Bull!

by Maggie Mahar

  But Spitzer did not see a closet whistle-blower in Blodget’s messages. Instead he, along with most of the investing public, interpreted Blodget’s e-mails as a sign of something far worse: cynicism. “Basically, [he] is saying ‘Hey, I’m going to threaten you with the truth,’” Spitzer charged. “The brazenness of that, and the insight into what was going on was so overwhelming,” he added—as though threatening to use the truth was somehow worse than knowingly concealing it.7

  At the very end, Henry Blodget was no longer a true believer. By contrast, Morgan Stanley’s star Internet analyst, Mary Meeker, maintained her nearly messianic commitment to the Internet. Meeker would not be hounded by the media or the public—at least not to the same degree as Blodget. If he had remained deluded, perhaps he, too, might have been forgiven.8

  In retrospect, Henry Blodget understood the role he had played in the bull market of the nineties. Sitting in a Greenwich Village café early in 2002, he reflected on his career.

  “Have you ever read John Kenneth Galbraith’s book about the history of bubbles?” he asked, referring to the Harvard economist’s A Short History of Financial Euphoria.

  “Well, I hadn’t—until recently. I just finished it,” Blodget admitted, with a pained smile. “It’s amazing how Galbraith spells it all out—what happens in every bubble, every time. He’s almost yawning as he lays it out: First some new thing comes along and captures the public’s imagination. Then everyone starts making money. After that, some person of average intelligence is held up as a genius.”

  Blodget raised his hand: “Hi, that was me,” he said with a sardonic, half-embarrassed smile.

  Blodget shook his head. “If only I had read that book at the beginning of 2000. It would have been worth a million dollars to me then.” For in his history of financial manias, Galbraith had predicted Blodget’s fate: “The [public’s] anger will fix upon the individuals who were previously most admired for their financial imagination and acuity.”9

  But even if Henry Blodget had read Galbraith’s book in 2000, he might not have recognized the full relevance of Galbraith’s story. For as the Great Bull Market of 1982 to 1999 reached a climax, only a handful of the actors onstage were ready to acknowledge that the longest bull market in U.S. history was coming to a disastrous end.

  INTRODUCTION

  —1—

  THE MARKET’S CYCLES

  January 1975. When Richard Russell squinted, he saw the silhouette of a bull emerging against a bleak horizon. The author of Richard Russell’s Dow Theory Letter, Russell had been writing his financial newsletter since 1958, and by now he had a wide following—at least among those still willing to read about stocks. Over the past two years, the Dow Jones Industrial Average had lost nearly half of its value.

  The Dow had last seen blue skies in 1966 when it grazed 1000. Two years later, it flirted with 1000 again, but in fact, the bull market that began in the fifties was peaking—much as the bull market that began in the eighties peaked at the end of the nineties.

  After reaching its apex in the late sixties, the Dow rallied and plunged, rallied and plunged without getting anywhere—until finally, in January of 1973, the benchmark index smashed 1000, setting a new high at 1051.69. It seemed that a new bull market had begun. In fact, the bear was just baiting investors, luring them in so that they could be impaled on the spike of a final bear market rally. What followed was the crash of 1973–74.

  When it was all over, in December of 1974, both the Dow and the S&P 500 had been slashed nearly in half; trading volume had all but dried up; mutual fund managers were grateful to find jobs as bartenders and taxi-cabdrivers, and Morgan Guaranty, the nation’s largest pension-fund manager, had lost an estimated two-thirds of its clients’ money. As for individual investors, the public was shorn. Between December of 1968 and October of 1974, the average stock had lost 70 percent of its value.1

  Nonetheless, at the beginning of 1975, Richard Russell could all but hear the bull snorting. At last, he believed, the bear market had bottomed. And he was right, just as he would be in the fall of 1999, when he warned readers that the first phase of a bear market had begun.2 By then, Richard Russell’s Dow Theory Letter was the oldest and one of the most widely read financial newsletters in the United States.

