Streetwise
Lauren Rudd
Sunday, October
5,
2008
October Has A Bad Rep...And Getting Worse
Yes, October is upon us once again, that time of the year
when trees display their fall colors and pumpkins debut as pumpkin pie. It is
also the most dreaded month in the annals of investing, the month of black
Mondays.
Does October really deserve its rotten reputation? Yes, if
the past week’s debacle is any indication. However, I am getting ahead of
myself. There is still prior justification for the bad rap, given the great
Crash in October of 1929, even though historically September is a worse month
for Wall Street.
More recent, but still only history book material for most of
those currently working (or laid off) on Wall Street today is the decline on
October 19, 1987 that sent the Dow down 23 percent or 508 points and resulted in
the initiation of this column. Of course, we cannot forget the relatively minor
“October massacres” of 1978, 1979, 1989 and 1997.
While you should probably view October’s overall reputation
in the same light as those ghosts and goblins that will come knocking on your
door on Halloween, at the same time keep in mind that Wall Street is an
inherently forward-looking animal. In economics we call it a leading indicator.
However, if Wall Street is anything it is fickle and sentiment on Wall Street
can reverse in the blink of an eye.
The critical factor in all this is to ask if there is any
connection between what happened in 1987 and what happened this past week. It
appears there are some unfortunate but definite parallels. Initial blame for the
1987 crash centered on the interplay between the stock market and index options
futures. Let me summarize it for you in two words...leverage and greed. A
simplistic explanation is that you control a lot of something, while putting up
relatively little cash or equity.
Another important trigger back in 1987 was the announcement
of a large U.S. trade deficit on October 14, which led then Treasury Secretary
James Baker to suggest the need for a decline in the value of the dollar on
foreign exchange markets. Is any of this beginning to have a familiar ring?
What had been hoped for was that the 1987 crash would teach
politicians the need for initiating a new era of discipline within the financial
markets. At this point I am not sure if I should be crying or laughing.
It seems that time veils the memory, especially that of
former Senator Phil, “we are a nation of whiners” Gramm, now a leading light in
presidential politics and a hopeful contender for the position of Secretary of
the Treasury. It was Gramm who in his Senate days took special care to prevent
oversight of financial derivatives.
Nonetheless, the intricacies and intrigue of Wall Street were
not a major topic for the evening news on Main Street...credit swaps, a totally
unregulated, highly leveraged and little understood derivative, which along with
a series of acronyms, such as MBS, CMO and CDO, were major contributors to a
contagion that first decimated Wall Street and then proceeded to endanger every
Main Street across the globe.
So where are we today, or more specifically, what actions
should you be taking in terms of your portfolio. Assuming you have not totally
liquidated your holdings, as some are recommending, and either put the cash
under a mattress or in Treasury securities, which will yield you a negative
return after inflation, the answer is to sit back and do nothing. Wait until the
circus in Congress concludes with the passage of the bailout package and its
members return home to face their constituents and, for many, reelection.
Above all, do not let yourself be unduly swayed by the negativism that currently
surrounds the financial markets. Investing can be deadly if you dance along with
the crowd for no other reason than to join in. What is important is what you can
realistically expect from a specific company in terms of earnings over the next
12 to 18 months.
