Wall Street History

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Wall Street History

08/10/2007

August 1982, Part II

With the 25th anniversary of the market low for the Dow Jones
industrial average at hand, Aug. 12, 1982, we continue our story
of the background behind this historic occasion; accessing the
archives of the New York Times for an overview and, perhaps, a
nugget or two that could come in handy as you manage your own
portfolios down the road.

To refresh your memory, I’ll repeat the numbers from last time.

Fri. July 30, 1982 Dow Jones Industrial Average closed at 808.

Aug. 2 822
Aug. 3 816
Aug. 4 803
Aug. 5 795
Aug. 6 784

Aug. 9 ..780
Aug. 10 779
Aug. 11 777
Aug. 12 776*
Aug. 13 788

Aug. 16 792
Aug. 17 831
Aug. 18 829
Aug. 19 838
Aug. 20 869

Aug. 23 .891
Aug. 31 .901
Sept. 30 .896
Oct. 11 1012
Oct. 29 ..991
Nov. 30 1039
Dec. 31 1046

Last week I wrote of the bottom. Continuing, we look at the
initial stages of the rally.

Aug. 14 reported by Alexander R. Hammer

“The stock market broke its eight-session losing streak yesterday,
as the Dow Jones industrial average surged 11.13 points, to
788.05, mostly on investors’ hopes for lower interest rates.

“ ‘The market was stimulated today by the sharp rally in bond
prices, hopes that the discount rate would be lowered and by
President Reagan’s statement that the recession has bottomed,’
said Charles Jensen, chief technical analyst of the MKI Securities
Corporation.

“After the close of trading, the Federal Reserve did cut its
discount rate, the rate at which it lends to banks and other
financial institutions, to 10 percent from 11 percent. Within
minutes, several major banks lowered their prime rate too, to
14 percent from 15.”

[Ed. As I mentioned last time, Gulf Oil pulled its bid for Cities
Service Company (Citgo) Aug. 6; for the record, after the close
on Aug. 13, Occidental Petroleum made a $50-a-share offer for
Cities Service, with the latter having closed at 33 on 8/13
before trading was halted.]

Aug. 14 reported by Thomas J. Lueck

“The Federal Reserve Board yesterday lowered the interest rate
that it charges for loans to banks and financial institutions by
one-half percentage point in another effort to encourage lower
interest rates and stimulate the economy.

“The reduction in the Federal Reserve’s discount rate, to 10
percent from 11 percent, was the third half-point cut in six
weeks, and resulted in the lowest charge in nearly two years.

“ ‘The Fed is setting a clear policy of being more accommodative
and injecting more reserves into the economy,’ said Jeffrey
Leeds, money market analyst for the Chemical Bank .

“The prime rate had declined from 16 percent in mid-June to
15 percent in the first two weeks of August .

“The latest reductions in both the prime and the discount rates
were clear signs that the cost of money has continued to fall in
recent weeks, particularly the important Federal funds rate .The
funds rate stood at 10.25 percent yesterday, down from the 14
percent level in June .

“The Federal Reserve’s reduction in its key lending rate came
two weeks after it lowered the rate to 11 percent from 11
percent, and 24 days after it made a half-point cut to 11
percent.

“As it has in the two recent reductions in the discount rate, the
Federal Reserve yesterday said its action was prompted by the
modest growth in the money supply in recent weeks, which has
given the central bank leeway to ease up on a tight money policy
that kept interest rates relatively high by limiting the amount of
bank credit available for private and government borrowing.

“Economists and money market analysts said yesterday’s drop in
the discount rate confirmed a growing belief that the Fed has
now made stimulating the economy a high priority.”

Aug. 14 reported by William G. Shepherd Jr.

“The last leg of a bear market is often crushing – a swift plunge
in stock prices on heavy volume that pounds small investors and
institutions alike, leaving them with big losses and shattered
emotions. The effect can be cathartic. But in the vacuum that
remains, investors can begin rebuilding their confidence.

“That last leg is exactly where the stock market now seems to be
heading. Indeed, it is hard to find anyone on Wall Street these
days who does not believe, or at least suspect, that the bear
market is moving into some sort of climactic phase that will
purge the investment community of its pent-up fears of economic
collapse.

“In the past two weeks, all the market averages have plunged to
new lows as Wall Street, beset by cruel economic news from all
sides, has time after time been unable to mount a sustained rally.
That is a discouraging omen, an indication that the bottom has
not been reached, many securities analysts say, and a sign that
even the most steel-willed optimists may be about to throw in
their towels.

“ ‘The market’s going to take the ultimate dive to culmination in
the next few weeks,’ said James L. Freeman, director of research
at the First Boston Corporation. ‘Batten down the hatches.’”

[Ed. Ah, Mr. Freeman? We just hit the bottom.]

“Though the consensus is that the market is in for a tailspin,
there is no clear idea on how to play it and confusion seems to be
the order of the day. ‘Nobody can tell if we’re starting a
depression or ending one,’ said a mutual fund manager who
asked to remain anonymous. ‘The market is one giant gamble.’

