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|Chapter 1: Not Now||1|
|Chapter 2: Bear-ly Noticeable||7|
|Chapter 3: Bear-ly Believable||15|
|Chapter 4: Bad News Bears||23|
|Chapter 5: Load Bear-ing||35|
|Chapter 6: Bear Bottom||51|
|Chapter 7: Bear Tracks||67|
|Chapter 8: Bear Traps||75|
|Chapter 9: Bear-ing Teeth||79|
|Chapter 10: Bear With Me||87|
|Chapter 11: Grin and Bear It||107|
|Appendix 1: Why WIN?||115|
|Appendix 2: Why Wade?||123|
Life is an illusion.
You are what you think you are.
I have, throughout this book, put together a collection of statements, transcriptions of public addresses, comments made in training sessions and on WIN (Wealth Information Network, our computer bulletin board service). My conclusions, made so often and based on different criteria at different times, have been relatively the same even as the current problem or question varied. However, the sum is a total of the parts and the parts say simply, "There will not be a bear market." Not now.
You, the reader, have a lot riding on how you perceive the market: where it's heading and how you're going to play it. To your stockbroker or financial planner (unless you find a rare one who really cares), the market going down probably will help the commission picture—there will be more people selling their positions to make commissions on, et cetera. But to you, it's the ham and egg example. The egg is a token donation for the chicken. The ham is "all there is" for the pig. You're in the pig's place. So, consider carefully all of the following comments and examples.
I don't think a bear market (one in the classical bear market sense) is about to happen. Might the market soften a little? Yes. Might there be temporary dips in the market and, more specifically, in a particular stock? Definitely yes.
My rationale for "not now" is not complicated and does not require a long thesis. Here it is:
1) There is no recession on the horizon.
2) Inflation is in check and the Federal Reserve is dedicated to keeping it there.
3) Corporate earnings are up everywhere. In some quarters, the only disappointing news is earnings coming in lower than what analysts expected. Ironic? Yes. Corporations are making millions, expanding sales, reducing debt, and growing, and then a $160 stock falls $8 in one hour because of 2 [cts.] less reported earnings than expected.
4) Taxes probably won't increase (at least directly) too much. There are too many conservatives hell-bent on lowering them to have much of a chance for increase. There might even be a capital gains tax reduction, which would be great—if only we can get some politicians to realize what a financial boon a reduction would create.
5) Interest rates will move up and down slightly in response to what the "Fed" perceives as inflationary.
6) Trade barriers are coming down worldwide. I don't care what your political persuasion is or how you view NAFTA and GATT (I personally don't agree with some of it, especially with some of the sovereignty issues). These agreements, with more to follow, have stimulated trade.a) The rest of the world needs so much of what we have. We are the world leader in:
Hi-tech computers and all the peripherals: hardware, software, content and applications
And too many more to mention here.
b) Way over half the world's population (some say 75% or more) are living in third world countries. Even the old Soviet Union and China qualify. There are countless "dollar-based" millionaires in these countries, and that, added to an exponentially growing middle class, bodes well for our products and services. (Note: India alone has a burgeoning middle class as large as the entire population of the United States.)
c) We can invest in these foreign companies or invest in American companies expanding into these new markets.
d) Expansion of existing products into new markets is a healthier prospect than developing new products for old markets. For example: McDonalds will do better opening up more stores in China than developing an octopus sandwich to sell in Kansas.
I'll deal with earnings more in several other places accompanied with strategies for making money, but in the theme of this section, "not now," I'd like to add a few thoughts:
There are definitely some companies' stocks with astronomical multiples—huge price/earnings ratios. These high prices usually won't be sustained unless the actual "drop-to-the-bottom-line" profits pick up—or raise to meet the high multiples. However, across the board of NYSE, NASDAQ, and S&P 500, multiples are not that high. Are they on the high side historically? Yes, a little. Have some retreated to more conservative levels? Yes, look at bank stocks, food stocks, et cetera.
Many American companies are simply doing well. Management in most companies is in sync with customers and employees. Most are concerned with quality, which helps build a good expanding bottom line and great shareholder value.
When companies' multiples get really low, they become turnaround candidates and takeover/merger candidates. Many companies are on the prowl for new businesses which can add immediate earnings to their own bottom line.
Add all of this to the fact that so much of the world lies within reach and we have a triple whammy:
1) Low inflation.So, when will a bear market occur? I'm not a prognosticator. I don't know exactly when it will occur, but I do know two things:
2) No recession.
3) Good corporate earnings.
1) It's not going to happen now or in the foreseeable future (say, one to four years). You should read The Great Boom Ahead by Harry S. Dent Jr. The author's research (consumer cycles, peaks) points to a current bull market ending around 2,007 or 2,008. His conclusions are based on baby boomers getting near retirement age. It's a convincing argument. I think if he errs, it is on the short end. Add to his calculations the "boomers" from Russia, China, and India growing older and adding to a worldwide expansion of commercialization, and you'll see why I say that.
