, well everything from the Buffalo's standpoint. A horse in no match for a rhino like buffalo. If the buffalo had turned and run against the Indians, it would have been a totally different outcome. The indians would have become farmers, if they wanted to eat. In the process the herd could have easily run through a teepee village trampling and destroying them all. 

But the buffalo did not do that. They reacted with a herding instinct. Yes, there was danger, but the correct response was to run at the Indians, not away from them. And so, the few buffalo remaining  are on display in zoos and various wildlife areas today. 

As humans we have fives senses of touch, smell, sight, hearing, and taste. Those served our cave man ancestors and the Indians reasonably well. At the sight of danger, the buffalo is chasing us, run. 

But that does not work in investing. We need  a sixth sense. 

My high school debate textbook listed four levels of probability. 

Certainly true -  the earth revolves to the east

Probably true - that won't change

Plausibly true - a giant meteor will hit he earth in our liftime

Certainly false - the earth will spin out of its orbit resulting in another ice age as it spins away from the sun or the earth will reverse the direction of spin or some such

The problem for investors in divining the difference between probably and plausible. Will the markets continue up or sideways or reverse and go down. 

Charting was once the venue of the well to do with  the data to produce the charts. Chart services were available in the 1980s for those that subscribed and studied the books on how to interpret them. And so there were reliable 'reversal' patterns. 

Now however, virtually everyone interested has some kind of charting software. The old rules no longer hold. A move lower, like August 8 or Oct 3 may be just a throw under, not the start of a complete breakdown. 

We had another example of this yesterday. THere are chart breakdowns the last two days. One of the Deans of Tech Analysis, John Murphy,  made this pronouncement Thursday on stockcharts.com

Chart 10 shows the QQQ falling below both moving average lines in rising volume. A 4% drop in the Semiconductor (SOX) Index was a big reason for that. From a charting standpoint, that appears to have ended the October rally. 

Dennis Gartman, who is another well respected, and expensive analyst, was cited in this article listing five reasons to move to the sidelines. 

I was in the process of posting a refute of his reasons Friday afternoon. 

The riots in Greece are nothing new, occupy Wall Street is being shut down and never produced one serious realistic demand, Euro debt contagion is a problem but as noted the Euro is higher than a year ago, the debt committee will do what Congressional debt committees always do with out money, spend more of it. 

However the article on Zero Hedge we posted yesterday did give me some pause on the MF Global issue. 

BCM ceases operations

An introducing broker has shut down. Her clients simply cannot get to their funds. Weeks after the MF Global demise, where is their money. She suggests Corzine simply stole from the segregated accunts, and lost it. Corzine was free to gamble MF's money but not the clients. Now that money  is apparently gone. 

This is the modern equivalent of the bank failures of 1930, you cannot have your money, it;s gone. 

After duPont Walston sold its offices in 1974, funds went to the buying offices. It was not possible to get them transferred to another broker. At least the money was there if not where you wanted it. 

And so I posted the article and candidly told all that I liquidated my QQQ positions dramatically lowering my risk exposure. 

Was I right to do so?  We'll look at that later this weekend. For a buffalo, it's an important decision. 

 

 

Then and Now

Tuesday Feb 22, 2011

The past 18 year bust period featured four clear periods of stock market decline. We lined up the

1966-82 period with the present period as a road map of what to expect. Other incidents are quite similar to now in terms of emotions and even actual markets and geographic places. 

None of these similarities of course are being reported on CNBC or in the financial press. 

Dennis Elam dennislelam@gmail.com

www.themarketperspective.com

Feb 21, 2011

 

Similarities between Then of 1972-3 and Now 2011

Stock Market Declines

Past 18  year cycle declines have contained four declines. The fourth tends to be a multiple bottom, a ragged end where any remaining optimism is met with waves of year after year selling to cause all to exit stocks.  The first three declines tend to be quite sharp.

Years	Dow Ind.	Percent	Years	Dow Ind.	Percent
1966-67	989-744	(25)	2000-2002	11722-7286	(38)
1969-70	985-662	(31)	2007-2008	14164-6547	(54)
1973-74	1047-577	(45)	2011-2013	12000+
1976-78	1009-747	(26)

If the parallel continues one would expect the next decline to exceed the 45% of 1973-74, the first two have exceeded their counterparts.  We are in a Wave Pattern of Higher Degree than in the 1966-82 period so all moves are magnified. 

