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. 

 

Comments

[Dennis Elam]

There are many markets. Dell for example alrady has lost half its value in the last year and down from 30 to 9 in the last five years. I expectthat major indexes like the dow and spx will decline until we have a 6% dividend yield on the few stocks that are still paying dividends. This is a traditional bear market bottom. My understanding is that this would be about 500 on the SPX. Whether the decline is 50 or 80%, one will need to be out of long stock positions. My consistent take has beenthat we are probably so close to a top time wise that it was not a favorable risk reward to stay long. THus far that appears to be correct.

We are seeing turn of the tidal wave shifts as Bob would say ad manufacturing leaves Western Europe for Eastern Europe and the far East just as business has migrated south in the USA.

[Trader Kid]

I certainly agree there is not a favorable reward:risk for longs now in case I didn't make that apparent, I am short in fact. We shall see how things play out, you are correct that predicting the size of the decline in advance is not particularly important. I believe it was Prechter that said in EWP that all one needs to know at any given time is whether to be long, short, or flat.

Thanks for your thoughts.