This has been a week where the term “valuation” has suddenly
become hot again, as in overvaluation. Investment giants Abby
Cohen, Julian Robertson, and Mark Mobius all chose this week to
highlight the overextended nature of some of the technology
issues. In the case of Robertson, the hedge fund king has taken
himself out of the game. It”s as if he had suddenly lost his stuff,
taking an 8-0 lead into the bottom of the ninth, only to see two
runs score quickly and then loaded the bases up again. It was
time for the flamethrower out of the pen to see if he could
preserve the win, and Robertson”s reputation.
I am constantly drawn back to the parallels to the 1929 market
environment. The economy was cooking back then, just as it is
today. But the market had advanced so far that a few had begun
to wonder just how long the good times could last. Here are just
a few notes of caution as well as merriment.before the crash.
And note some of the terminology that was used then, just as it is
today.
–Arthur Lehman of Lehman Brothers expected troubles ahead.
“When I say that the outlook for business is doubtful, I mean it
literally, and not euphemistically, as predicting bad business.
Production has been at a high rate during the past year and it is
difficult to see where in many lines an expansion could take
place.”
–After a plunge in late December 1928, an unsigned New York
Times article was bullish. The market was rallying back and the
theme was, “Don”t sell America short.”
“The underlying strength of the stock market, which brought
sharp gains yesterday in many individual issues, has been about as
much a surprise to Wall Street as was the recent decline. The
professional element of the Street has been certain that a
”secondary reaction” of large proportions would follow in the
wake of the sharp decline, and on this theory a sizable short
interest has been built up in the market. Most of these short sales
now show a loss, and short covering furnished a considerable part
of yesterday”s business. Many more brokerage houses are
hopping nimbly over to the bull side of the market, and once
again yesterday many tips were in circulation. No one predicted,
however, that the market would start out once more in a burst of
wild excitement, but professional opinion is that the mid-
December crash was a ”reaction in a bull market” rather than ”the
end of speculative frenzy.”” [Of course, the frenzy in 1929 only
got worse.]
–Time magazine publisher Henry Luce and his staff were
preparing to bring out a new magazine, Fortune, which would be
dedicated to the proposition and the “generally accepted
commonplace that America”s great achievement has been
Business.”
–In early1929, Paul Warburg, the “ancient” leader of Kuhn,
Loeb, spoke of the times. He had lived through the 1907 panic,
and now he saw the same signals. Prices were too high. The
market rise was “quite unrelated to respective increases in plant,
property, or earning power.” The “colossal volume of loans” had
reached “a saturation point.” Unless “the orgy of unrestrained
speculation” was ended, a crash would surely follow, and then
would come “a general depression involving the entire country.”
As historian Robert Sobel notes, Warburg was accused of
“sandbagging American prosperity.”
–And then there was Bernard Baruch. He had been
recommending stock purchases while secretly selling his holdings.
“The bears have no mansions on Fifth Avenue,” he told one
reporter. Later on, he would write: “When beggars and shoeshine
boys, barbers and beauticians can tell you how to get rich it is
time to remind yourself that there is no more dangerous illusion
than the belief that one can get something for nothing.”
By the summer of 1929, Sobel writes, “There was no sign of
weakness on Wall Street. When the Federal Reserve raised the
rediscount rate to 6 per cent in August, stocks only rose higher,
disregarding all attempts to curb the boom. The boardrooms of
large brokerages were jammed with speculators and people who
did not own stocks, but were curious about the excitement. The
atmosphere was lighthearted and carefree. A year earlier
individuals who had made fortunes on Wall Street were
applauded; now they were commonplace. Speculators, both large
and small, were beginning to accept continued advances as an
expected occurrence. Not even a rise in margin requirements
made by some brokers could dampen the enthusiasm.”
The Saturday Evening Post printed a poem to illustrate this
feeling:
Oh, hush thee, my babe, granny”s bought some more shares
Daddy”s gone out to play with the bulls and the bears,
Mother”s buying on tips, and she simply can”t lose,
And baby shall have some expensive new shoes!
From a September 1, 1929 New York Times article:
“Traders who would formerly have taken the precaution of
reducing their commitments just in case a reaction should set in,
now feel confident that they can ride out any storm which may
develop. But more particularly, the repeated demonstrations
which the market has given of its ability to ”come back” with
renewed strength after a sharp reaction has engendered a spirit of
indifference to all the old time warnings. As to whether this
attitude may not sometime itself become a danger-signal, Wall
Street is not agreed.”
The more things change, the more they stay the same.at least in
writing.
Source: “The Great Bull Market,” Robert Sobel
Brian Trumbore
[Note: The preceding was abbreviated due to travel.]
