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Wall Street History
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09/08/2006
9/11: A Look Back
Note: I initially planned on doing a piece on Walt Disney, then I
realized it was 9/11 anniversary time. I’ll get to Walt next week.
On this five-year anniversary of the attacks, I thought I’d take a
look at some of the items I was covering in the weeks leading up
to 9/11, as well as my first thoughts afterwards; all courtesy of
my “Week in Review” archives.
The focus for this particular edition will be on the more market-
oriented commentary and outside of a few grammatical changes,
all of the text is as I wrote it then warts and all including
warnings on real estate that proved to be over four years too
soon!
---
“Week in Review” 9/1/01
Market History
September 1 marks the one-year anniversary of the real market
top. From this day in 2000, it was truly downhill. The numbers
tell the story.
12/31/99
Dow Jones 11497 [DJ hits 11722 on 1/14/00]
Nasdaq 4069
The indexes then diverge significantly.
3/10/00
Dow Jones 9928 [-15% from the 1/14 high]
Nasdaq 5048 [All-time high]
Then the process reverses. Over the next five weeks the Nasdaq
swooned, culminating in a 25% decline for the week of April 10.
But the Dow rallied.
4/14/00
Dow Jones 10305
Nasdaq 3320 [-34% from the 3/10 high]
I hate to admit it, but it was at this point that I made a mistake. I
thought the drubbing in tech would equate to reduced consumer
spending (the wealth effect). I have learned one of those lessons
that make this game of life (as well as the stock market) so
challenging. I would now say that barring an external shock
(which is why we still focus on wild cards around here), it takes
a year for the majority of investors to materially change their
consumption habits after a large market move. And it was so
ingrained in our psyche to buy the dips last year, that folks
adopted the Alfred E. Neuman stance, “What? Me Worry?”
And for a while they were right. Capped off by a 5-week
winning streak for both the Dow and Nasdaq, the averages
settled as follows one year ago.
9/1/00
Dow Jones 11238
Nasdaq 4234
So in the case of Nasdaq we had our first Crash in the spring and
we were about to have our second. Both the Dow and Nasdaq
embarked on a 6-week losing streak from this point forward.
10/13/00
Dow Jones 10193
Nasdaq 3316
While the Dow then managed to rally back into the close of the
year, Nasdaq kept sliding.
12/31/00
Dow Jones 10788
Nasdaq 2471 [-42% from 9/1/00]
And now, to complete the year...
9/1/01
Dow Jones 9949 [-11.5% for the period 9/1/00-9/1/01]
Nasdaq 1805 [-57.4%]
September 1, 2000 was also a key date for some big-name
stocks. The following either hit highs that week or slightly
thereafter.
Intel - $76 (8/28/00)...today, $28
Corning - $113 (8/30/00)...$12
Oracle - $46 (9/1/00)...$12
Sun Micro - $65 (9/1/00)...$11
Nortel - $84 (9/1/00)...$6
EMC - $105 (9/25/00)...$15
Juniper Networks - $245 (10/16/00)...$14
Ciena - $151 (10/20/00)...$17
One year later, if you bought these issues near the respective
highs, the realization may be sinking in that you won’t see the
purchase price for a long, long time. And that may be impacting
your spending patterns.
Now what? First off, so much for relaxing the last week of
summer. I was hoping to “mail this in,” as they say. Instead, the
Street was in a surly mood and if you had to pick just one
culprit it was Sun Microsystems, which issued another gloomy
reading of today’s economic environment for technology,
particularly as it pertained to the weakening overseas picture.
We’re all desperate for that little ray of sunshine that will foretell
a brightening profits outlook. But with the ongoing overcapacity
situation in techland, lack of pricing power across all sectors,
burgeoning layoffs, rising bankruptcies, and falling portfolio
values, it’s no wonder that consumer confidence appears to
finally be sliding for real.
In about 10 days we will be entering the formal earnings warning
season for the 3rd quarter. The profits picture looks just as bleak
this go around as it did last reporting period.
