HOW STOCKS TURNED BACK FROM THE ABYSS

SOMETHING happened at around 1 p.m. our time yesterday that pulled the stock market back from the edge of the cliff.

Traders say it was almost like divine intervention. One minute the Nasdaq was down 11 percent -- say it out loud, "Eleven percent in one day" -- and then it suddenly rallied several hundred points in the matter of an hour.

The Dow followed suit. Down 500 points around mid-day, the blue chip index's decline -- along with the horrible showing of over-the-counter stocks -- was destined to make yesterday's market an unqualified disaster for investors and the country.

Then, traders said, someone started buying large amounts of stock index futures contracts through two major brokerage firms -- Goldman Sachs and Merrill Lynch. These transactions are usually done on the QT so we don't really know how many of these contracts were purchased.

And unless the brokers tell, there is no way of knowing which of their clients were making the purchases. Goldman wouldn't comment on this and Merrill did not return a call for comment.

But traders said enough were bought to catch everyone's attention. In fact, the buyers seemed to want people to know they had an appetite for stocks.

Then the market rebounded.

It didn't go all the way back. At the end of the day the Dow Jones index had still lost lost 56 points or half a percent on the day. And the Nasdaq lost another 74 points, or the equivalent of a 1.77 percent drop. Yesterday's loss by over-the-counter stocks nearly put the Nasdaq index back to ground zero for the year -- in two days all but 2 percent of its gain for the year was gone.

It was real nice of Goldman and Merrill to stick their necks out like that. In fact, it was downright uncharacteristic for Wall Street outfits to put the thought of possible losses aside for the greater good.

Because of the purely unselfish nature of what went on, traders are naturally suspicious. Hell, so am I.

"I think some one or more persons saved the market today. There was a suspicious urge to buy stocks at an opportune time," says one trader. "Why drive the Dow up 350 points in a half hour? That's never serious buying. That's someone trying to establish prices," he adds.

I'm especially suspicious when the market suddenly rebounds at nearly the very same moment that a member of the Clinton administration -- economic advisor Gene Sperling -- is on TV telling investors not to worry.

And there's the obvious connection between Goldman Sachs and the administration, the Wall Street firm having given Robert Rubin to the Clinton administration as its Treasury Secretary.

Plus, what better way to make investors not worry than by having the stock market recover a lot of the ground it had just lost. That gesture almost makes a guy want to buy some stock -- bottom fish, if you are into sporting analogies.

I'm not saying that government intervention in a collapsing market is wrong. In fact -- except for the obvious contradictions with the free-market system -- it is politically and socially a very right thing to do.

I've written about this before. And I've mentioned that Washington has had a secretive group call the Working Group on Financial Markets, made up of investment industry and government people, that would be in just the right position to rescue the market.

Informally the folks on Wall Street call this the "Plunge Protection Team." In February 1997, the Washington Post did a piece on this team, just in case you don't believe it exists.

And while I can't swear that Goldman and Merrill are captains of that team, they sure acted like it yesterday.

HOW STOCKS TURNED BACK FROM THE ABYSS

-- Ain't Gonna Happen (Not Here Not@ever.com), April 05, 2000

Answers

Informally the folks on Wall Street call this the "Plunge Protection Team." In February 1997, the Washington Post did a piece on this team, just in case you don't believe it exists.

http://washingtonpost.com/wp-srv/business/daily/feb/26/plunge.htm

-- (Washington@Post.article), April 05, 2000.

Discussion about this is well underway on this thread.

Mutuals funds stepped in to stabilize the markets and avoid more serious losses to themselves. This is not earth-shattering news to anyone who follows the markets, so as secretive activities go, it's rather poorly executed. The funds are taking a huge risk, since in the event of a true market collapse, they could easily end up pouring billions into a failed effort to shore up the markets. They are obviously willing to take that risk, just as the banks and brokerages were back in 1929.

We now have two forms of "moral hazard" in the equities markets: Dr. Greenspan's liquidity interventions last year and now this clear demonstration that the big players will put a net under losses. The game goes on...

-- DeeEmBee (macbeth1@pacbell.net), April 05, 2000.

The Bill and Melinda Gates Foundation is seeking contributions.

-- (nemesis@awol.com), April 05, 2000.

It go's something like this , at 1:25 pm Tuesday BIG CHIEF calls litte bears and says Blue Horseshoe loves Anacot Steel . Start riding the wave of the future . Daytrade only $8.00 my man!

-- justin (justlucky@aol.com), April 05, 2000.

