When the stock market fell last week, most Americans probably didn’t notice. They went about their daily lives, commuting to work, dropping their children off at school, playing golf, enjoying their grandchildren. For them, it was a non-event.
I reacted differently. For weeks, my staff and I have been watching the market crumble slowly, like a row of dominoes falling in slow motion.
First we saw a breakdown in the Dow Jones Transportation Index … then a crack in the advance-decline line … next a fall in the Nasdaq Composite and the Nasdaq 100 indexes.
One by one, these indicators were telling us that the long, one-year rally was close to over, and that we had crossed an invisible threshold into a new danger zone. The halo that surrounded the market’s every move had begun to fade. The magic spell was broken.
No one knows what the future will bring or how it will unfold, and I dare not guarantee where the market will be six months or even six days from now.
What I CAN promise, however, is this: I will let my mind roam freely and share my thoughts with you frankly. If that takes us to times and places that we normally would not visit, so be it. And if it takes us on detours into my personal past, please bear with me: I will point out the relevance in parenthetical comments whenever I can.
OCTOBER 2004
The time is seven months from now. The stock market is down sharply. Investors are bewildered and demoralized. Wall Street is in shock.
“How could this possibly be happening?†they ask. “Isn’t this an election year and isn’t the election going to take place next month?
“Doesn’t the market always go up during a presidential election?
“Didn’t everyone say the bear market was over, the economy was strong, and the government was in control?
“Didn’t Fed Chairman Greenspan himself virtually guarantee good times were rolling?
“What could have possibly gone wrong?â€
The answer: Nearly everything.
FIRST, their facts about stock markets and elections are wrong:
* Since 1901, the Dow has dropped in eight presidential election years — by as much as 32%.
* The Nasdaq has only been around since 1972, but it has still managed to log two losing election years, down as much as 25%.
* The entire notion that a presidential election could somehow help the stock market defy gravity are misguided.
SECOND, the government simply ran out of medicine — no more stimulants to inject, no more interest rates to cut, no more taxes to slash. As soon as the effects of the 2003 cuts wore off, the economy began to slip back into a coma.
THIRD, the patient had a chronic disease all along. But no one was paying attention to the obvious symptoms: A run-away budget deficit, a sinking dollar, record-high personal bankruptcies.
Slowly but surely, however, a growing minority of investors woke up and saw the signs. They saw jobs escaping, confidence slipping, and earnings sinking. So they sold their shares, and the market fell.
OCTOBER 1987
My mind leaps from the near future to another image. It’s still October. But it’s 17 years earlier — just days before the Crash of ’87.
Dad and I are at our old office. He’s sitting down at his desk, poring over his stock market charts.
I’m standing behind him, resting my hand on his chair. Other charts — on the Dow, T-bill rates, and bonds — cover the wall behind us.
Pointing to the chart before him, Dad explains a series of patterns that he says remind him of the crash of 1929.
He talks about 1929, when he had been a young stockbroker on Wall Street. When the crash hit, he was as surprised as everyone else by the utter fury of the decline. But his portfolio was clean. He was out of the market and neither he nor his clients had one share of stock.
Then, the market rallied for six months, reaching a peak in April of 1930.
In order to reassure the country that the crash was just a temporary situation, President Hoover called executives of the largest U.S. corporations into New York for a special meeting. He urged them not to lay people off, to keep the economy strong. But when the executives went home, they did exactly the opposite of what Hoover told them to do. They laid off workers left and right.
Still, no one on Wall Street was paying much attention to the sinking business picture. They said the crash was a “temporary lapse.â€
They believed Hoover. Dad didn’t.
In March of 1930, he borrowed $500 from his mother and started to go short the stock market — 100 shares, 200, 300, building it up slowly at first. That was a lot of money in those days. Dad grew up in a poor and tough immigrant neighborhood in mid-Manhattan. He worked two jobs to help support his parents and family ever since he was a young teenager. He didn’t have much money. But he said he was confident because of his indicators.
The main indicator he watched was the Federal Reserve’s figures on the broker loans of the large New York banks that issued their data weekly. He noticed that, instead of broker loans going up, as they normally would in a recovery, they were going down. This tipped him off that the banks were liquidating stocks.
The banks represented the smart money in those days, so he followed them. They didn’t have any faith in stocks, so neither did he. As long as they sold, he sold. When they stopped selling, he stopped selling. (Today, in 2004, we track a similar indicator — the selling by CEOs and other top executives. And it’s sending us a very similar signal.)
His other benchmark was foreign currencies, especially the British pound, which was the kingpin of the world’s currencies. Britain was still the financial capital of the world. So when the pound fell, it had a direct impact. Dad charted the pound daily, and as soon as it broke a key low, he sold short more stocks that were closely tied to the pound’s fate. (Today, the U.S. dollar is the major world currency, and it is falling too, just like the pound was back then.)
A major threat to the pound was Germany, which simply could not pay the World War I reparations that had been agreed upon at Versailles. England was a major holder of these loans, so the British pound, which was selling at about $4.80, began to plunge.
With this in mind, Dad decided to target for short sale companies that he thought could get hurt by the falling pound. One was Electric Bond and Share, which was a holding company of public utilities, especially in Latin America. Their main subsidiary was called American and Foreign Power. He sold them short in ever bigger amounts. This turned out to be extremely profitable, and other trades worked out even better.
By the time the market touched bottom, Dad said he had accumulated about six figures. But he also confessed to severe losses when the market rallied.
My mind wanders to the next day, late in the afternoon, Thursday, October 15, 1987.