There were a few positive sparks in some of the manufacturing
reports, but every week there is always something to hang your
hat on. The vast majority of the data, however, is negative and
what’s most important is investor psychology and consumer
sentiment, or, more specifically, real estate and consumer
spending.
I need to repeat something I wrote 7/7/01, as part of my “Black
Diamond” commentary.
“On numerous occasions I have argued that we would avoid
recession, only as classically defined...but that if housing ever
truly cracked, we’re talking Depression...yet all of us have
marveled at the strength of both housing and the consumer
during this increasingly wicked downturn. But whether it’s
housing or consumer spending that goes first, it really doesn’t
matter, for if one cracks the other will surely follow.”
This week we had the first revision of second quarter GDP.
Many of us were worried the original 0.7% number would be
restated to below zero. Alas, it remained positive, 0.2%. [Though
there is one last revision late September, so it can still go
negative.] Psychologically, a minus sign would have made for
even more depressing headlines, on top of stories about the Dow
collapsing below 10000.
I found it necessary to rewind the above tape, if you will,
because suddenly every one and their brother is talking about the
real estate bubble; except, it seems, the writer of a front page
story in this week’s Wall Street Journal who held the opinion that
current real estate values in many parts of this country were not a
concern.
With all due respect (long-time readers know what this is code
for), there comes a point with every product or investment where
you just have to stop and go, “Is a 2-BR condo in Manhattan
worth $2-$3 million?” Of course not. “Did Juniper Networks at
$245 and a P/E of a grillion make sense?” Of course not. To say
otherwise is simply adopting the role of the village idiot.
But the real estate issue isn’t just about value. If you can afford
the $18 million New Jersey estate I wrote of last week, you have
no reason to worry (or care). No, it’s the debt associated with the
vast majority of the real estate holdings many Americans have
acquired over the past 5 years in particular that is troublesome.
If the current economic slump were to continue much longer,
layoffs will gain momentum, the consumer will keep pulling in
his or her horns, and we will also finally see a conclusion to the
greater fool theory when it comes to real estate. And IF it were
to roll over, with some homeowners - already loaded with
consumer debt - suddenly facing negative equity on their prized
asset, well then it wouldn’t be inconceivable to envision a day
where we are all discussing something far worse than a
recession in manufacturing.
There is still hope we can somehow pull this out, however.
While I have my doubts as to its relevance these days, maybe the
Fed rate cuts begin to have a more positive effect (aside from on
real estate), and maybe Japan avoids its own D-Day, and maybe
Europe’s economies stabilize, and maybe a real truce takes hold
in the Middle East, and maybe we won’t have a flight out of U.S.
dollar assets, and maybe we will get real leadership from our
president.
Wow, that’s a lot of maybes. But sentiment is getting so awful
that it can be construed as a sign of a bottom. So we’ll end on an
upbeat note, and I now ask Jesse Jackson to help lead us all in a
cheer.
“Keep hope alive! Keep hope alive!”
---
“Week in Review” 9/8/01
Nowhere to run...nowhere to hide, part deux
Ah, the trials of a weekly column. How to keep it fresh and
enlightening, when all the editor sees is the same old doom,
gloom, and despair. Forgive me for injecting a bit of religion
here, but I was in New York this week and when I stopped in St.
Patrick’s I lit a candle for President Bush and prayed he would
be granted some wisdom to help lead us out of this mess.
Sure, on one hand we are simply paying the price for what will
go down as the biggest bubble, ever, and it’s only natural that it
would take years to work off the excesses. But while I’m as
guilty as the next guy in spending as much time as I do on
technology and Nasdaq (because that’s where all the money
flows were), we need to be reminded from time to time that tech
represents less than 10% of the overall U.S. economy. There is
another world out there, non-tech, that could use a little shot of
confidence. President Bush should come up with a real stimulus
program (not the tinker toy tax cut we’re receiving in the early
years of his first plan), demand national air time, get out the Ross
Perot charts (which were darn effective), and appeal directly to
all of us for our support. But, alas, he’s not the greatest
messenger (as Friday afternoon’s hastily called ‘state of the
economy’ proved)...and then my votive candle died out.
