Crazy, Man!
By ALAN ABELSON
After giving due and careful study to the fallout from Ailing Asia, Reeling
Russia and Listing Latin America, weighing the possible impact of the
personalities filling our tiny screen from Monica Lewinsky (former First Intern,
now embittered extern) and Osama bin Laden (may his tribe decrease) to Ken
Starr (will somebody please tell him to stop smiling when he spots a camera
pointed his way) and Bill Clinton (who thinks that being President means you
never have to say you're sorry), weighing the effects of the anti-terrorist missile
strikes in Afghanistan and Sudan against the potential terrorist retaliatory
attacks on Americans abroad and at home, our considered reaction to Friday's
stock market action is ... ???
How can a market be so ugly all day long and so beautiful in the final hour?
Did the real market sneak away late Friday to get a head start on the weekend
and a rogue market take over? If so, won't the real market be boiling mad, and
what does that bode for Monday?
Did Alan Greenspan decide to switch his portfolio from bills to equities or at
least grab a few calls on the S&P index?
Did every partner at Goldman Sachs (enough to fill 100 elevators if the fat
ones call in sick) chip in a week's pay and buy stocks in a gallant move to save
the nation, the economy, the bull market and their pending IPO (not necessarily
in order of importance)?
Did the humble but honest Japanese investor, who after eight years of a bear
market in Tokyo still has a yen for stocks, decide to try his luck in the U.S. and
proceed to quietly pour into our market some of the dough he has been
squirreling away in postal savings at a 0.0005% yield (compounded)?
Did the trillions the Russians don't pay in taxes hop a freighter, land on these
shores and rush helter-skelter into the stock market?
Did the Colombian drug lords, nervous about devaluation in Venezuela, Brazil,
Argentina, Mexico, etc., etc., take their loot out of South American banks
(scrupulously paying penalties for early withdrawal, of course) and send it,
disguised as bananas, tacos and coffees, into this country, whence it found its
way into the pharmaceutical sector?
Did the early selling represent heavy shorting by the aforementioned Osama bin
Laden and the last-minute buying represent even heavier buying by his
estranged Saudi relatives?
Did the Chinese, famously canny investors, having suckered the Americans into
shoring up the yen while they were dumping $10 billion worth of that shaky
currency, put their winnings from that transaction into U.S. stocks?
Did participants in the global sex industry, which, a U.N. agency revealed this
week, rings up revenues of hundreds of billions a year, fearful that exposure
will subject it to local taxes, choose 3:30 p.m. on Friday to sequester their
ill-gotten gains in IBM, Microsoft, GE and other impeccable issues?
That the market buckled so sharply Friday morning was hardly surprising. In
fact, the surprise would have been if it hadn't. We don't think the selling was
occasioned by the news that some smart missiles had been fired at some dumb
terrorists. Nor, for that matter, are we persuaded that Mr. Clinton's 'fessing up
to doing naughty things in the Oral Office sent stocks into a tizzy.
The strikes against the terrorists, if anything, might be viewed as a positive and
purposeful action. And gosh, is there anyone of legal competence (or even
most folks who might not qualify for that designation) who thought Mr. Clinton
wasn't capable of fibbing? We remember in the initial months of the President's
first term, Barron's ran a cover showing Mr. Clinton fitted with a fine Pinocchio
nose. We weren't prescient, merely observant.
More likely the excuse for the big dive was the evidence, which suddenly
became too imposing for even the most optimistic bull to ignore, that the world
was inexorably dissolving all around us. Beyond East Asia and Japan, the likes
of Russia and Venezuela were teetering on the precipice, with Brazil and
Mexico, to name only two, edging ever closer to the precarious edge. And the
currency plague is threatening to spill over from the emerging economies and
infect Canada and Norway, as well.
Especially unsettling was the official denial by China that it planned to devalue
the yuan or unpeg the Hong Kong dollar. Denial of intent to devalue is
invariably a precursor to devaluation. Mr. Yeltsin, you may recall, firmly
offered just such a vow the day before the Russian ruble, with Moscow's
blessing, went down the tubes. The Chinese economy, from all indications and
despite the numbers concocted by Beijing, is stagnating or worse. It's hard to
imagine the powers-that-be hesitating to do what they must to stay competitive
in foreign markets.
All of which strikes us -- and, obviously, an increasing number of investors as
well -- as auguring further deflationary pressure around the globe. We think the
stock market reacted on Friday to the dreary prospect of a
beggar-thy-neighbor world.
Nothing, we're afraid, changed in the final hour of trading to alter that
perception. Everything suggests the crisis will worsen, maybe badly, before it
lightens. Friday's rally thus stacks up as a reprieve, not a reversal.
Bob Wilson is an old pal, as bright as they come and a peerless investor. Not
the least of his virtues are a pleasantly vicious wit, a great sense of humor and
an aversion to cant. Behind a fairly conventional and placid exterior lurks a true
nonconformist, a man of spunk and originality. For all he's such a paragon,
Bob, of course, is not perfect, as evidenced by his open admission that he has
a thing for opera.