 

Endless War

Then Vietnam, Now Iraq,  Afghanistan

Mid East

OPEC stages a first oil embargo causing long gas lines

Now revolt spreads across the Mid East, as always the West worries about supply interruptions, gas prices now as then on the rise

Municipal Disruptions

New York City went bankrupt,  Chapter 9 of the Bankruptcy Code created for Cities

Now entire states CA IL NY NJ and cities like Detroit and Chicago are in trouble

Legislation begins to allow states to go bankrupt

Civil Unrest

Then protests against conscription into the Viet Nam war

Now unions protest loss of benefits for state employees as unemployment for the nation stays fixed at 16% on a U-6 measure

Madison, WI cited as one of the ideal cities to live in the US becomes the battleground for public employee unions

Then as now the nation faced high unemployment

Inflation Deflation

Then inflation was the scourge with Gerald Ford sporting  a Whip Inflation Now button WIN

Now both are a problem. The FED has created inflation around the world with high commodity prices but denies it (they really wanted inflation) High gas prices then and now

But deflation in housing prices threatens bank balance sheets, FNM FRE shut down

El Erian of PIMCO uses the term stagflation from the 1970s to describe 2011

 

Stock Market

35-50% swings or even 100% swings  are common which is a feature of bear markets, then and now

Nifty Fifty

Then the Nifty stocks dominate trading including IBM, Polaroid, Eastman Kodak, Wang and DEC are new wave computer stocks

Now Social Media and service stocks like GOOG, NFLX, Apple, BIDU,PCLN, AMZN Notably not one of these companies produce a tangible product made in the USA

Polarization and Reversal

McGovern carried but two states earning 17 electoral votes to Nixon’s 520 but Nixon’s schizophrenia led to his downfall just 2.5 years later

Bush loses House, Senate, Presidency for the Republicans, does not even appear at his own convention in 2008

Just two years later, Barack Obama  suffers a similar reversal losing the House Majority, in the New Congress more have voted to repeal Obamacare than voted for it,

In Texas Republicans take 99 of 150 seats

Entire Nation divided into Red  Blue States

Economy

The term Rust Belt and Sun Belt are coined to highlight the different economies of North and South, new airports in Atlanta and DFW ease the transition to leave Union Shop states for Right to Work States

National Security

Then the Pentagon Papers were leaked revealing US meddling in other countries,

Now WIkileaks reveals, yep, meddling in other countries

Commodity Prices

OPEC raises gasoline prices with a 1972 and then 1979 oil embargo

Nixon takes the country off the gold standard, Americans are allowed to own gold, by the end of the 1970s gold and silver prices are soaring

Eventually the Hunt Brothers attempt to ‘corner the silver market’ by demanding delivery on their contracts, the Exchange alters margin requirements, the Hunts go bankrupt, Silver falls from a parabolic panic high of $50 to an eventual $3.50

Now, gold is $1400, silver back to $30+ as rumors circulate that JP Morgan and HSBC are  massively short the silver market, rumors of ‘fails to deliver’ and a crisis at the metal exchanges make popular fodder on weblogs

Cotton, sugar, coffee, cocoa,  and even onion prices make world headlines

Real Estate

Real Estate Investment Trusts were popular income vehicles then and now. In the 1974 meltdown, many were shut down or lost half their value.

The same thing happened in 2008; REITs and junk bonds are now the best performing a

Wall Street

Then back office computer delays cause shortened trading days, Old line firms are forced to merge or be taken over, Merrill acquires White Weld  which takes ML into investment banking, upstart Shearson acquires Loeb Rhoads, numerous regional firms  disappear, national wire houses DuPont and Walston merge and close shortly thereafter, Prudential acquires Bache, Sears buys Dean Witter

Greenspan ‘rescues’ Long Term Capital Management in 1998, Glass-Stegall is repealed the next year, now everyone is back in the investment business and emboldened, believing they, like LTCM, are ‘too big to fail’

Bear Stearns fails and is bought, Lehman fails and is not rescued, Merrill’s Thain cuts a deal with Bank of America one hour before Lehman fails, Rubin resigns as Co Chair from CITI Board, stock falls to low single digits, Goldman et al receive bailout money

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A Bear Market Memoir

Friday July 5, 2010

 

Ross ‘n Me

A Bear Market Memoir

Copyright 2010 by Dennis Elam

 

 

It was the most exclusive club. Floor members of the NYSE had 'seats'

not memberships. First Boston was a 'lead underwriter.' First Boston

simply did not participate unless its name was prominently displayed

on the first line in the 'tombstone ads.' The exclusive nature of

being 'in the business' extended to Member Firms of the NYSE. One was

not a shareholder, one was a 'partner.'

