The Market Perspective

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....