As noted on the Contrary Investor site:

Yesterday, the NASDAQ had an intra-day swing of close to 8% and closed down almost 7%. Today the intra-day was 13.7% and the close was a -1.8%. This is almost identical to the Dow in the days prior to the '29 crash. Will it happen again? Just stick around and we'll all find out. (Don't worry too much as today is nothing like '29. Back then we had no trade deficit, a positive savings rate, the public were not participants in the stock market broadly (remember, most were farmers and labor), debt as a percentage of household income was at much, much lower levels, and credit was not generally available in mass quantities to anyone with a pulse. Lastly, and most importantly, we didn't have instantaneous decision making power via the Internet.)

In the words of the immortal Dr. Evil, "quite interesting, really."

-- DeeEmBee (macbeth1@pacbell.net), April 05, 2000.

"Today" in the above article was Tuesday, 4/4/00. In Wednesday's action, the Nasdaq ended the day up 0.5 (almost the same as the 0.6 for the equivalent day in the table), but the Intraday Range (index volatility) was almost twice that of 10/25. Interesting, no?

-- DeeEmBee (macbeth1@pacbell.net), April 05, 2000.

DeeEmBee:

I think the contrarian needs a little study of history. In 1929, one of the big problems was the small, undercapitalized investor that was in the market with margin rules far more liberal than today. When things started to go south, their margin postitions were rapidly sold out, contributing mightily to the decline. We also had trade barriers in the form of high tarrifs being erected all over the world that made the length of the decline much worse. There were no mutual funds with huge resources at their disposal that could serve as a stabilizing force to the market.

I'm not completely sanguine about today's market but I think that some comparisons to 1929 are a bit overdrawn.

-- Jim Cooke (JJCooke@yahoo.com), April 05, 2000.

Margin back then was 90%; nowadays it's 50%. Still serves a hellacious magnifier of any decline, and that doesn't count all the mortgage and non-collateralized credit that's been used to buy into this market.

Major players nowadays also have far more sophisticated leverage instruments (e.g., option trading, short sales, non-trading derivatives, hedge funds, non-deliverable currency transactions, program trading, index futures, etc.) than were available back in 1929. Get on the wrong side of the leverage (e.g., LTCM) and watch the walls cave in.

Mutual funds will defend their positions, just as the banks and brokerages did back then. If they have enough funds and willpower, they win. If not, then, like JP Morgan and the other bankers in 1929, they'll win the first few rounds, but eventually they'll run out of ammo and be forced to evacuate their positions. Lots of folks thought that Morgan and Co. would rescue the markets. They thought wrong.

I do agree that the Smoot-Hawley tariffs were a big mistake. However, I follow Galbraith's lead in his wonderful book, The Great Crash, 1929, in which he shows over and over that the primary cause of the Crash was excessive speculation creating an asset "bubble". All those laissez-faire policies by Hoover and his Fed allowed a massive build-up of unsustainable asset valuations, and then one day, everyone wanted out, right now! Smoot-Hawley was a contributing factor, but then so was the Bank of England repatriating millions of pounds sterling in the months leading up to "Black Monday". Many bad decisions were made which seemed smart at the time, but without that asset bubble, few of them would have mattered all that much.

-- DeeEmBee (macbeth1@pacbell.net), April 05, 2000.

Hey Jim,

Did you read this part very closely??

"I've written about this before. And I've mentioned that Washington has had a secretive group call the Working Group on Financial Markets, made up of investment industry and government people, that would be in just the right position to rescue the market.

Informally the folks on Wall Street call this the "Plunge Protection Team." In February 1997, the Washington Post did a piece on this team, just in case you don't believe it exists."

Sure makes you look like an idiot again, with all of the skepticism that you were spouting yesterday. But for you, that's just par for the course! :-)

-- Hawk (flyin@high.again), April 05, 2000.

Hey anybody:

I know someone who has a position in one of the top 5 bulge bracket banks on the street. Looking for 2-3 year associates with Asset Backed Securitization experience. Know anybody??

-- FutureShock (gray@matter.think), April 05, 2000.

Mutual funds did exist in the late 1920s. At that time they were called "investment trusts" and there were nearly 500 of them. The first investment trust was the Massachusetts Investment Trust, founded in 1924.

-- Someone that (reads@a.lot), April 06, 2000.

Hey Hawk:

This refers to the same article that was posted earlier. This is the group that spent their time running meetings and writing speeches. Simply becuase a group gets an informal label like the PPT doesn't mean they have any ability to actually change the direction of the market. I asked you exactly what these folks do and where they get the money that has such a great effect on the market. I'm still waiting for an answer.