2) You can tell the signs of a bear market before they happen. Think about it. If a bear market (however short and insignificant) is caused by certain factors: high interest rates (which could have occurred by a Fed worrying about inflation and which could end with lower corporate earnings occurring simultaneously or close to each other) high taxes, high inflation, and low corporate earnings; and if a bull market is caused by the opposite (low interest rates, relatively low taxes, lower inflation, and good earnings) then the answer is simple: watch for real moves—up or down—in these areas. I say real because the Fed might tinker with rates in response to fears (not actual occurrences) of things they think are important.
The horizon would need to have all three clouds (a storm if you will) coming together. My solution: keep an eye on the horizon but get busy making money. Make hay while the bull climbs.
How? Read on.
Average earnings of an English worker in 1900 came to half an ounce of gold a week and, in 1979, after world wars, a world slump, and a world inflation, the British worker has an average earnings of half an ounce of gold a week.
—William Rees Mogg
It is difficult to keep things in perspective. At the time of the crash of 1987, there were too many comparisons to 1929 to even count. Charts pointed out the likeliness and the likelihood of the two events. Cyclists developed 50-year cycles, 12-year cycles, 4-year cycles, and so on. There were political observers and economists everywhere, each with his or her own theory.
Yes, it is true, there are several similarities between the two events. And yes, there are numerous attempts to make sense or figure out what happened—maybe an attempt to pigeonhole the phenomena made it understandable and hence, palatable. I reject most of these attempts.
The only thing I agree with is this: a set of circumstances occur in no particular order. A cause (however minor) starts and a chain reaction commences. The situation, usually totally irrationally, takes on a life of its own. The crash (or whatever you want to call it) ends for different reasons, and the recovery time period and strengths are totally unrelated.
A strange, but hopefully useful, comparison would be Woodstock. I was not there. I was too busy with my own rock-and-roll band. The place, the timing, the participants, the attendees, what preceded the event, the feelings at the event and afterward created "Woodstock." Many attempts have been made to recreate the main event. Thirty years later, one was pulled off that would, in a few ways, parallel the original event. The point being, it is a phenomenon that can't be recreated. It just happens. I'm sure everyone reading this has had such an event. Maybe a honeymoon, a vacation, a special meeting, whatever. Attempts to duplicate it are futile.
So that's what I'd like to accomplish here: give a comparison of the 1929 and 1987 crash, not to prove that they were the same, but to prove that they were not the same. I won't purposefully try to discount any comparisons which match up. I won't have to. You'll see that any likeness usually had different timing and effects.
Why do I make this attempt? Only to educate others so that readers, my seminar attendees, and even my staff will not make decisions based on incomplete or erroneous information. This comparison will be relatively short. It would serve you well to study greater and more comprehensive studies of this matter. History may not recreate itself, but if we don't study history, we are destined to repeat ourselves.
The 1929 Crash:
The roaring twenties were hardly a crash to Main Street. People were working, factories were humming, and a new religious revival was happening. Speakeasies were around, but were not the norm.
The buildup to 1929, and even the first half of that year, had progressed at a fairly rapid pace. Many average Americans were buying stocks. Mutual funds were many years in the future, as were derivatives of stocks, like options and other interest rate, index-related securities. But margin investing did exist and was used extensively. The Dow Jones Industrial Average peaked on September 3rd. It turned around, however, and in the first two weeks of October, it rallied to 353.
News happens. On October 15th, the Weekly Production figures came in and US Steel was down 17%. Heavy selling commenced. Back then, the market had a Saturday trading session. US Steel fell $27.75 that week. General Electric and other stocks were down. Obviously, everyone was concerned. A group of big banks got together immediately and committed one billion dollars to bolster the market. This worked, as the market temporarily stopped skidding.
On October 24th, one million shares traded in just 30 minutes. Buyers couldn't be found and major companies' stock (even the most previously liquid stock) plunged—sometimes dipping $5 to $10 between trades. That day 12.9 million shares traded. The old one-day record was 8.2 million.
The Wall Street Journal added fuel to the fire. On Monday, October 28th, its headline read, "Stock Market Crisis," and sales orders poured in even before the market opened.
Tuesday, the market fell another 30 points. It closed at 261. It was at 381 on September 3rd, and had fallen 31%. General Motors was at $40 from its high that year of $91.75. General Electric had been $422, now it bottomed at $222.
How could the bad news from US Steel cause a crash? It didn't, but was one log on the fire. No one factor caused the crash. A culmination of events, news, and statements, created a selling atmosphere which eventually created a crash.
Earnings were okay. They surely didn't seem to be heading lower. Many companies and many experts were looking to a good solid growth pattern extending through 1930. Chrysler shipped 17,000 more cars in 1929 than 1928. Household furnishing orders were up. Typewriter sales were up. Many other companies showed increased earnings on the horizon.