“Many bulls – while they concede that a sharp decline is likely –
are acting on the longer-term assumption that a boom is coming
on the other side. They are determined ‘to tough it out,’ said
Robert J. Farrell, chief market analyst at Merrill Lynch

“It is just that group of optimists, Mr. Farrell said, that must be
driven to sell before the market hits bottom. Mr. Farrell calls it a
‘capitulation’ phase – a time when everybody simply gives up.
‘It doesn’t have to be a lot of screaming and 100-million-share
days,’ he said. ‘It can be a disinterest in stocks and a preference
for something else.’ As Mr. Farrell figures it, a final sell-off
could come by November and maybe sooner.

“But a cardinal rule of the stock market is that what most people
expect usually does not happen. In 1974, when panic selling was
widely anticipated, one of the longest and most severe bear
markets ended in more of a whimper. The last leg of the bear
market was spread in relatively orderly fashion over nearly three
months. The worst market debacles – in 1929, 1962, and to a
lesser extent in 1970 – have always been those that caught
investors off guard.

“The most recent example of expectations betrayed has been the
market’s failure to react to declining interest rates. Throughout
the spring and the first part of the summer, the prevailing
wisdom was that once rates began to come down stock prices
would shoot up. Short-term rates did begin to come down in late
July, and since then yields on three-month Treasury bills have
dropped to 9.35 percent from 12.5 percent. But the market has
continued its slide.

“This has utterly confounded the theorists. The more agile
among them quickly concocted two explanations. One is that
they meant long-term rates, which have not declined yet. The
other explanation is that credit is actually tighter now because the
jittery banks do not want to make any more bad loans.

“Barton M. Biggs, the portfolio strategist at Morgan Stanley &
Company, is probably closer to the mark. ‘I don’t know what’s
going on,’ Mr. Biggs said in an outburst of candor. ‘The
market’s reading tea leaves.’

“Even more disorienting is what investors perceive to be the
disarray in economic policy and the abandonment of economic
leadership in Washington: The inability of anyone to cut the
Federal budget, the flight of economic advisers from the Reagan
Administration, and most recently, President Reagan’s sudden
repudiation of his own tax cuts in favor of a $99 billion tax
increase.

“The proposed tax increase is having an especially insidious
effect. Bewitched by the implications of large budget deficits
and high interest rates, Wall Street now has to worry about the
proposed remedy, too.

“As if this were not enough, the market has been buffeted in
recent weeks by a sobering series of economic developments:

“* The economic upturn is nowhere in sight. It did not appear in
the second quarter of the year, as many people had hoped. It
does not seem to be appearing in the third quarter, either. ‘My
analysts come back from visiting companies,’ said John R.
Groome, senior vice president in charge of equity research at the
U.S. Trust Company, ‘and everybody’s despondent. No orders.
No sign of an upturn.’

“* Corporate profits are continuing to slide, increasing the
likelihood that companies will have to cut their dividends. A
recent Standard & Poor’s survey of 885 companies found that
corporate earnings sank 16 percent in the second quarter
following an 11 percent drop in the preceding three months.

“* Gulf’s withdrawal of its bid for Cities Service – and the
subsequent collapse in Cities Service shares – did not just
produce huge losses for the professional arbitrage community; it
also bashed thousands of amateur speculators and a number of
brokerage firms that had risked their own capital in Cities
Service stock. Coming on top of the public’s withdrawal from
the market during the past year, which dried up commission
income, that blow has produced considerable alarm in the
brokerage community .

“* The trouble is spreading abroad. Following the mystery-
drenched collapse of Italy’s Banco Ambrosiano, Germany’s
mighty AEG-Telefunken suddenly declared bankruptcy.
Meanwhile, the only rising stock markets left, in Japan and
Britain, started falling – suggesting that the slump is becoming
worldwide .

“Considering all that has happened in the past months it is
astonishing that the market has not fallen further. On average,
bear markets since World War II have lasted 15 months, and
stocks have lost roughly 25 percent of their market value. The
current bear market is far longer in duration; now in its 21st
month, it is only a few weeks from surpassing the 1973-74
debacle.

“But so far the decline has been comparatively shallow. The
familiar Dow Jones average of 30 industrial blue chips, which
peaked at 1030.98 in April 1981, is down only 24 percent. The
broader-based indexes peaked late in November 1980, amid the
euphoria following Ronald Reagan’s election. They have fallen
further, reflecting greater demolition among small stocks. The
S&P 500 is down 27 percent By contrast – although the
recession was not nearly so brutal – prices in 1973-74 fell 47
percent.

“Some ways of looking at the market, however, suggest that it is
on a par with the 1974 bottom. One yardstick is corporate
earnings. When the Dow Jones industrials hit 577.60 in 1974,
their price/earnings ratio was 5.8. Today, with the Dow 200
points higher, the P/E ratio is only 6.5,

Aug. 18 reported by Michael Quint

“High interest rates, which have stymied economic growth,
broke sharply yesterday, sending the stock market in a burst of
euphoria to its largest one-day gain in history. The volume of
trading was the second largest on record.