But calling me names is so much more fun, isn't it :^)

-- Jim Cooke (JJCooke@yahoo.com), April 06, 2000.

DeeEmBee:

Although the official margin rate was 90% in the 20's almost no one paid that rate. Many people paid far less, often as little as 3% (see http://sac.uky.edu/~msunde00/hon202/p4/ for more on this). Since the regulations were so lax and poorly enforced, what you paid on margin was really up to the brokerage house and many joined their customers in taking flyers. Margin buying may be a problem now but it was a lot worse then.

You're absolutely correct that a defender of anything needs a lot of ammo and a lot of resolve. Running out of either in this type of market could mean big trouble. OTOH, I've been waiting for the big crash since the early 70's and I'm still waiting. Maybe it will come tomorrow and maybe not but the one thing I've found out is that I'm a pretty bad forecaster of economic upheaval.

The Crash of 1929 is a great book. JKG may not be my favorite economist but he was a great writer.

-- Jim Cooke (JJCooke@yahoo.com), April 06, 2000.

OK, this piece is on a goldbug site. Take the time to read it, though. It's the best summary I've seen comparing the 1920s and the 90s.

http://www.eldoradogold.net/content/bubble.htm

Two paragraphs.

We have created over-capacity and precipitated massive speculation just as we did in the '20s. Inflation has been held in check not by prudent monetary policy but by a unique combination of events. In addition to the post-Cold War boom and NAFTA, the enormous productivity gains achieved by the massive invasion of powerful microprocessors into our lives conspired to keep CPI inflation in check, just as innovations such as autos, planes and fractional- horsepower electric motors suppressed inflation in the 1920s. Instead of CPI inflation we have created asset inflation in the form of the largest stock-market bubble of all time.

Also....

"In fact, only 388 of the nearly 1,200 issues listed on the New York Stock Exchange had advanced between January 2nd and September 3rd [of 1929], while more than 600 stocks already showed substantial declines from their highest point of the past few years. 'This has been a highly selective market,' observed the Cleveland Trust Company's resident market guru, Colonel Leonard P. Ayres. 'It has made new high records for volume of trading, and most of the stock averages have moved up during considerable periods of time with a rapidity never before equaled. Nevertheless the majority of the issues had been drifting down for a long time...In a real sense there has been under way during most of this year a sort of creeping bear market.'

-- (worth@a.read), April 06, 2000.

Jim -

Well put. I've often had the sense that you and I are kindred spirits when it comes to the markets, so any discussions we have about same will more than likely come under the heading of being "in violent agreement". I also have proven a poor forecaster of the markets in the past 18 months, which is why I decided to simply go to the sidelines and stay there until the fog lifts. No sense trying to drive when you can barely make out the white lines even when you open the driver-side door...

Came across a most interesting article today from good ol' JJC over at TheStreet.com:

Manifesto for a New Market: Part 1

...So perhaps it is a good moment to talk about what it is that so irritates the professionals about this market.

First, the professionals truly believe in the notion that they are investing in businesses not stocks. I like that notion. I used to believe in it. It made me money for a long time. When it is right again, I will switch back to it because I am pretty good at it. It's what I started with, how I was honed, and it makes a ton of sense to me.

Somewhere along the line, however, perhaps because I was a journalist in a previous life, perhaps because I am by nature a nihilist at work who leaves the beliefs at home, I came to view the market from a different perspective. I came to view it as the logical intersection of the following tenets, which I hold to be self-evident:

1. Supply can be manipulated to spur demand.

2. Demand determines which stocks go up.

3. Never underestimate the power of the Wall Street promotion-mutual-fund-affection machine.

4.Everybody in the end is driven to find the next Microsoft (MSFT:Nasdaq - news - boards), Cisco (CSCO:Nasdaq - news - boards) and Intel (INTC:Nasdaq - news - boards) because of how much money those stocks have made, regardless of the possibility that their choices won't pan out over the long term.

5. To sell is wrong; to buy is right. Taxes are the ultimate evil.

These five points are the backbone of my thinking about the current market. They were arrived at by the recognition that I am in a business, not a religion. My business must perform well enough to be able to attract new money, keep a talented staff and make my existing investors happy. That way, I succeed; I am driven by success at work. (I am driven by other things at home, but this is not some lifestyle.com that you are reading.)

Over the next week I am going to flesh out these tenets, hopefully one day at a time, market permitting, because they are the keys to understanding this market.