No, I certainly didn’t see us retesting the spring lows in our
equity markets, but now, forget the spring, the S&P 500 is at its
lowest level since the Russian / Long-Term Capital crisis of
October 1998. And it’s not just here in the U.S., all of Europe’s
major markets are at lows going back to the same period, too,
while Tokyo’s Nikkei index is chasing down the Dow like a
kamikaze pilot at the end of the Big One. As Archie might have
said, “Geezuz, Tojo, kill yourself in your own country, don’t take
the rest of us with you.”
On the economic front, early in the week the equity markets got a
boost when the leading gauge of manufacturing activity rose far
more than expected, signaling that inventories were successfully
being worked down and the pace of new orders was picking up.
Good. Maybe we’re near a bottom, we all thought.
But then the reading on non-manufacturing activity (i.e., the
service sector, which has a far greater real-life weighting than
the manufacturing figures) unexpectedly plunged. That set the
tone for the rest of the week.
The Dow closed at its lowest level since the spring, 9605, while
the Nasdaq lost another 6.5% to the 1687 level, just 50 points
from its April low. Even a blockbuster merger between
Hewlett-Packard and Compaq failed to generate excitement; in
fact, both stocks tanked.
And anyone seeking a glimmer of hope on the earnings front saw
that dashed, with comments from the likes of Ericsson (no
recovery for the mobile phone maker in 2002), Motorola (revised
revenue estimates down, again), and non-techs like Marriott
(which said its own business was plummeting).
Intel, however, basically reaffirmed guidance for the current
quarter, but when you’re now looking at $6.5 billion in revenue,
after you did $8.7 billion for the year ago period, and your stock
trades at a 50+ p/e multiple based on future earnings
expectations (which may still be way too high), how much of a
positive can it really be? And it wasn’t, as the stock went
nowhere after the news.
But on Friday it was the employment report that really shook
things up. The unemployment rate shot from 4.5% to 4.9%, the
highest level in 4 years. This headline grabbing event will do a
number on consumer confidence, just in time for the holiday
season. [Psst...I’ve decided I’m going to take some arts and
crafts classes and make my family and friends little boxes out of
popsicle sticks this year. I’ll make it up to them when the
economy recovers. Just don’t tell them I’m doing this.]
Lastly, there is this ever-present issue of debt. Individuals and
corporations are swimming in it. Forget the figures for space
junk you heard about this week, that doesn’t include all the paper
that is floating around. For example, Europe’s telecoms and the
$100 billion-plus they spent on wireless licenses for a new
generation of product that is years away, by most sane estimates.
Or bringing it closer to home, mortgage delinquencies, which are
rising at an alarming rate.
It’s getting bleak. Lord knows we could all use a rally. But the
media now has its hands around this story. It’s like throwing
chum to the sharks. We need leadership; in Washington, Europe
and Japan. Someone has to step forward. I’m waiting.
---
“Week in Review” 9/15/01
On Tuesday morning I turned on the “Today Show” in my hotel
room in Sturbridge, Massachusetts, to find that the lead story was
the return of Michael Jordan. “This is news?” I thought.
“Heck, I had reported it the day before in ‘Bar Chat,’ where it
belonged.”
I was heading up to Wellesley for a long-planned golf outing
with my friend Dave. As I flipped the radio dial while on the
Mass Pike, I settled on a country station. Within a minute the
traffic reporter said to the DJ, “Gee, I see that picture on your
screen. Is that the Trade Center?” “Something has happened,”
replied the DJ. “It appears a plane hit it.” My immediate
thought was I knew it was a beautiful day in the New York area
and that this was no accident. It was a terrorist attack.
I was soon calling my parents so they could describe what was
being shown on television. Both Mom and Dad were obviously
shaken. Then, “Oh no, there has been an explosion at the other
tower!” I hung up with them, sick to the stomach like every
American that morning, and proceeded to my friend’s office.