“Bond prices also soared as hopes grew that a recent plunge in
interest rates for Treasury bills and other short-term borrowings
had spread to the long-term markets that finance job-creating
investment in housing and new plants. The rate decline was
attributed to the persistent recession and the prospect of
shrinking demand for business loans .

“The Dow Jones industrial average jumped 38.81 points, a record
rise, to 831.24. Yesterday’s volume of 92.86 million shares
came within 20,000 shares of the record set in January 1981.

“ ‘Investors apparently are finally convinced that interest rates
will now continue their recent decline,’ said Michael Metz, vice
president of Oppenheimer & Company.

“ ‘A continuous flow of bad news about the economy finally
convinced people that rates will come down,’ said George S.
Johnston, president of Scudder, Stevens & Clark.

“In the market for short-term credit issues, Treasury bill rates fell
about half a percentage point – to 8.1 percent for three-month
bills and 9.7 percent for one-year bills.

“Traders said the surge in both the stock and bond markets was
fed by a turnabout on the part of Henry Kaufman, the chief
economist at Salomon Brothers, the investment banking concern.
Mr. Kaufman was well known in the financial community for his
predictions that interest rates would rise later this year.

“Yesterday, however, Mr. Kaufman said his earlier predictions
would not come true because the weak economy would reduce
business demand for credit, leaving more room for the Treasury
to finance the still huge Federal budget deficits.

“ ‘A smart recovery in economic activity in the second half is not
likely to materialize,’ Mr. Kaufman said in what he called a
‘fresh look’ at the economy .

“ ‘A lot of people are almost sycophantic followers of Kaufman,’
said one trader in government bonds yesterday, ‘and I would
have to characterize today’s activity as panic buying at almost
any price.’

“Another trader explained that Mr. Kaufman and Albert
Wojnilower, an economist at the First Boston Corporation who
Monday changed his forecast to lower rates, ‘both have
tremendous psychological impact on this market.’ The trader
added, ‘They have been more right than wrong for a few years
now.’ .

“Mr. Kaufman said that yields on long-term Treasury issues
might fall to 9 percent or 10 percent in the next 12 months, while
the rate for Federal funds – overnight loans between banks –
might fall to 6 percent or 7 percent.”

Aug. 21 reported by Alexander R. Hammer

“The Dow Jones industrial average surged a further 30.72 points
yesterday, finishing the session at 869.29

“ ‘The raw power of this week’s advance intensified today as
stepped-upped buying from individuals and foreign investors
joined the large institutions in further lifting stock prices,’ said
Robert H. Stovall, director of investment policy at Dean Witter
Reynolds Inc .

“For the week, the blue-chip average climbed a record 81.24
points. The previous record of 73.61 points was set in the week
ended Oct. 11, 1974, on reports that the economy was beginning
to recover.”

Aug. 21 reported by Douglas Martin

“ ‘We are embarked on a huge bull market,’ said Howard Winell,
executive vice president of Bostian Research Associates, a New
York financial analysis firm.

“The day began on an optimistic note as investors welcomed the
passage by Congress of the $98.3 billion tax bill that President
Reagan has said was necessary to reduce interest rates and insure
economic recovery .

“The net effect, analysts and industry officials said, appears to
have been a lifting of the gloom that has clung to Wall Street for
more than a year and a half .

“ ‘It’s a momentary outburst, not necessarily justified by the
facts, of the strength of the American populace and industry,’
John H. Gutfreund, chairman of Salomon Brothers, said.”

Aug. 24 reported by Vartanig G. Vartan

“The stock market extended its strongest rally on record
yesterday as the Dow Jones industrial average rose to an eight-
month high .

“The Dow Jones industrial average rose 21.88 points, to
891.17 .

“Analysts said that if the market’s remarkable performance
continued, it would signal a recovery for the nation’s slack
economy for early in 1983. In the seven economic recoveries
since World War II, a rebound in stock prices has preceded the
start of a business expansion by anywhere from three to seven
months. The average was six months.

“Most Wall Street professionals now believe that the stock
market registered its low for this cycle on Aug. 12, when the
Dow industrials reached a 27-month low at 776.92 .

“ ‘It was precisely the fear of an ominous recession ahead, along
with recent strains in the nation’s financial structure, that caused
the Federal Reserve to encourage sharply lower interest rates,’
said Howard J. Abner, chairman of Abner Herrman & Brock
Inc., a brokerage firm. ‘High rates had choked the economy.
Now the Fed has turned its guns from fighting inflation to
fighting recession.’”

Well, the market had indeed bottomed; not just for that cycle but
forever, it would seem.

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I will have a brief piece next week on volatility. The following
one, a report from the farm as I will have spent some time in
Iowa.

Brian Trumbore

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