Even as I write this I feel defensive about admitting these canons. It would be so much better to pretend that we really are in a business of evaluating businesses both short- and long-term.

But I know that is not true. I know it isn't because for 20 years I would hear from individuals and institutions that the two greatest practitioners of evaluating businesses in the stock-picking game were Warren Buffett and Julian Robertson.

I am a realist about my skills. Those guys are the Michael Jordan and Ted Williams of the business. They are Hall-of-Famers. Even if you are a good .300 hitter you are in awe of Ted Williams. Everybody who plays pro basketball today is not as good as Michael Jordan. (Don't sweat the program. Does it bother you that nobody has ever written as well as Shakespeare? That nobody has ever composed as well as Mozart and Beethoven, and the purists won't allow Beethoven in the same sentence?)

But somewhere along the line Robertson got blown out of the shop. And Buffett's methods have generated sub-par results for just long enough that, if he were doing what I am doing, he would have to close. Yes, close...

Food for thought. As I noted at the time, Julian Robertson closing Tiger sounded a warning for me. But who knows, eh? Maybe "it's different this time."

-- DeeEmBee (macbeth1@pacbell.net), April 06, 2000.

DeeEmBee:

"Violent agreement", huh? Sort of has a nice ring to it :^)

Your article highlights my feelings about the markets. Have we, indeed, entered a new era? Was all my time in econ classes wasted? It sure looks like it, at least for now. Eveything closed up today, traders are happy and calm again. Still, there's that nagging feeling that EVERYTHING I learned can't be wrong. But, I'm still pouring money into the old 401k because I can't make a reasonable return anywhere else. Ah, the cognitive disonance of it all.......

-- Jim Cooke (JJCooke@yahoo.com), April 06, 2000.

Well, today was pretty nasty for Tech. NASDAQ dropped 3% before anyone on the Left Coast had even finished breakfast and it never recovered. Looks like margin calls hit (again) around 2:30PM and the Comp ended the day down 5.8%.

Lots of free-floating anxiety. Biotechs gave back a lot of last week's bump, especially when the US government's chief scientist made some less-than-positive comments about Celera's announcement re finishing their genome mapping. Two heavyweights from Merrill Lynch (Richard McCabe and Henry Blodget) issued some cautionary statements about Tech and overall market stability. Analysts are really drilling the numbers for Lucent and reportedly not liking what they see.

Frankly, a NASDAQ re-test of 3800 in the next week or so seems more likely than ever.

-- DeeEmBee (macbeth1@pacbell.net), April 10, 2000.

Dee:

Isn't this exactly what Greenspan wants to see? If the NASDAQ drops while the DOW remains stable or rises a little, doesn't this take the pressure off the Fed for more rate hikes? Seems to me this is the case. Of course, I've got investment dollars in both sides of the equation so, for the next several months at least, I hope I can come out even :^)

-- Jim Cooke (JJCooke@yahoo.com), April 10, 2000.

Jim -

Dr. Greenspan has stated fairly clearly (for him) in the past few weeks that the Fed isn't trying to manage stock prices and that he isn't using rate hikes to cool down the equity markets. The Nazz could correct all the way back to 3000 (back around the levels just prior to last October's "moonshot") and he'd probably still raise rates if the PPI and CPI numbers merited it. He watches for price pressures, inventory changes, and demand problems. To the extent that rising equity values fuel demand, he cares, but it's not his primary focus.

Besides, Nasdaq Comp at 4200 still doesn't qualify as a rational market. Lots of traders want to believe that the Fed will rescue them from any serious correction (as noted, a form of "moral hazard"). They are probably mistaken in this belief. As long as it corrects in an orderly fashion (say, 2-3% on average per week over the span of a few weeks), the Fed is unlikely to intervene.

Watch reaction to Motorola tomorrow. MOT announced earnings after the close and they beat the analyst number by a penny (why am I not surprised?), but the "whisper number" was much higher. If we see MOT lose some altitude on this "good news", it'll be an indicator that the love affair with tech may be truly heading south.

-- DeeEmBee (macbeth1@pacbell.net), April 11, 2000.

Well, in a word: *eeeeewwwwww*

Not only was MOT's announcement not "good news", their conference call with analysts gave lower guidance for the year. In other words, they barely beat their current estimate and they're cutting estimates for the rest of the year. Very, very "not good".

This is one of the best-run techs around, friends. If they're having trouble making good money, it bodes ill for lesser companies.

-- DeeEmBee (macbeth1@pacbell.net), April 11, 2000.