Thursday, March 03, 2005


The number 40 is special. At least three people have thought so; Moses, Noah and Jim Stack. Noah may have gotten the best deal of the three. It rained on Noah 40 days and 40 nights but at least he had a roof over his head. I appreciate that he was in a boat for 40 days with at least 1000 animals and three sons and that there must have been a lot of manure to be shoveled. I'll take 40 days on most any cruise (I hate them; leave me on dry land near the ocean) over losing 90% of my assets or 40 years in the desert.

Noah wandered in the desert for 40 years because a whole generation needed to pass before the people could enter the promised land. Jim Stack figures a whole generation has to pass after a true stock market crash before the next generation is ready to enter. Jim runs a grizzly old site called Jim says that after the stock market collapse from 1929 to 1932 a whole generation swore they would never buy a stock again and indeed many of them never did. Only a few folks were willing to take advantage of the incredible bear market bounce from 1932 to 1937. By the 1950's a whole new generation started investing. After solid returns for 19 years, most of them got suckered into going all-in by 1969. I got lucky and caught a bounce or two and came out ok but the bear market that ended in 1974 was not a pretty sight.

One of the charts I remember from this era showed the savings and loan bankruptcies. Prior to this debacle the vast majority of home loans were made by building and loans which came to be known as saving and loans. There were more saving and loan bankruptcies in 1973-74 than ever before or after. (The industry was not totally wiped out but came close to total annihilation in the savings and loan scandals of the late 1980's).

The good news is that we are still 4 years away from 2009! To make a fortune, you must pay attention to what happened before 1929 and 1969. In both cases we had a beautiful bull market. In both cases the beautiful bull had to stop, catch its breath, graze for a couple of years, add 500 pounds and then charge ahead for the second half. In both cases, the second half of the bull made the first half look like a billy goat market.

A good fellow and good friend, Bill Leinbach, a successful broker for more than 40 years, loves to tell stories of the 1960's bull market. It has been 20 years since he had me and others rolling on the floor with stories I only wish I could tell. Bill bought Xerox before lunch one day, sold it after lunch, took the rest of the day off, bought his wife a new car with part of his profits and was in bed making love by 4:30 in the afternoon. (Forgive me Bill if I have butchered the story, I always thought you exaggerated a little but the charts prove the market was a lot of fun.)

It is impossible to understand all the effects significant events have on a markets behavior. It often takes hindsight to gain understanding. For example, when Kennedy was shot, November 22, 1963, "everyone knew" the stock market was going to get hammered the following Monday. Almost everyone of that generation can remember the scene of Lee Harvey Oswald getting shot by Jack Ruby. This is natural partly because the scene was replayed on TV only 50,000 times. The market was closed on Monday but re-opened Tuesday. How many folks remember that the stock market made its biggest one day move since the 1930's?! How many folks remember that the Dow Jones Industrial Average hit an all time record high two weeks after Kennedy was shot and that the market didn't hardly take a breath until 1969?! (A good read: The Bear Book, John Rothchild.)

Folks like Papa John (my Dad), who did very well trading Xerox, Control Data, Burroughs Computer and other "Nifty-Fifty" stocks in the 1960's, did not like to talk about the stock market of 1969 to 1974. I never learned how badly he was burned but his attitude reminded me of his WWII service. He saw things during the war that he did not like to talk about. As always, there were a few that caught the bear market bounce of 1971-72 but most of those went all-in to catch the worst of 1973-74. Papa John was a resilient old cuss and he was able to get back into the market and participate in the big bull boom bubble bust of the 90's but many walked away from the 1974 market to never come back.

For many more folks, the collapse from March of 2000 to October of 2002 is too fresh to even consider buying now. These folks have already missed a nice move. A bull that has paused for a little while. This bull is grazing, putting on weight and getting ready to make a big charge (I figure it will charge at least by November 1).

Back to the Kennedy assassination. The economic conditions were ripe. Kennedy had successfully passed a significant tax, he had jaw boned inflation down (this time it was the price of steel that had gotten out of hand) and the bull had been grazing for two years. Only about half of the businesses had adopted the new technologies during the first half of the bull. The second half of a big bull boom bubble bust stampede was ready to go the only thing it needed was the classical wall of worry to climb. Who knows; Kennedy probably would not have increased government spending nearly as much as Johnson so the bull may have taken a zig, a zag or both along the way, but the market was ready to explode no matter who was president.

The parallels between the mid bull slow downs of 1919 to 1922, 1961-1963 and 2000-2002 are striking.