Shortly after my arrival the first tower collapsed and I knew it
was time to go home. I wasn’t angry, yet. I was scared .
---
But in listening to some of the comments discussing the financial
implications of the tragedy, I must say I’ve been disgusted.
Idiots (who will go nameless, for now) are saying things like,
“We’re all going to go out and buy a big ticket item to show the
terrorists they can’t beat down our spirit,” or, “It’s a long-term
buying opportunity.” This is nuts. We all want to buy
American, we all want to see the economy and the markets
rebound, but, now more than ever, as a people we need to face
the truth.
This is going to be a long, drawn out war, with many tragic
moments, and our emotions (and the markets) may swoon with
each one. This week, for example, as 17,000 passengers were
diverted to Gander, Newfoundland, I immediately thought of the
December 1985 accident there, which claimed 256 of our armed
forces. There will be accidents, there will be missions that may
not succeed, there will be more terrorist attacks around the
world; the point being that no one knows what the future holds.
As for the economy, as you listen to those who are saying the
future is bright, remind yourself of the tremendous dislocations
taking place, not just in the U.S. today, but around the world.
The most obvious example is the aviation industry. Midway, for
starters, shut down operations this week, throwing 1,700 out of
work. Every nation is going to be faced with the task of bailing
out their major carriers. The costs will be $tens of billions.
And you hear talk of the insurance industry and the losses they
face. One analyst came out yesterday and said, however, this is a
buying opportunity because once they get through this (stupidly
assuming Tuesday was it!) these companies will be able to jack
up their premiums. What if that were, indeed, the case? Who
bears the cost? Corporate America, that’s who, which then
passes it on, or, if not, sees reduced earnings.
Sure, we’re all going to go out and buy flags (and believe me,
I’m excited by this new burst of patriotism), and security and
defense companies should profit, but those who say the
American consumer will resume his or her normal buying
patterns simply don’t deserve one second of air time.
The premise of StocksandNews was to remind you that wild
cards were important for one reason; they could shatter
consumer confidence. And the lowering of confidence could
also have a big impact on the average American’s #1 asset, real
estate. Imagine what is going through the minds of people in the
New York area right now. It’s not just the high-end folks who
have been impacted. Those who died were from all walks of life.
And it’s not just confidence in America that has been shattered,
it’s the same story in Europe (where markets collapsed for a
second straight week), Canada, Mexico, and an already
crumbling Japan. As Morgan Stanley economist Stephen Roach
remarked “The (very) underpinnings of globalization” are at
risk.
We have to deal with facts, and when it comes to Wall Street the
fact is that right now preservation of capital is paramount. Don’t
look to pick a bottom. Don’t try to be a hero. Don’t go out and
“Buy American” if you are already loaded up to your gills in
debt and run the risk of losing your job. Take care of your
family first, and let President Bush and our military take care of
the killers.
Volatility is going to be the order of the day, but, again, ignore
those who would have you believe that times of crisis are always
buying opportunities. First, that isn’t the case. Second, we now
face a situation unlike any other in our history. We may go
months with largely positive news on the war front and
then...bam!..another attack that will drop spirits to new lows.
Life has changed, and not for the better.
As to the war effort, there could be some exciting positive
developments. For starters, we have a tremendous opportunity to
forge a new relationship with Russia. The U.S. needs its help
and we have common interests in this fight. The good work that
President Bush has previously done in creating a relationship
with President Putin appears to be paying off.
And the U.S. has a tremendous ally in Great Britain. Anyone
who didn’t cry when the “Star Spangled Banner” was played at
Buckingham Palace on Thursday clearly doesn’t have a clue.
But while others like Germany and Italy will surely aid our
efforts, we’re soon going to find out who our real friends are,
especially in the case of nations like France, which it needs to be
remembered hosted Syrian President Assad just this past June. I
know the French people are behind us, let’s see if the
government follows. And in the Middle East the Gulf War
coalition is a thing of the past. What real support will Egypt,
Jordan and Saudi Arabia give us as their own leaders fear for
their heads?