Were stocks expensive? Not in general. Some were, and their high multiples were based on projected future earnings. This is not uncommon. All in all, stocks just didn't seem high priced based on the future. But, on current earnings per share, they were high. For example, General Electric's high of $403 was at price to earnings ratio of 56, or 56 times earnings. See Stock Market Miracles and Wall Street Money Machine for more on the importance of price to earnings ratios.
When excitement builds and people don't want to get left out, they'll do anything to get in. They'll borrow heavily—home mortgages, personal loans, etc. Margin accounts, at brokerage firms were at an all time high. Some allowed investors to put up as little as 10%. Obviously, a downturn would hurt, and they assured extra selling.
Think of it. As stock slides a little, the investor has to cover the collateral by bringing in more stocks or cash. In a full fall, they could not cover, and mass selling occurred to stop further erosions. Another log on the fire.
Interest rates were high. Just before September, the Federal Government raised its discount rates from 5% to 6%. This was the fourth rise in rates from 1927. They were raised to stem the flow of gold out of the country. With this negative economic news, foreign investors sold US stocks and bonds before they continued to erode.
Now to another bugaboo, another large log. Congress seemed likely to pass a very restrictive tariff bill, virtually isolating American industries, restricting their ability to trade freely (or at least less restrictively). Like now, it seems out-bungling politicians can't seem to get government out of our pockets, causing more harm than good. The Wall Street Journal reported this story on October 28th. It was the Smoot-Hawly Tariff Bill, a bill so damaging in the cause and length of the Great Depression. All of these factors together added up to the crash of 1929. No one thing caused it.
The Biggest Crash In History, 1987:
The 1987 stock market crash was incredible. The recovery took nowhere near as long as the 1929 crash, but in terms of dollars, its loss was more severe. The market once again turned expensive. Just like 1929, certain specific events led up to the crash. You'll see, except for stock prices being high, no event listed here is the same as 1929.
On October 14th, the Dow Jones Industrial average went down 95 points. This set a new record. Why? News came out that the trade deficit for August was $10 billion. This caught people by surprise.
Then the House Ways and Means Committee set about to change the tax filing requirements for mergers between big companies. Such mergers or acquisitions had failed to produce some of the expected price/value increases, and this tax change was seen to have damaging consequences. That Thursday, the Dow Jones Industrial average fell 58 points. The next day, it fell another 108 points. It stood at 2,247: 17% less. A decline from its high on August 25th. Too many logs too fast.
Monday saw a panic. The Dow dropped 508 by the close, going down in major chunks all day long. An astounding number of shares traded that day. I owned stocks at that time, but was so busy running my business, I hardly noticed. When I did, I bought more shares.
Was the 1987 crash like 1929 in its severity? Yes. But in its causes, not hardly, except for a few things. Stocks were priced high. In August, for example, the S&P 500 traded at 25 times earnings.
Investors and analysts (brokers) were finding innovative justifications for purchasing stocks at these high prices. One such valuation was modern in nature. It's called "break-up value." Buy a company, even with expensive debt, then sell off divisions, or assets, pay off the debt and pocket the excess. Mergers and acquisitions abounded. Anyone who held onto stocks through the '80s was much better off even after the 30% decline because shareholder value had increased so much.
In 1929, margin usage had been overused. New margin requirements were 50%. However, new forms of "margin" popped up. One was index futures, and options. This allowed investors with small amounts of money to tie up larger positions. The "magnified" movement on these derivatives can make overnight millionaires or overnight paupers.
Another thing occurred in 1985 and 1986. The Federal Reserve (under Paul Volcker) expanded the money supply, up 12% in 1985 and 16% in 1986. This easy money found its way to the stock market. Inflation seemed guaranteed and interest rates were just starting to increase. Stocks seemed like the place to be. Many investors bought in.
Mutual fund investing saw billions of dollars pour in from individual investors who "trusted" these big fund managers more than their own instincts. This money had to be invested.
Just like in 1929, the Federal Government's monetary policy shifted two months before the crash. This time it was Alan Greenspan. He replaced Paul Volcker and, on September 3rd, raised the discount rate from 5.5% to 6%.
The dollar started falling and it now required foreign investors to finance our debt. The amount of foreign involvement dropped in half. Now, this increase in the interest rates would draw foreign investors back into the game.
After the crash, the Federal Government announced it would provide whatever liquidity the market needed to stem the tide. The market rebounded 150 points by December 31st.
The only really significant comparison is that stocks seemed overpriced. So, this should also be our concern. No single event caused it. Neither wars, impeachments, corporate bankruptcies, nor tragedies of any sort have sent the markets into decline. Crashes are not random events. They occur when a series of negative things happen which affect or infect investor attitudes.
No one knows when, but you will read elsewhere in this book how you can watch the horizon, diversify, stay with some cash and learn how to play any type of market.
Copyright © 1996 Phyllis Forbes Kerr. All rights reserved.