  Russell based his predictions on “Dow Theory,” an analysis of stock market cycles invented by William Peter Hamilton and Charles Dow. (Cofounder of Dow Jones & Company, Charles Dow also lent his name to the benchmark stock market index.) At the end of the century many investors would assume that “market timing” meant day trading, buying and selling stocks in a matter of hours, days, or, at most, months. But Dow Theory does not attempt to predict the highs and lows of particular stocks, nor does it strain to forecast the market’s short-term gyrations. Instead, it focuses on longer trends—cycles that can last for years. Each cycle is the peculiar product of a particular moment in economic and political history, but in Dow’s view the force behind each go-round was the same: human nature.

  Most descriptions of investor psychology reduce human behavior to a series of simple knee-jerk reactions: rampant greed followed by blind fear. Charles Dow sketched something subtler in The Wall Street Journal editorials that he wrote between 1899 and 1902. He recognized that investors do not rush into a bull market, and when it ends they do not swoon in surrender to the bear. Both bull and bear cycles begin slowly, he observed, because “[t]here is always a disposition in people’s minds to think the existing conditions will be permanent. When the market is down and dull, it is hard to make people believe that this is the prelude to a period of activity and advance. When prices are up and the country is prosperous,” Dow added, “it is always said that while preceding booms have not lasted…[this time there are] ‘unique circumstances’ [which will make prosperity permanent].”3

  Because human beings are slow to embrace change, these cycles can run a decade, or longer. In fact, as Gail Dudack, chief market strategist at SunGard Institutional Brokerage, shows in the table below, the history of the S&P 500 from 1882 through 1999 can be broken down into alternating “strong” and “weak” cycles that average nearly 15 years. During the booms, investors who plowed their dividends back into their portfolios reaped returns averaging nearly 18 percent a year—even after adjusting for inflation. During the dry spells, by contrast, average “real” (inflation-adjusted) total returns dropped to less than 2 percent. Without dividends, investors lost nearly 3 percent a year.

  In the final third of the twentieth century, the market’s returns fit the pattern with ruthless precision: from January 1967 through December 1982, investors averaged 0.2 percent annually—and that was if they reinvested their dividends. Those who became discouraged and stopped plowing their dividends back into the market lost an average of nearly 4 percent a year—year after year, for 16 years. Finally, in 1982, the cycle turned: from January 1983 through December 1999, real returns averaged 12.1 percent. If an investor reinvested his dividends, he was rewarded with annual returns of 15.7 percent.

  “Few investors realize how much dividends have contributed to the stock market’s performance,” Dudack observed. “Nor does the public realize that in this century, there have been three separate periods, ranging from 16 to 20 years, when inflation-adjusted capital gains on the S&P have been negative.”4

  Inevitably, any attempt to break the past down into cycles involves choosing beginning and ending points that are, to some degree, arbitrary. Others might well divide the market’s cycles somewhat differently. But virtually every market historian agrees on the larger picture: the history of the market is a story of bull and bear markets that take place against a backdrop of much longer waves—weak and strong cycles that last long enough to convince us that they are the norm.

  In other words, as James Grant, editor of Grant’s Interest Rate Observer, put it in 1996, “The stock market is not the kind of game in which one party loses what another wins. It is the kind of game in which, over certain periods of time, n
early everyone may win, or nearly everyone may lose.”5

  The story of the Great Bull Market of 1982–99 needs to be understood in this context. For what was seen, rightly, as the most extraordinary bull run in U.S. history was, at the same time, very much part of a larger pattern.

  THE LIMITS AND USES OF CYCLE THEORY—RUSSELL’S RECORD

  Charles Dow was neither the first nor the last to note the market’s cycles, and he is only one of many who have tried to use a theory of cycles to forecast long-term trends. Some historians emphasize the psychological factors that drive cycles; others focus on economic causes. The most sophisticated recognize that the two cannot be separated.6 But no system can be turned into a crystal ball. Any scheme that attempts to predict the future based on the patterns of the past is but a grid laid over the messiness of reality. History is ambiguous, and every financial mania is unique, the product of the peculiar folly of its time.

