Panic Early And Don’t Look Back

Near total carnage in financial markets going back some 50 years rests in the consciousness of just a few of us still running money today. I remember telling my bride-to-be that I had put on a silver straddle then, in London, that theoretically could destroy my net worth. Toni said “I don’t care” and the ensuing 50 years proved a bonanza for us.

Alas, the deep recession of 1973 – ‘74 was induced by overspeculation in commercial real estate development, early seventies, and nobody saw trouble ahead. Morgan Guaranty Trust put wealth management clients in growth stocks at any price. They called ‘em 1-decision stocks, but they got torn apart in the market collapse.

The profundity and intensity of the bear market could be recaptured because I kept extensive notes. Arlington House had commissioned my first book, Humble on Wall Street, published in 1975. It’s out of print and $400 in the aftermarket. When Jerry Goodman, (“Adam Smith”) my old, old buddy, now gone, was interviewing Alan Greenspan decades ago, he asked Alan if what he did was “fun.” Greenspan probably never had to field such an impudent question and seemed nonplussed. “Well, not exactly,” he replied and went back to more weighty matters where he was at home. Central bankers don’t talk like stand-up comics, who themselves can be full-up with wisdom.

One of George Washington’s horses, Blueskin, was rubbed down with white paste before our maximum leader rode into town. Such action is like comparing GAAP with non-GAAP earnings. There can be too wide a disparity therein. Technology investors don’t often deal with which construct is real and which one is false ciphering. I long for simplicity in my investments. Thin files made me more money than thick files. These become long-winded rationalizations for holding onto bad paper.

Note the disparity in sector performance for 2014. Negative results for energy, financials and industrials surprised me, but buoyant numbers for technology and healthcare sectors made my year.

The iffy factors in financial markets often destroy the confidence level therein. General Motors reduced its cash dividend early in 1975. Nobody saw this coming. Carnage in the staid utility sector was a big surprise, too. Consider - American Electric Power for decades was deemed a growth utility, but had to sell 10 million shares, publicly, at below book value. Its common stock then yielded 12%. That’s right, 12%, more than its earnings power. Pan American Airways was a step away from disaster, too.

Fire and casualty underwriters then ran combined ratios of 108%, normally the road to financial impairment if lasting more than a year or two. Geico sold down to $4 a share while the insurance commissioner of Pennsylvania debated whether to put them out of business. Geico was considered foolishly sanguine on their operating outlook.

My deep basic is what happened to financial markets nearly 50 years ago could repeat itself today. A deep recession ain’t off the table as yet. Few operators now think the Big Board should sell much under 20 times their earnings projections 12 months out. The market selling at 1.5 times book value isn’t particularly pricey, they pontificate. The foreshortened optimism of financial markets, early seventies was equivalent then to Seventh Avenue’s hot pants cycle. Fun while it lasted, but then, you fold up your pants and face reality.

The declared bankruptcy of the Penn Central, then considered a solid fixture, was totally unforeseen. Goldman Sachs was its primary commercial paper dealer right up to the last day of its offerings. Suddenly, the market dried up and bankruptcy was declared, everyone discredited.

As late as mid-1974, Herbert Stein, Chairman of the Council of Economic Advisers, was advocating for further tightening of interest rates, although the economy had topped out early in 1973. Unemployment had reached 8%. The country was profoundly depressed. Not just General Motors and its ilk. My friends told me I was crazy to buy a co-op apartment in the Dakota for $87,500. Owners everywhere were walking away from newly opened co-ops because maintenance charges proved too steep for them during the recession.

I never lost my moxie. I was telling my analyst (3 times, weekly) that I had a very funny story to tell him: “I got up this morning, read the papers and walked to the office convinced our President was a moron and the market would drop 30 points. Instead, the market rose 30 points and I’m very happy.”

Both of us burst out laughing. “Finally,” I said, “I understand that my self-image should no longer depend on the stock market. My emotional commitment to the intellectualization of stock prices no longer matters.”

“How did you arrive at that conclusion?” he prompted.

“It’s difficult for me to articulate such,” I said.

“Why don’t you try?”

I took a deep whiff of his pipe smoke and began my story with a dream I had that my psychoanalysis was completed, and we both agreed it was so.

I discarded my role as “Scheherazade.”