Bob made his mark and his money as a hedge-fund virtuoso of the old school:
He actually shorted stocks, as well as bought them. He delighted in taking the
unorthodox tack. We remember, for example, he used to circulate the names
in his portfolio among brokers, fellow money managers and assorted strays like
us on the odd chance that someone with some worthwhile information or even
sensible opinion about one of his stocks would convey it to him. So far as we
know, neither the information nor the opinion his list elicited was of sufficient
value to cover the mailing cost (and stamps were a lot cheaper than they are
today). Still, he enjoyed the stir it caused and the dire warnings from the
conventional wisdom of the consequences of such unconventional behavior.
Bob did not, to be sure, identify which of the stocks on his list he owned and
which he had sold short. And in any case, as we were happy to point out to
him, he had no worries on that score, since no matter how carefully you
studied the names, you couldn't tell his shorts from his longs.
No stranger to the pages of this magazine, Bob for many years was a member
of the Roundtable, which he enormously enriched by his picks (and pans) and
enlivened by his irreverence. His most recent Barron's appearance was in this
space last December, when he was unsolemnly bearish.
As a matter of fact, as he reminded us when we chatted with him Thursday,
with the market practicing for its end-of-the-week swan dive, he has been
bearish for a spell now. Indeed, in a Q&A about a year ago that also featured
another truly brilliant investor, Walter Mintz, Bob, with mock rue, confessed
that he had been wrong so often of late on the market that he no longer trusted
his own judgment.
His big mistake, he noted last week with estimable equanimity, was in failing to
anticipate just how good the fundamentals would prove to be the past few
years. Corporate earnings growth, profit margins and return on capital, he
reflected, were spectacular. And inflation was much more subdued than he
expected. But those positive fundamentals, he pointed out, were looking
increasingly less robust.
He cited earnings as the big case in point. (For chapter and verse on the
dramatic slowdown in the growth of profits, we refer you to Rhonda
Brammer's piece on page 22.)
Unlike so many of the bearish persuasion, who have suffered not only the
ignominy of being wrong on the market but also the real pain of loss from
putting their money where their sentiment is, Bob's errant prophecy hasn't
prevented his considerable net worth from expanding even further. The reason
is that, as he explained last December, rather than liquidate his longs (or
compel his money managers to do so), he has taken out an insurance policy by
buying 5% out-of-the-money puts on the S&P equal in value to about half his
net worth. The most he can lose, he points out, is 5%.
If we get a decent bear market, Bob cheerfully concedes, he'll take his lumps,
along with everyone else. But thanks to those out-of-the-money puts, they'll be
gentler, kinder lumps than they otherwise would have been. With a laugh, he
recalls the insight proffered to him by a wise colleague years ago that the
"greatest protection against getting wiped out in a bear market is to have made
a ton of money in the preceding bull market."
And Bob continues to expect a bear market and suspects it'll be a memorably
bad one. He has been growing more and more antsy, he confides, over the
seeming parallels between today and 1929. Among the resemblances he sees
are the New Era mentality, exemplified by a recent Op Ed piece in The Wall
Street Journal by a noted economist (Bob discreetly didn't say what the
economist was noted for), insisting that the business cycle, pockmarked by
nasty recessions and kindred sorrows, is a thing of the past and it's strictly blue
skies from here on.
There's the same blissful faith now as there was then in technology and the
brave new and plentiful world that technology is creating. The 'Twenties, he
says, even had its Microsoft; it was called RCA.
Still another similarity with that era, he observes, is that the rich, a category that
happily includes himself, are getting richer, while the unrich are not.
He also observes that like '29, there's huge public participation, and the public
is participating, as it did in '29, with borrowed money. Not now as then in the
form of margin debt, but, instead, home equity loans, plastic credit and the like.
That public, moreover, just as it was in '29, Bob sighs, is completely sold on
equities as the instrument of financial salvation. Recently, he relates, he was
cornered by someone at a cocktail party asking for investment advice. The
conversation went like this:
Bob: "Well, I think stocks are pretty risky. Why not buy some bonds?"
Advice-seeker: "Bonds!"
Bob: "I think you can get, oh, something like 5 1/2 % yield on government
bonds. Not bad at all, with inflation so low."
Advice-seeker: "5 1/2 %!"
Advice-seeker scurries away, trailing undisguised contempt in his wake.
Given the huge public participation in the market, which Bob believes is
actually more pervasive and of much greater moment than in '29, he expects
the reverse wealth effect of a bear market to be extraordinary, triggering a
painful economic slump. Lest his forebodings frighten you, we hasten to assure
that he emphatically does not expect a repeat of the 'Thirties. What made the
Depression so exaggeratedly terrible, he explains, is that the money supply
collapsed -- a circumstance that has not been lost on the official stewards of
our economy. With the result, Bob chuckles, that never in the lifetime of
anyone now living or in their grandchildren's lifetimes will the money supply
contract again.
Just how bad a bear market he reckons we're in for? Bob speculates that a
decline of around 60% doesn't seem unlikely. Let the record show (a) he
smiled when he said that; and (b) he prides himself on being conservative.
|
