October 19th, 2012

Echo of the 1987 Crash

It was twenty-five years ago but it still seems like it was only yesterday.  I didn’t have much money in the market during the ’87 Crash but it was all the money I had saved.  It was a time when it wasn’t as easy as it is now to get up-to-the-minute stock market news and quotes.  It was before the Internet and CNBC so the only way of obtaining that information was either by calling your broker, listening to radio news or waiting for the evening newspapers.

Nevertheless, we some how found out that the market was in free fall.  I somehow got hourly updates and remember running down to my bosses office to update him on what I had learned.  He had much more invested than I and his face was ashen.  By the end of the day, we finally learned that the market had closed down 22.6%, it’s largest ever one-day decline.  All we could do was just pace back and forth in his office, wondering whether we we witnessing the “end of the economy”.

Today is the anniversary of that one-day crash.  And today, we’re experience an echo decline triggered primarily by Google’s announcement about a shortfall from expectations based on disappointing results of their advertising business due to a shift away from desktop to mobile computing and internet access.  In 1987, the focus was on the newly introduced PC’s and what was anticipated to be a revolutionary implication on traditional business.  Twenty-five years later, we see that the world has been markedly been impacted.

As I note in my book, Run with the Herd, the market has suffered through 10 bear markets since WWII and discusses in detail the 4 during the last 40 years.  But one of the best ways of putting the crash into perspective is to read some of the comments of key players in 1987 (these quotes are from my book):

  • “Technically, the crash of 1987 bears an uncanny resemblance to the crash of 1929. The shape and extent of the decline and even the day-to-day movements of stock prices track very closely.” – George Soros in “The Alchemy of Finance”
  • “The market crash of 1987 caught most economists, scholars, and investment professionals by surprise. Nowhere in the classical, equilibrium-based view of the market so long considered inviolate was there anything that would predict or even describe the events of 1987.” – Robert Hagstrom in “Investing, the Last Liberal Art”
  • “The President [Ronald Reagan] has watched today with concern the continued drop in the stock market….consultations confirm our view that the underlying economy remains sound.  We are in the longest peacetime expansion in history.  Employment is at the highest level ever.  Manufacturing output is up. The trade deficit, when adjusted for changes in currencies, is steadily improving. And, as the chairman of the Federal Reserve has recently stated, there is no evidence of a resurgence of inflation in the United States.” – White House Statement released on October 19, 1987
  • “I have never experienced anything like this, so it is difficult to have clear vision. I don’t understand it in terms of the fundamentals of the economy” – Robert Allen, president of AT&T, October 20, 1987
  • “The borrowing has to stop. The market slide was a shot right between the eyes that had better wake us all up to simple fact that we can’t keep romping forever on borrowed money.”  – Lee Iacocca, Chrysler Corp Chairman, October 20, 1987
  • “It’s the nearest thing to a meltdown that I ever want to see. We were fortunate this occurred when the American economy is very stong.” – John J. Phelan, Chairman of the NYSE, October 20, 1987
  • “They should bar buying and selling by programming. They can’t stop the selling once it gets going, it’s just computers selling to computers. It became a gamble, not an investment anymore. All those guys with 65 credit cards and Porsches who think they are all geniuses at 25 – now see what’s happened.” – Alexander Kopelman, 80 year old Florida man, October 20, 1987
  • “I told my clients that it was a sucker’s market (two days after the crash). A week ago, I would have taken a gamble on anything that looked promising when I was dealing for my own account or for some of my family members. I had been spoiled by the bull market, I never knew anything else. But I became a cynic and a skeptic in a hurry.” – A broker, October 23, 1987
  • “I will tell you that, prior to the opening of the market, Mr. Phelan (Chairman of the NYSE) and I had a conversation where he advised me that there was an inordinate number – “unbelievable” I think was his word – of sell orders coming into their market. That was like an hour before their opening on Monday. So we saw it coming, but who knows who pushed the button to make it happen.  I think that button was pushed a million times by a million people.” – Leo Melamed, chairman of the Chicago Mercantile Exchange, October 28, 1987
  • “Investors had expectations before the 1987 crash that something like a 1929 crash was a possibility, and comparisons with 1929 were an integral part of the phenomenon. It would be wrong to think that the crash could be understood without reference to the expectations engendered by this historical comparison. In a sense many people were playing out an event again that they knew well.” – Economist Robert Shiller
  • ” So improbable is such an event that it would not be anticipated to occur even if the stock market were to last for 20 billion years, the upper end of the currently estimated duration of the universe. Indeed, such an event should not occur even if the stock market were to enjoy a rebirth for 20 billion years in each of 20 billion big bangs.” – Mark Rubinstein, economist in “Comments on the 1987 Stock Market Crash: Eleven Years Later”
  • “Those who thought Black Monday on 1987 was the most frightening day of their lives are forgetting those first few hours of Terrible Tuesday, when the market as we know it simply ceased to exist…. In fact, the dirty little secret of that Tuesday morning is that the screens simply weren’t functioning. It was like the Wild West out there. Anything you tried to buy simply went up ahead of you until you caught it and then it would come down so fast that you could lose hundreds of thousands of dollars in mere seconds. I retreated to the sidelines rather than endure that kind of punishment.” – James J. Cramer, founder of theStreet.com and CNBC personality

Some of these personalities are still around.  It would be interesting to know both their view of the 1987 crash from today’s perspective and their view of today’s sell-off due to what today’s talking heads call the death of desktop computing and click advertising.