Yes, in the months ahead we’re all suddenly going to become
foreign policy experts. Just remember your editor was there first.
My challenge now is not just to be different, but to add value to
the debate.
---
“Week in Review” 9/22/01
Getting Back to Normal
Well, this past Monday night was the first one where I didn’t
dream of a chemical attack. Longtime readers will remember,
however, that I have often dreamt of North Korean rockets
slamming into Seoul, long before 9/11. But after just one
peaceful night I progressed to dreaming of all things nuclear. On
this I may not have been alone.
I also stopped crying this week, and I noticed a return to some
semblance of normalcy in the town where I work, one that is still
tallying up the dead. Life goes on and I hope I don’t offend
anyone when I say I’m ready for a little football.
But patriotism and a back to work, can do, spirit are one thing.
Wall Street is quite another. And looking back over the past
week, no one could have offered better advice than I did in my
last review.
“We have to deal with facts, and when it comes to Wall Street,
the fact is that right now, preservation of capital is paramount.
Don’t look to pick a bottom. Don’t try to be a hero. Don’t go
out and ‘Buy American’ if you are already loaded up to your
gills in debt...Take care of your family first.”
Here is just a sampling of some of the more idiotic statements
made either before trading resumed on the Street, or during the
week.
Senator Joe Biden [Sunday night on “Larry King,” forecasting
Monday’s market action] “After an initial decline, I predict the
Dow will bounce back the same day, just like Pearl Harbor.” Ah,
Senator, aside from the fact that it is not your place to make
market predictions, you also have your history wrong.
Jack Rivkin / Citigroup [On CNBC’s “Squawk Box,” before
Monday’s open] “You’re not going to make a lot of money in
your money market funds.”
Suzie Orman / self-made financial “guru” [Sunday on “Larry
King”] “I’m more optimistic than I was six months ago.”
Bill O’Reilly [Commenting Thursday on the “Imus” program]
“If (stocks) go down, that’s alright. I’ll take the hit because I
don’t want to give in to the terrorists.”
Richard Grasso / Chairman, New York Stock Exchange [At the
opening bell on Monday] “The long-term has never looked
brighter.” This was one of Grasso’s tamer remarks.
As I made clear last week, what upsets me is that these
comments are coming from individuals (excluding O’Reilly and
Biden) who have a tremendous amount of influence with the
average investor. Again, it is time for truth, just as President
Bush laid out himself on Thursday.
Of course we all believe in America, and capitalism, but there is
a way to address the ‘present’ with dignity, as well as caution.
Nasdaq Chairman Wick Simmons is one such individual. He
was a statesman this week. And I apologize that most of you
won’t understand why I’m attacking Richard Grasso, since many
of you don’t get to see him during the day, but he not only acts
like a used-car salesman, his search for soaring rhetoric (as if he
is running for political office) couldn’t be more inappropriate at
this time. Isn’t it amazing that Rudy Giuliani is receiving
universal praise, and there isn’t one line you can remember from
all of his news conferences and interviews? The mayor is the
very personification of dignity, humility and strength.
These shills have performed a tremendous disservice. And for
some of them like O’Reilly, it’s downright cruel to say, “I’ll take
the hit,” when you’ve got $millions still in your bank account.
So what did I do? I followed my own advice, of course. It is a
time to preserve capital.
While the market was closed I kept thinking of my junk bond
position, which was substantial. I always told you that while the
economy was softening, and my net asset value on the fund was
slipping, on a total return basis I was still confident as I awaited
an eventual economic rebound. But eking out positive growth in
the economy is far different from going negative, given the
handwriting that is now on the wall. The only prudent thing to
do was exchange my position into the money market option,
which I did at my first opportunity, Monday. I knew I would
take a hit to the NAV as positions were marked down following
the 4 days without trading, but I lost less than 1%. Since my
move, the fund declined an additional 2.5%. Other, less
conservative junk funds, lost far more. As of Monday evening I
was thus 75% cash, 25% equities.