In the first great bull of the 20th century, the invention of the car assembly line in 1914 created prosperity and a market that would not quit; but in 1919 it did! The boom had caused prices to zoom; one industry in particular, the oil business, needed to catch up.

My great grand-father took advantage of the situation and bought 40 acres of land in Texas. Two weeks after buying the land, he sold half the mineral rights for the same price he had paid for the whole 40 acres. In other words he got all 40 acres of land and half the mineral rights as a "finders fee". Isn't it amazing how smart a move one can make one day and then mess up big time only 2 weeks later? He traded a fortune worth of mineral rights just to get his original investment back quickly. Isn't it easy to be critical of a man who was one of the smartest of his generation? The fact is that he, his children and grandchildren received a healthy stipend from his smart move. Even now, I get two small checks each quarter. Had he had the wisdom to have invested the check for half the mineral rights into anyone of the companies that became General Motors (Pontiac Motors etc.), I would really have a story to tell you.

The only problem I have with his oil well purchase is that families were too big in those days, my ownership is equal to three tenths (I inherited one tenth and bought the inheritance of two cousins) of one sixteenth of one third of one half of my great grandfathers share. Great-granddad only got one eighth to start with because the oil company kept 7 barrel's of every 8 to pay for exploration and production costs. In other numbers, I get about 2 hundredths of the oil revenue produced on this land and the well is about played out. My grandmother who owned a share 3.3 times the size of mine, received $700 a month during many years when that was a lot of money. I own about 4 acres of land 30 miles north of Dallas that I have never seen. I pay local taxes of about $600 per year and my checks total less than 25% of the taxes. I plan to post a picture of me, my family and my oil well in a few months.

Back to the "real" story. After about half the families had purchased cars, the market stalled. It took a little company that became known as General Motors to figure out that trade-ins should be accepted and installment financing should be arranged. The second half of the bull market became known as the roaring '20's. Even those, who made the "mistake" of buying General Motors in 1919 before the mid-bull bubble busted, made 2,200% on their investment by 1929. Calling the purchase of General Motors in 1919 a mistake is like calling my grandfathers purchase of an oil well a mistake and it is like calling the purchase of EBAY in January 1999 a mistake.

Same story, different characters in the 1950's and 1960's. The computer and other high tech inventions increased productivity dramatically which is another way of saying the inventions increased weath dramatically. (Productivity is my favorite word and we have lots of it in our current economic environment). The market was on a great run but prices got out of hand. Steel was in great demand and the industry tried to raise prices sharply, Kennedy used the bully pulpit to convince the industry that it was in its best interest to squeeze profit margins rather than customers. The adoption of the computer still had a long way to go and technologies like the Xerox machine was sitting in the same place the radio-TV-cell phone sits today. And yes, the P/E ratios were just too high!

Marty Zweig and many other knowledgeable investors have lamented that one needs to be extremely careful when P/E ratios get too high. However, if one steps back to take a long view, it is clear that P/E ratios stay too high for a very long time during a big bull boom bubble bust. In the roaring 20's the roaring 60's and the roaring 90's, the P/E's really did get too high and there was a major correction in each case. After the correction, P/E ratios were still too high! Even during a time when the majority of folks will not touch the market, there are wise old owls who recognize they are in a bull market and they hold the market at high P/E ratios.

At any auction sale, prices only go down so much until the market makers out bid one another. The relatively few big buyers are stong enough to hold at these levels. Latter on, when the crowd shows up, prices soar. Investors are confused. The majority are holding record levels of liquid assets in a combination of savings accounts, money market accounts and fixed rate instruments of some type. Those who are investing in equities are crowding into the foreign markets. The world markets have out-performed dramatically but remember the whole world is arbitraged. To put it in biblical terms the foot bone is connected to the leg bone and so on; the world market cannot walk off and leave its head behind (too far). Huge amounts of money are invested in 10 year bonds that guarantee a maximum return to maturity of 4.4%! It does not matter that 4.4% is well below the averages for a couple of thousand years. Investors on balance are too scared to enter the market.

At least a couple of the bloggers that I read and respect have made an issue of the fact that the sentiment is too bullish. This measure is of those that are in the market. The fact is that you can't get the majority of the people to even discuss the stock market right now. (The long term put-call ratio is actually pretty positive.)

The bottom line is that if you buy the big bull boom bubble bust, one day, you will tell your grandchildren about it. If you wait until the bubble phase is reached, when everyone is getting rich but you, you will have to tell your grandchildren about the bust.

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