 

 

Firm names were, well simply legendary. Morgan, E F Hutton, Kuhn Loeb, Bache, and Dean Witter, these were after all Wall Street legends, J P Morgan herded bankers  together and ended the Panic of 1907. Upon perusing the E F Hutton 'J boat yacht' in the 1920s, one amazed observer put it succinctly, but where are the customer's yachts?

 

And so it was that one brash Annapolis graduate from Texarkana, TX,

self made billionaire, in, egads, computers or some such, rode into the most exclusive club in America. He did not earn his admission, he

was granted it by the Federal Government. The Wall Street Club was in

trouble, and the cowboy was riding to the rescue. This was not a match

made in Heaven. It was of convenience and necessity. And the Street

loathed him for it. His brash demeanor, his disregard for tradition,

his upstart fortune. And then there was his remark on national

television.  "Soon it would be clear who knew better, myself or the

personnel department at Merrill Lynch" declared Ross!   Eyebrows

raised all round Wall and Broad, indeed, they thought, we would.

 

...........................

 

Steve Denning, one of  a procession of managers in our office,  had been a 3% Partner at Goodbody. By the time the Bear of 1973-74 was done, Steve had a phone and a desk at a regional wire house.

…………………..

 

There is a tipping  point, beyond which even a King worth a billion dollars on paper cannot deliver on a promise when the mood changes.

Once the mood changed it did not matter how DuPont Glore Forgan was re arranged. It did not matter  which other   firm duPoint captured.  It did not matter   what scheme duPont dreamed up to put the assets here and segregate the customer accounts there. The only direction left was –

 

 

 

down.

Deja Vu, It's 1973 All Over Again

I was (am?) a product of the most expensive training program  ever staged by a wall street company, duPont Glore Forgan  aka duPont  Walston, but in Los Angeles. not New York City. It was to my knowledge Ross Perot's only losing effort, at least until just recently Read about the disastrous Park Central Hub fund here. Indeed,it has taken a Fibonacci 34 years for Ross Perot to suffer a spectacular loss again, and so this seems a fitting time to commemorate how the first one happened. The same hubris then led to the much larger financial failure by the guy who could not fail now. 

 In the interest of historic perspective, we will be re visiting the period from my recruitment in October 1972 to the bitter end, such as it was for me in August, 1974. That two years would be a new lifetime for me, and lots of others as the economy went into full tilt bear mode. Here is an excerpt of what you can expect. The point is to provide a window for historic perspective, how things were done then. But more than that this will be a story that shows while times changes, people and their moods do not. The same progression of Hope Fear Greed that dominated markets then does so now. We can use that period as a virtual road map of what to expect. My excerpt begins below, let me know what you think. 

We got half a day of financial training  and a half a day of sales training which tells you more than I can say  about how that business worked then and now.

Upon my return to Houston, the first phone call I was assigned was a fellow who wanted to cash in his mutual fund. I had no idea of course, how that was done, they had only trained us to sell funds and fill out applications, not redemptions. That was the late spring of 1973, about  16 months after the January 1972 high, gee why bother to teach anyone  how to sell eh?

I did of  course subsequently learn how to do that as it was a  frequent request, back then it took a signature guaranteed letter from  the share holder. A bank officer no less had to guarantee the signature. Here is another perspective. A commission investigating the cause of the crash of 1929 concluded that trades by telephone should not be allowed. It led to irrational short term decisions, better to require someone to come into the office and make a decision. The same sort of thinking held sway with the signature guaranteed letter. In the pre Fed Ex days it would take several days to end up at the fund anyway. Now contrast that procedure with today's online hit the key in and out trading frenzy. Gee, have we come full circle, first the telephone, now the internet, wrong decisions can be made in nano seconds. What an improvement....