Another Black Monday Hiding In The Bushes?

For those not around for the original Black Monday, lemme fill you in. First, digest this chart on gyrations in NASDAQ between 2000 and 2015. This index traced a gigantic necklace formation. It plunged from nearly 5,000 in 2,000 to under 1,000 a year later, before recovering.

NASDAQ fought its way back to around 4,500 over10 years.

Consider, the precondition of Black Monday in 1989 was the market’s 1929 crash, denoted then as Black Friday. The market then sold at high price-earnings comparables. Comparatively, the art scene then was equally bubbly. Players were the old Robber Barons: Andrew Mellon, Jules Bache, Solomon Guggenheim, Otto Kahn, Benjamin Altman and Henry Frick.

Even in our 1980’s, if your fortune topped 250 million, you made the Forbes 400 list. Speculation in art during the twenties was as frenetic as today and in Black Monday’s time. I turned down a bunch of Basquiats for $2,500 apiece in 1961 which now bring in $100 million each at auction. Art can run better than venture capital.

Think of it! I would no longer need to read boring research reports, and lawyerese prose in proxy statements. Price compression around 20%, was an overnight phenomenon you lived with.

Actually, our Gilded Age lasted until 2000. Everyone still believed in the magic of technological leverage until the ugly recession hit the country in 1973. All this despite the blooming of the Internet and cellular telephony. Valuation excesses weren’t fully purged until the market’s wipe out of 2008-09. Too many banks had believed their own mumbo-jumbo on financing home mortgages with skimpy backing. Nobody remembers the last week in July, 2000, when the market sliced 25% off tech houses like Applied Materials, Nokia and Texas Instruments.

Black Monday stands alone for its overnight compression of stock prices. The market tapped out on August 26, 1987 (my birthday) and fell steadily for weeks. Interest rates were rising, the economy, peaking and macro stats wobbling. The SEC focussed on insider trading as a major gut issue. (What nonsense!) The Japanese Minister of Trade wagged his finger at us. Called the U.S. soft on trade, undisciplined.

Two decades, hence, the Japanese still hadn’t got over their overinvestment in capital goods and real estute. They had buried losses carried on their books for decades.

Actually, Black Monday was a simplistic event, hard on everyone’s pocket book and self-esteem. This was an over-the-weekend event that blindsided all of us on Monday morning.

I was in the throes of my hostile takeover of Caesar’s World. Overnight, my cost of financing preferred stock moved from like 7% to 9%.

As for Black Mondays, the last week in July 2020 was more punishing. The market withered some 25%. Even my Cisco was taken out and shot. The upending of the Internet was punitive and a widespread wipe out.

Warren Buffett in one of his 30-page tour d’horizon in Berkshire Hathaway’s annual reports, early nineties, disposed of the efficient market concept in one sentence, referring to Black Monday when the market chopped off 22% overnight, and came near to imploding, obviously inefficient. Academics wrote dozens of papers, rationalizing this event. They surely ring hollow and foolish.

Black Monday shouldn’t have proved such a surprise. After all, the market had sustained several 20% collapses over the past 20 years. All that made this one so notable was its overnight compression while the city slept.

Was it down 19% or 20%? No matter. Elements rested in place for a substantive market correction: interest rates stood too high, and so did inflation. Corporate earnings wobbled. The price-earnings ratio for the S&P 500 stood over 20 times forward 12 months earning power?

Does all this sound familiar today? It’s what we’ve got percolating nowadays. My only surprise is how does the market stubbornly hang in? I am at 50% invested, mainly growth stocks, like Apple and Microsoft. My energy positions, Occidental and Enterprise Products Partners still scrappy. How many major market capitalization’s like these two, sell under 10 times earnings and seem viable?

Compare our frothy market with the one in 1982 when Paul Volcker destroyed valuation by taking interest rates up to 15%. The punch bowl was snatched away. From 1983 to Black Monday late in 1987, the market gathered speculative momentum. The system had gone LBO crazy while price-earnings ratio’s levitated. LBO money costs you over 8%. Our U.S. Treasury mulled disallowance of interest expense on deals. Wall Street talked them out of such insanity. Could another Black Monday erupt? Sadly, many of our macro conditions easily rationalize such a move.

And, yet, in America optimism pays off. Look at Buffett's portfolio. Stocks do outperform all other assets, even studded with Black Mondays, past century.

I’d miss all the swinging dicks who normally made markets in 100,000 share lots. Morning of Black Monday, they huddled by their banks of phones, afraid to pick up callers.

Is this how capitalism ends? No swinging dicks chattering at their work stations? Trading floors big as football fields emptied and silent, forlorn.