  Nevertheless, precisely because such systems are so rigid, they can help steel an investor against his own emotions—giving him the strength to resist bear market rallies, and the faith to get back in at the bottom when everyone else has abandoned the field.

  Certainly, over the years, a combination of Dow theory and sharp instinct served Richard Russell well. Even though the final two decades of the 20th century included a 17-year bull market (which should have rendered market timing moot), a subscriber who followed the market timing advice in Russell’s newsletter would have earned, on average, 11.9 percent a year, beating a buy-and-hold strategy, on a risk-adjusted basis, for the 21 1/2 years from June 1980 to December of 2001.7

  But it was in January of 1975 that Richard Russell made what was probably his finest call. With the crash of 1973–74, the market had finally bottomed out. The next bout of prosperity would not begin in earnest until 1982, but Russell was correct: the market had laid the foundation for a new bull run. The Dow was now cheaper than it would be at any time for the rest of the century. Eagerly, Russell trumpeted the good news. It was, he told his subscribers, time to buy stocks.

  Then came the hate mail. “I don’t want to hear about stocks!” wrote Russell’s subscribers in 1975. “How dare you tell us that this is the beginning of a bull market.”8 In fact, an investor who had been patient enough to wait for this final low watermark—and was now both courageous and contrary enough to wade back in—would see double-digit gains for the next two years.

  Few were willing to take the wager. It was not just that Russell’s readers did not believe him. They were tired of being snookered. When the crash of 1973–74 finally ended, the Dow came to rest at 577—seven points below where it had traded in 1958, some 16 years earlier. No wonder long-term investors felt betrayed.

  The long, steep decline broke the spirit of the most faithful investors. “Even if you weren’t in the market, there’s a good chance you saw someone in your family go through it,” said New York money manager Ken Smilen. “Maybe you had an uncle who, say, in 1955 began putting $150 a month into stocks to send his one-year-old to college. Maybe some months he had trouble scraping the money together—maybe one month he borrowed it from your mother. Then, after doing it for 18 years, he finds that, at the end of ’74, he’s lost all of the appreciation. That’s something your family will never forget.”9

  Little wonder that in January of 1975, Richard Russell’s readers greeted his “buy” signal with so little grace. “By late 1974 the crowd had not just left the party, it was stoning the host,” observed financial writer Andrew Tobias.10

  TWENTY YEARS LATER

  July 1995, a sweltering summer on Wall Street, and Ralph Acampora, Prudential’s head technical analyst, presented investors with a head-swiveling forecast: by 1998, Acampora declared, the Dow would break 7000. At the time, the benchmark index was trading well under 5000 and Acampora’s target seemed, to many, outlandish. Skeptics pointed out that the Dow had already sprinted 900 points in less than eight months—a climb that they called “unprecedented.” But the 54-year-old Acampora found precedent in the bull run of 1962–66, when the Dow gained 85 percent in four years. The naysayers were just too young to remember a real bull market, Acampora scoffed: “I have sneakers older than the people who write these articles.”11

  As it turned out, Acampora’s forecast was conservative. In 1995, the final leg of the most spectacular bull market in U.S. history was about to begin. The index hit Acampora’s target in February of 1997, and at age 56, he found himself a folk hero. He liked to repeat comic Jackie Mason’s line: “It took me 30 years to become an overnight sensation.”12

  Ralph Acampora would become one of Wall Street’s best-liked seers. The son of a Bronx truck driver, he was a throwback to earlier times on the Street. Although he was a technical analyst who conjured his forecasts from charts and spoke the language of “trend lines” and “60-day moving averages,” Acampora was hardly a wonk. Beneath all of the numbers lay an old-fashioned faith in American capitalism. “It makes all the sense in the world that our stock market would go up,” he once told a reporter, “because we have more confidence in our way of life.”13

