Let Somebody Else Stir The Pot

When I reviewed my charts on householder’s share of equity markets, I was surprised to see how low it gets when recessions hit the country. Our banking system usually goes kaput then. The Fed steps in, finally,  and transfuses liquidity to keep business flowing. 

Financial markets overreact. Banks trade down to book value from 1.5 to 2 times book. Their Preferred stocks like Bank America’s trade down almost off the page at 5 bucks. Operators like Warren Buffett then get busy. Warren made billions on his Bank of America warrants play after BAC’s preferred stock hit the canvas. 

I bought some BAC Preferred stock at $5, too. But Warren is braver than yours truly who scored in the mid-seventies. I did too buy some Lehman Brother’s equity at $5 a share and watched it erode to zero despite its decades history of operating soundly. Its commercial real estate never recovered from the 1973-’74 deep recession. 

Today, while I watch the Street’s operators fight over Macy’s, I stay disinterested. But, I do own my fill of racy paper starting with American Airlines and going on to Enterprise Product Partners and Citigroup. The heart of my portfolio rests in Microsoft, Goldman Sachs and Amazon. These are all staunch properties that lead their sectors and are readily analyzable and modeled. They can go down, too.

The following chart depicts the enormous holdings in equities by households. In market sell offs, household  weighting in financial assets does run down close to 10% of assets and as high as 29% in the good times when speculation is in the air. 

In market panics there can exist no reasonable bids for even respectable stocks. We used the expression “Who cares? Nobody cares!” When speculation is avid, household ownership of stocks pushes 30% of their financial assets. I’ve seen a change of 0.1% in employment stats touch off a hundred point chop to the market. 

There’s an eerie synchronicity to this chart on household equity holdings. When times get rocky, household equity drops from 30% to 10% in succeeding cycles since early postwar years. It repeated itself in the mid-seventies and then nearly symmetrically in the banking crisis of 2009-2010. Our major banks practically destroyed themselves when they dealt out home mortgages on collateral that was fictitious, manufactured by our banks and their mortgage seekers. 

In securities markets, more and more, small differences in input cause enormous reactions in share prices. A butterfly flapping its wings in China can cause enormous change in stock prices on our Big Board here. No analyst wishes to risk his reputation on being wrong for even a day. 

I remember John Kennedy’s face-off with Roger Blough over U.S. Steel’s price hike on steel. The market went crazy until Jack Kennedy’s father got John to tone down his putative response. Economists do hide with their wavering “on the one hand, on the other hand” nonsense. The economy in their eyes is more likely than not to grow at 3% per annum until the end of time. 

It never does so. 

For years, analysts underplayed earnings power of Goldman Sachs (I still own it) while avoiding dire wordage on tech houses falling apart like Intel and decades before, IBM, even Texas Instruments. Later on, EBITDA was emerging as the focusable metric for tech used religiously by take over operators.  This became, finally, the world of Mike Milken whose take-over artists, hungry for payouts like Saul Steinberg, John Kluge and Rupert Murdoch. 

I miss the sixties despite all their ups and downs. Does anybody but me remember that Saul tried to take control of the New York Times, and failed along with  the Chemical Bank of New York? We were buddies, but Saul indulged in too many containers of chocolate ice cream and died, chubby and youngish.