The Dow Jones Industrial Average has just plummeted by 58 points, breaking down below its 200-day moving average for the first time in years. While I don’t think this one indicator will make or break the market, a lot of people do. Tomorrow morning, they will walk out of their strategy meetings with big sell orders. I record my daily hotline message, telling our subscribers to go short.
Friday, October 16: Dad is more bearish about the stock market than ever before. I ask rhetorically if we should tell our subscribers to take their profit on yesterday’s trade. “After all, the Dow is down another 138 points today, which means they have a windfall profit. Shouldn’t we tell them to take that profit now?†I ask.
In response, he makes me look again at his big chart of the Dow on the wall. Then he goes into a long explanation about Bernard Baruch and Black Tuesday of 1929. Except this time he says it’s going to be Black Monday instead of Black Tuesday. And he’s not talking about next month or next year. He’s talking about 72 hours from now, next Monday, October 19, 1987.
Sure enough, on Monday the Dow plunges 508 points, or 22.6%, nearly DOUBLE the percentage decline experienced in the great crash of October 28, 1929. But despite the turmoil that followed, it turned out to be a giant false alarm — the prelude to one of the biggest stock market booms of all time.
SOME TIME IN 1970
My thoughts jump back another decade and a half — also to an office, also to a time when Dad and I are talking about the future.
But this time, we’re not working out of my research company in Florida; we’re at his research company on Wall Street.
His company is very successful, but he doesn’t believe in extravagance. He sits behind his Spartan metal desk, sifting through a small stack of books on bonds and interest rates, with a pencil between his fingers and a warm, cheerful smile from cheek to cheek.
He’s pleased that I have come to visit, to lend him support. Because, despite the smile, he has deep concerns — about President Nixon.
Eleven years earlier, Richard Nixon, then Vice-President under Eisenhower, had thanked Dad’s Sound Dollar Committee for its efforts. The Sound Dollar Committee had helped Eisenhower balance the federal budget with a massive, national grass-roots ad campaign. An estimated 11 million letters, telegrams, and phone calls had poured into Washington, demanding a balanced budget.
But now Dad suspected that Nixon had an insider deal with a prominent Wall Street bond trader — to profit from leveraged speculation in Treasury securities. Dad was outspoken about this. And he lambasted Nixon’s economic policies.
At the time, I was on a path of my own. I took a great personal interest in everything he was doing, but I had no intention of making that my career. It wasn’t until later that, I picked up where Dad had left off, and built my own company, Weiss Research, from scratch.
But back then, I had other endeavors in mind.
One summer, when I was 21, I returned to visit Brazil, where I had spent some years growing up.
I stopped first in the Northeastern coastal city of Recife, and stayed at the beach of Boa Viagem, where the sun set each afternoon behind towering palm trees.
That’s where I met Elisabeth, who was just 18 at the time. She was helping to care for our nephew, who was just a few months old, and the affection she showered on the baby was what tugged at my heart as well.
From Recife, we traveled South, and I joined her on their family farm in the interior of the State of São Paulo, where sugar cane, coffee, and dairy were the primary products. At the time, the city had recently finished the construction of a dam on the farm, and the reservoir had been flooded.
Two years later, my future mother-in-law insisted that Elisabeth cut and shave off my beard. It was the final precondition for allowing me to marry her daughter.
Our wedding was in the nearby town of Piracicaba, where a river by the same name tumbles into a broad cascading waterfall and where the fish swimming upstream can go no further. (“Pira†is the Tupi Indian word for fish. “Ci†means where. And “caba†means stop. So Piracicaba is simply the place where the fish stop.)
The reception was by the Piracicaba waterfall. But it wasn’t until December of last year, after 35 happy years together, that we were able to finally visit the waterfall of our dreams — Iguaçu Falls (Iguazu in Spanish) — in a corner where Brazil, Argentina and Paraguay meet.
Today, our nephew, who, years earlier as a baby, played a role in bringing us together, has three children of his own, Julia, Tiago and Arthur. Anthony, our only son, says that if we’re waiting for grandchildren, we should not hold our breath. So, for now at least, we are content to borrow our grandnephews and grandniece as temporary substitutes.
PHOTOS FOR YOUR PERUSAL
I warned you my thoughts would take us a bit astray. But after all the time we have spent focusing mostly on the stock market and the economy, I thought this juncture might be the right time for us to get a bit more acquainted on a personal level.
So I’ve also posted some photos to a public website — called “Webshots†— that I like to use for sharing pictures with family. If you have a moment, feel free to peruse at …
http://community.webshots.com/album/125263464aFduOM
When you come to this page, you should see the headline …
For “Martin on Monday” Subscribers
Just a few photos from my last 40 years
Then, just below it, you’ll see View Guestbook, View Slideshow, etc. Click on “View Slideshow.â€
The first photo to appear will be the picture that was taken when Dad and I were poring over his stock market charts at my office, as I told you earlier.
Above the photo, you should see a rewind button, a pause button, a play button, etc. Click on the play button, which is the third from the left.
Once you do, it should load the next photo, which was taken about a decade and a half earlier, when I visited Dad at his office on Wall Street.
From there, the pictures follow along pretty much in the same order as the vignettes I have just shared with you.
The only disadvantage of the slideshow is that the captions above the photos are hard to read. To view those, you’ll need to go back later and click on each photo individually from my home page on the Webshots website.
All this is my way of letting you know that, even if we encounter some turbulent seas ahead, I will be here to do my best to guide you. But hold onto your hat. We could be in for a rough ride indeed.
Good luck and God bless!
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