On Tuesday I sold my small California energy play, at a nice
profit, but due to lack of liquidity it wasn’t easy. At the end of
the day I was then 85% cash. And that’s where I sit today,
though because of further depreciation in my remaining holdings
it’s closer to 87%.
What I’m left with is my Nasdaq QQQ position (about 4%) and a
natural gas play, 9%. This latter stock I first sold last February at
$63, bought it back a few weeks ago at $26, and now it’s $20.
[For new readers, I do not give individual names QQQ is an
index play.] I am sticking with the oil stock come hell or high
water. I will unload the QQQ (purchased when Nasdaq was
around 1950) by yearend to book the loss.
Some of you may have wondered why a patriotic rally didn’t
unfold. The market hates uncertainty, and we have it today in
spades. Not only are we soon to be enveloped by the “fog of
war,” but we also can’t effectively gauge the economic impact
yet. The terrorists planned the attack long before the economy
was sliding. They were originally out to kill innocent civilians.
It is not an overstatement to say they also killed the global
economy.
Nonetheless, there are many responsible voices out on Wall
Street now proclaiming that after we have this severe decline in
economic activity, the economy will roar back, largely because
of all the economic stimulus that will be handed out by Congress
for the rebuilding effort, as well as the massive amounts of
liquidity that the Federal Reserve has injected into the
system in other words we may have a “V-shaped” recovery.
I want to believe this, but it is far too early to tell. There are so
many moving parts, in both the war effort as well as the global
economy, that I must continue to take my own advice. I can’t
pick the bottom and I’m preserving capital as best as I can. If the
market rallies back at least my remaining equity positions will
participate. *And when I develop a sense that the economy is
close to rebounding, I will go right back into the junk fund and
add to my energy position.
We all need some time to think, collect as much information as
possible, and then make rational decisions. It’s been difficult to
do this these past two weeks. We’re all beat, tired, wrung out.
Unfortunately, the markets wait for no one; they have no
timetable. Or, as Wick Simmons said, “Markets will be
markets.” That’s the reality of it all.
Street Bytes
--The major market averages suffered declines not seen since
1933, in the case of the Dow Jones, off 14% and a record 1,369
points (to 8235); 1987 for the S&P 500, off 12%; and spring of
2000 for Nasdaq, off 16% (1423). The big issue is how do you
price individual equities in this New World? Wave after wave of
earnings warnings hit the Street. And traders, the most impatient
folks in the world, want immediate gratification on the war front.
---
Following are the returns for the past two weeks. The first figure
for the stock returns is for the single day of trading, 9/10 the
second for last week.
Gold closed at $280 (9/14) $291 (9/21)
Oil, $29.76 (9/14) $25.97 (9/21)
Returns for the week, 9/10-9/14 9/17-9/21
Dow Jones -0.0% -14.3%
S&P 500 +0.6% -11.6%
S&P MidCap –0.7% -13.5%
Russell 2000 -1.0% -14.0%
Nasdaq +0.5% -16.1%
Returns for the period, 1/1/01-9/21/01
Dow Jones -23.7%
S&P 500 -26.9%
S&P MidCap -21.8%
Russell 2000 -21.6%
Nasdaq -42.4%
Bulls 39.6% (9/14) 35.7% (9/21)
Bears 36.5% (9/14) 37.6% (9/21)
---
Post-script: As it turned out, while the markets began to rally
back strongly, the averages later resumed their swoon and
wouldn’t bottom until one year later, Oct. 2002.
9/21/01
Dow Jones 8235
S&P 500 965
Nasdaq 1423
10/4/02
Dow Jones 7528
S&P 500 800 .officially bottomed on 10/9 at 776
Nasdaq 1139
Of course in the fall of 2002 there was increased talk of war
against Iraq. It proved to be a good time to buy, even if the war
effort itself would falter badly after the initial success.
---
Wall Street History returns next week.
Brian Trumbore
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