Friday, October 19, 2012

October 19th, 25 years ago

On this day in 1987 (that's 25 years ago, if you are burdened with a graduate degree), the NYSE had one of its most dramatic trading days in its 220 year history.

It suffered its largest single day percentage loss (22%) and its largest one day point loss up until that day (508 points). Anyone who was in the securities business that day will never forget it.

While it was an unforgettable single day, there were months of events that went into its making.  The first two-thirds of 1987 were nothing other than spectacular on Wall Street. From New Year to shortly before Labor Day, the Dow rallied a rather stunning 43%.

Fear seemed to disappear. One thing that also helped banish fear was a new process called "portfolio insurance". It involved use of the newly expanded S&P futures. Somewhat counterintuitively, it involved selling when prices turned down.

The rally topped out about August 25th with the Dow hitting 2722. Interest rates had begun creeping up amid concerns of early signs of inflation.

Treasury Secretary Baker began a rather open debate with the Germans on the relationship of the dollar and the Dmark. Soon the weakness in the market was turning into a visible correction. By the middle of October, the Dow fell to break an uptrend line that had protected it for over 1000 points. The flurry of takeovers and leveraged buyouts that had flourished all year began to dry up.

On Wednesday, October 14th, there were widely discussed rumors of a new punitive tax on takeover profits. Selling turned a bit ugly and the Dow fell 96 points by the close (a record point drop at the time). The next day there was no bounce and the Dow fell another 58 points.

Friday, the 16th was an option expiration day. There was a very bad storm in London and that market closed, which forced more people to seek liquidity in New York. Stocks faced a steady wave of selling. As the close neared, rumors spread that the First Lady, Nancy Reagan, the President's right hand, might be admitted to the hospital with cancer. The selling intensified and the Dow closed down 108 points, on the low and a new record point drop.  At 4:01 I left the office to pick up my date and head to the airport.  My pal, Budd Zuckerman and I had chartered a small plane to fly to Catalina Island and retrieve his 46 footer,  "Flatulyn" and sail back to San Diego on Sunday.  Our dates were in for more then they bargained for! 

The weekend was a rumormonger's delight.  Nancy was admitted to the hospital.

Japan was considering a confiscatory 96% tax on real estate speculation. Germany proposed a change in taxes on some interest rates, which would make U.S. Treasuries unattractive to Germans. Rep. Gephardt was talking about a trade bill that would freeze imports. Treasury Secretary Baker went on a Sunday talk show and openly challenged the Germans on currency. There were even rumors of U.S. planes engaging Iran.

Our office manager, Walter J. Shaw presided over our early morning meeting on Monday.  You could cut the fear with a knife.  There was going to be a tremendous amount of money "lost" that day.   Walter was a great broker and a good manager.   He told the troops to keep him informed of any situation where margin calls could be enough to cause accounts to be "sold-out". 

From here let me retell the story that I wrote a mere 5 years ago.  It seems like only yesterday.


Friday, October 19, 2007

20 years ago today...............

October 19, 1987. 508 points. A 22% decline. Record volume.

Looking back it was a tremendous buying opportunity. As all steep market corrections have been in your lifetime and mine. Just step in, buy the market and give it time. That October day found me in the offices of Drexel Burnham Lambert in LaJolla, California where I had been a stockbroker for several years. I spent that preceding weekend on an adventure to ease the drama. Friday afternoon I met my pal, Budd Zuckerman at a San Diego airport with our dates and hopped in a chartered plane for a 40 minute run out to Catalina Island. We were late getting together and the pilot was in a hurry to get in the air and get out to Catalina as there were no lights on the Island's airstrip. It was a great weekend with plenty of great food and cold beer and our dates were alot of fun. The boat had been out there for a few weeks and we were to sail it back to San Diego for the partnership that owned it.

Early Sunday we left the yacht basin a little after 4 a.m. for the sail on the 46 foot Flatulyn back to San Diego. It was a little scary as once you left the confines of the marina there wasn't any coming back in until daylight arrived if engine trouble (fire) developed. And no shortage of sharks off of Catalina. And there aren't any lights on the open ocean to guide the way! We had no GPS, no cell phones, no marine emergency radios. Just a compass with no backup, some bravado, our dates and our youth. What else do you need? It was a cool, very cloudy sail until mid afternoon and the clouds were so thick it was virtually impossible to tell where the sun was. There were many many beautiful songbirds on migration virtually "lost" on the open ocean as they couldnt' detect the sun's position and they were landing on every piece of kelp sticking out on the ocean surface as well as all over the boat. We arrived back in San Diego before dark and readied ourselves for what was to be a wild day.

We had our morning meeting at 6 a.m. led by our branch manager, Walter J. Shaw, who has since gone on ahead. Walter did a great job in that meeting. He asked us all to keep him abreast of any major unsecured debits or margin issues in client accounts that were likely to crop up in a further downdraft. We all knew to a man there was going to be some major selling pressure after the Friday rumble of 108 points and a 4.8% drop.

With the market opening it was clear to see that specialists were inundated with selling. Stocks were being opened in big gaps down. As wire communication to the floor became impossible, phone orders were being the norm. And there were probably hundreds of thousands of phone calls that day to trading desks that went unanswered. Traders wouldn't trade. Phones were not being picked up. Notices of trade fills on either buys or sells were hours late. Hours. No specialist firm under the sun was going to commit their own capital when selling of this magnitude was staring them in the bottom line.

That day I had several clients wade into the abyss and just buy some blue-chips. Small trades but more buying than selling. As the day wore on it became apparent the system was in trouble. My livlihood was threatened. Was the NYSE on the verge of collapse? Where would we work? What would I do?

I remember so clearly sitting in the office of my great friend, Maurice Altshuler, who is still a broker with the venerable brokerage house of Morgan Stanley in LaJolla. Maurice and I talked about the future, what could happen and never without any fear for ourselves as to having a career or a job or doing something else. Little did I know that Maurice had over a $1,000,000,000 unsecured debit from a new client in Switzerland who had opened an account the previous week and put the money to work. It wasn't pretty then and could have been a nasty situation. Maurice handled it like he does with about everything else in life, with grace, dignity and professionalism.

The market soon recovered. 1987 was a year to remember. It was the year the government fingered Ivan Boesky and when Boyd Jefferies handed over his firm. It was a year to remember. And a heck of a year to put money in the stock market.

To buy them when no one else wants them. To buy when the baby is getting thrown out with the bathwater. Just buy the market. And sit until you need the money.

Native American Advisors CHIPPEWA PARTNERS