worldlyinvestor.com Daily Speculations
Broken Rules, Shattered Expectations on the Markets
By Laurel Kenner and Victor Niederhoffer, Columnists
Columnists Kenner and Niederhoffer try to make sense of this week's carnage on
the stock markets. E-mail them at speculators@worldlyinvestor.com.
If you can meet with triumph and disaster
And treat those two imposters just the same,
You'll be a Man, my son!
-- Rudyard Kipling
Every rule on the stock market was broken last week.
Buying after panics didn't work.
Buying on interest-rate declines didn't work.
Buying on a Friday to play the odds for a favorable government economic report didn't work.
Buying at resistance levels didn't work.
Buying good stocks didn't work.
The one rule that was not broken this week was the principle of ever-changing cycles invented by Robert L. Bacon. In Secrets
of Professional Turf Betting, Bacon wrote:
``The crazy gambling urge and speculative hysteria that overcomes most players (makes losses) an certainty. But if the public
play ever did get wise to the facts of life, the principle of ever-changing cycles of results would move the form away from the
public immediately.'
Bacon was talking about betting on horses, but the principle is even truer for stocks. When you get accustomed to making money
a single way, too many people barrel in. They bull stocks up to unprecedented, unjustified levels, and when they run for the exits,
the devil take the hindmost.
That said, we don't share the glee of the bears. We found their snarls on Friday horrible and unseemly. As one veteran bond
trader said: ``The economic gurus are even now calling for a 50-basis-point rise. We think it's psychic revenge for having missed
for themselves and their clients the biggest bull market in history.'
What hideous joy abounded on Friday: punishment had finally come to the upstart innovators. How dared the 20-somethings
attempt to make millions on good ideas, the Warren Buffetts asked in their computer-less offices. And how dared those who
couldn't meet the minimum for opening a white-shoe brokerage account presume to trade stocks in their little online accounts?
The old regime has had its ugly laugh. We hope it doesn't last. And may all of us come out of this month wiser as well as poorer.
As Christy Mathewson, whose three shutouts for the New York Giants in the 1905 World Series still stand as a record, said:
``You can learn little from victory. You can learn everything from defeat.'
It Had to Happen
From the armchair of perspective, it had to happen. People were too comfortable after the miraculous rally at 1 p.m. on April 4,
when the Nasdaq rebounded from a 575-point loss. When the market retested those lows today, it created panic. And then trend
followers, delta hedgers, margin liquidators, chart watchers and fearful ones just joined the stampede.
Because no brokers were around to stem the online exodus, this became another chapter in the book on New Economy investing,
wrote reader Mark M. McNabb, Ph.D.
The net result: A week of five consecutive declines for both the Nasdaq and the Standard & Poor's 500 Index. The Nasdaq's
25% drop this week was the greatest weekly loss in its 29-year history. The Dow's 618-point loss was the worst point decline of
all time. The S&P 500 ended the week 10.5% lower.
Just two weeks ago, at the end of March, the Nasdaq 100 June futures touched a high of 4,488. That was 47% above a close of
3,050 on Nov. 30, before the December run-up. The contract's close of 3,217 on Friday, 65 points above the day's low of 3,150,
gave up the entire 47% gain.
Stocks that had traded above $200 in March closed below $100 on Friday. Xclera.com (Amex:XLA - news), Commerce One
(Nasdaq:CMRC - news) and Human Genome Sciences (Nasdaq:HGSI - news) are just a few examples.
No Other Time Like This One
There's hardly a precedent for this.
If we use 1987 as a guide, the wealth's disappearance may affect the economy, at least in New York. In Manhattan, streets
were emptier than usual last night, and it was unusually easy to find a table at a restaurant. People spoke of their tax bills and
their stocks in the same breath.
``I owe $8,000 on my estimated tax, but now I can't sell my stocks, so I'm in trouble,' a young woman said as she walked along
Broadway on the city's tony Upper Westside. People shopping for apartments asked sellers whether the market crash would
affect real estate values, as happened after the 1987 crash.
The decline has already affected individuals' lives. A friend who made a million by carefully picking biotech stocks says he'll
have to look for a day job now. People who bought on margin are in even worse shape, he added. ``Spoke to a friend from New
York City who had to borrow from his life insurance policy and is still $75,000 short.'
Buying Opportunity?
Even if the vicious cycle isn't over, it's a good time to recall that 1987 was a great time to buy stocks.
The question is when and how.
The Chicago Board Options Exchange's Volatility Index, which measures expectations for changes in options prices, closed at
39.33 Friday, the highest level since the above-40 readings in October 1998, when Russia's debt default brought the world's
financial system perilously close to collapse. For the past few years, a reading of above 30 has been a buy signal. But in this new
market, the reliability of the indicator is untested.
Looking at individual stocks that showed strength amid Friday's decline yields few insights. All but 13 of the S&P 500 fell. And
four of the winners were gold stocks, a phenomenon that since the inflationary 1970s is seen only in times of the greatest fear.
Today's carnage was too great for two people to extract the full monty of meaning, but our readers weighed in with great
wisdom.
Paul Lewis of San Francisco responded with Churchillian grandeur to the assault of the bears. ``I sold my GE (NYSE:GE -
news) and Goldman Sachs (NYSE:GS - news) today... to hell with the financials. I live and die with tech,' he wrote Friday
morning. ``It is MY business. I bought a TON of SUN (Nasdaq:SUNW - news) at dawn, and if that sun sets, then my whole
game falls where the sun doesn't shine.'
He added: ``I made a bunch by buying The Day After in October 1987. I will be buying by this quarter's end, and living to jig, not
hobble, again. Take that to the streets.'
(For the record: General Electric closed 3.7% lower on Friday and Goldman fell 13%. Sun Microsystems fell 1.6%.)
We found some sustaining thoughts in the Rudyard Kipling poem If. A search engine yielded 16 different Web sites where this
poem is posted. Here is one: newtrix.com.
Laurel Kenner is a financial writer in New York City. During her 16-year career, she has reported on police, politics and
aerospace, and most recently headed US stock market coverage at Bloomberg News. Kenner is long Human Genome Sciences
and Commerce One.
Victor Niederhoffer is a private speculator specializing in futures and options trading. He formerly managed money and hedge
funds, and had one of the best records until turmoil in Asian markets in 1997 caused financial disaster. He is the author of
best-selling The Education of a Speculator. His hobbies include music, electricity, sports and ecology, all of which form a
foundation for his scientific speculation. |