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August 10th, 2012

GOOG to 1626?

There couldn’t ever have been a more interesting and exciting IPO than the GOOG (Google).  I last focused in on GOOG back on June 12, 2007 when I wrote:

As a precursor of its novel approaches to problems, whether technical or business, August 19, 2005 was GOOG’s on NASDAQ through a little-known Dutch auction process with the stated intention of attracting a broader range of investors than the usual IPO. Almost immediately, the stock started marching to new high territory…..The Google lesson is that the best strategy (and the one taking the most discipline and guts) is to stick with this sort of stock where, regardless of external market factors (note the S&P corrections in Aug-Oct 2005, May-August 2006 and Feb-Mar 2007) is early enough in its product and business life cycle that it only suffers relatively minor retreats.”

GOOG was 511 on that date and it traded five months later at 741.  But that was the end.  Since 2007, the stock has been stuck in a multi-year trading range of approximately 433-633 (excluding its major correction during the Financial Crisis Crash of 2008 when it fell briefly to 250):

The question today is whether GOOG will join other mega-cap tech stocks and break across long-term resistances like IBM, AMZN(click on symbol for chart)?  There are only two possibilities: the horizontal channel morph into a double-top carrying the stock back to its IPO price of nearly 10 years ago (or at a minimum to near the 2008 lows) or it will cross the resistance and launch a new multi-year bull move.

I’m guessing that it’s the latter.  With all the sidelines money that is going to need to find a relatively low risk home there aren’t many stocks along the lines of GOOG with a sufficiently large enough capitalization that can absorb the money flow.  As a matter of fact, if AAPL falters on the introduction of its iPhone 5, fails to introduce a new T.V. or has some other disappointments in its product rollouts then some of the money that has been riding the AAPL gravy train when Jobs was running the company may look to GOOG to again be the tech standard bearer.

AAPL has significantly outperformed GOOG over the past 10 years but it may be GOOG’s turn to play catchup.  If the market does successfully approach and then cross into all-time new high territory then I wouldn’t be surprised to find GOOG more than doubling to 1626 over the next couple of years..

June 12th, 2007

Life Cycle Investing: Google (GOOG)

Google (GOOG), although more recently an IPO than Apple, has had a more spectacular and, so far, more consistent trading history than AAPL.

As a precursor of its novel approaches to problems, whether technical or business, August 19, 2005 was GOOG’s on NASDAQ through a little-known Dutch auction process with the stated intention of attracting a broader range of investors than the usual IPO. Almost immediately, the stock started marching to new high territory. It didn’t hurt that the market, as measured by the S&P-500 was also breaking through some resistance and about to make it’s assault on it’s all-time high resistance trendline. The stock nearly doubled within less than 60 days to 195.

GOOG formed an unusual, but very bullish, upward-sloping consolidation channel that, throughout its formation and until the breakout, was difficulty isolating with much confidence. In fact, there was a failed breakout about midway through the pattern.

But it was ultimately resolved with an upside gap breakout.

Ultimately there was a positive breakout leading to another 100-point, 50% increase in the stock to 317. And, again, a second upward-sloping consolidation channel was formed and, again, there was another gap breakout leading to a third 100 point increase, or 33% to 413.

On a longer-term perspective of the GOOG chart since IPO shows distinctly the channel from the IPO till it touched the upper boundary of the channel at the beginning of 2006, about 475% higher than the IPO and, along the way, the 2 upward-sloping consolidation channels about 100 points apart. This is the point of my first GOOG post on November 25, 2005 in which I wrote:

“There’s a universe of over 8000 individual stocks and EFT’s to chose from, many about to make significant gains by breaking through resistance trendlines and, therefore, have greater profit opportunities. Anyone putting money into GOOG at this time would, at worst, be assuming significant risk or, at least, incurring opportunity costs.”

Over the past 18 months later since that posting (and since peaking at 475 a weeks later in January 2006), GOOG has been struggling to maintain its upward momentum and has merely matched the S&P-500. While the S&P increased 17% between January 31, 2006 and June 12, 2007, GOOG increased 18% and has been much more volatile.

The stock is poised to breakout of this long-term multi-year consolidation; it is currently working its way through a retracement test of support at the previous all-time high. The Google lesson is that the best strategy (and the one taking the most discipline and guts) is to stick with this sort of stock where, regardless of external market factors (note the S&P corrections in Aug-Oct 2005, May-August 2006 and Feb-Mar 2007) is early enough in its product and business life cycle only suffers relatively minor retreats.