  As a guru, the outgoing, charismatic Acampora was a natural. A showman who thoroughly enjoyed his own show, he brought pizzazz to the otherwise dreary business of technical market analysis. Before long, Prudential’s top technical analyst found himself on CNBC. There, the financial network’s top anchor, Maria Bartiromo, bestowed a title upon him: “If Abby Cohen is the Queen of the bull market,” said Bartiromo, referring to Goldman Sachs’s chief market strategist, Abby Joseph Cohen, “you must be the King.”14

  “It played in Peoria,” Acampora recalled a few years later. “I had a great time. I got invited to a lot of cocktail parties. My firm gave me a 1962 Roma red Corvette with plates that said DOW 7000. Here I was on a pedestal, driving this little car. I was part of a phenomenon—I think of the whole bull market as a phenomenon. It was exciting. It was real. It was America. But we all got carried away. Now, it’s over.”15

  THE SENSE OF AN ENDING

  Even Ralph Acampora, the bull market’s self-described “raging bull,” knew that the Great Bull Market of 1982–99 had to end sometime. In the late nineties, Acampora was still driving the red Corvette his firm gave him when the Dow hit 7000. Nevertheless, he understood what many refused to accept: bull markets cannot continue indefinitely. Acampora, after all, was old enough to remember the crash of 1973–74—and the eight years of drought that followed. As a technician, Acampora saw himself as a historian. Using charts to compare the market patterns of the present to the past, he tried to tell investors when it was time to get in—and when to bail out. Like Charles Dow, he looked at the market’s cycles, but unlike economists who attempted to forecast long-term trends, Acampora tried to time both short-term and long-term cycles.

  This was why in February of 1998, Acampora called his boss, Rick Simmons, Prudential’s CEO, and told him that he wanted to meet him for breakfast.16 They met only a few times a year, and it was unusual for Acampora to set the time and place. Not long after the meal began, Simmons cut to the chase:

  “Why are we having breakfast?” he demanded.

  “We have a problem,” Acampora replied.

  “What’s the problem?” asked Simmons.

  “I’m too popular.”

  “Why is that a problem?”

  “Abby is the queen,” said Acampora. “And I’m the king. The problem is, at some point, one of us is going to blink. You know this market can’t last forever. And I’m enough of a competitive son of a bitch that I want to get out before Goldman.

  “But if I turn negative,” Acampora continued, “people will get very upset. Besides, I’ll turn off clients—it will cost the firm revenues.”

  As Acampora recalled, Simmons told him to stop worrying. It was not Acampora’s responsibility to guard the firm’s coffers; it was his job to make sure that Prudential’s clients bought low and sold high—which meant jumping off the merry-go-round before it stopped.

 
; That Prudential’s investment banking business was anemic greatly simplified Simmons’s decision. Firms that did a brisk business taking companies public might be loath to announce that the bull market was over: such news would be bound to distress their clients. But Prudential was not a major investment banker: in 2000, the firm handled less than 1 percent of all underwritings. (By 2001 Prudential’s new CEO, John Strangfeld, would decide to get out of the investment banking business altogether, “freeing [Prudential’s] analysts to call ’em as they see ’em, without fear of alienating potential banking clients.”)17

  The conversation with Simmons was still in the back of Acampora’s mind when he took his summer vacation in 1998, going on safari in Africa. When he returned, in late July, the Dow had dropped 500 points in a week, and investors were selling the big stocks—names like Procter & Gamble.

  Acampora began to get nervous. They’re shooting the generals, he thought. Monday, August 3, his first day back in the office, CNBC called and wanted him to appear on air. Acampora was reluctant—he was just beginning to digest what had happened while he was gone. But ultimately he agreed. On air he said, “The breadth is not so good. But if the Dow holds up, we’ll be all right.”

  When he got back to his office, Acampora discovered that the Dow had slid another 90 points. That night he didn’t sleep. As he later explained: “I knew that the next day I would have to go into the office and shoot my best friend—the bull.”

  The morning of August 4 Acampora headed for his office with his forecast written out, ready for broadcast. But when he arrived, the Dow futures looked good. Maybe I won’t have to do it, he thought. Then, at 10 A.M., the rally died.