Bull!
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References to past bear markets provided only snapshots of a cycle. Investors were told, for example, that in recent history, there had been just two long-lasting bear markets: the 42.1 percent collapse that began in January of 1973 and ended in November of 1974, and the 22.3 percent plunge that extended from November of 1980 to August of 1982. But very few stories connected the dots. What happened in between the meltdown of 1973–74 and the crash that came in 1980? In fact, both crashes were part of a much longer cycle where the primary trend was negative: after peaking in 1966, stocks zigzagged for the next 18 years, but the S&P 500 made no headway. Indeed, from 1971 to 1981 the real return on the S&P was negative—even if an investor faithfully plowed all of his dividends back into his stock portfolio.35
QUARTER BY QUARTER
But the pointillist perspective of most real-time reporting ignored the market’s longer cycles. Instead, the media monitored the Dow’s daily performance, while the press tracked both earnings and mutual funds, quarter by quarter.
Quarterly mutual fund reports tried to keep up with a market that never looked back. By the mid-nineties, the press had replaced annual scorecards with reports that appeared every three months. The change spurred investors to chase performance, rushing to buy the funds at the top of the charts, just when they were most expensive—and often shortly before they peaked. Ed Wyatt covered mutual funds for The New York Times and he recognized the dilemma: “No matter how much we tried to stress long-term performance at the beginning of the reports, inevitably, quarterly reports focus attention on the short term.”36
Yet mutual fund reports brought such lush advertising revenues—particularly from mutual fund companies—that the temptation to publish at least four times a year proved irresistible for virtually any magazine or newspaper that followed the mutual fund industry. And without question, the press was responding to its readers’ most immodest desires for the timeliest information. Before long, The Wall Street Journal would be feeding the lions a monthly mutual fund edition.
In search of ever-higher returns, mutual fund investors were beginning to “churn” their own accounts. In the sixties, investors sold only about 7 percent of their stock fund holdings each year, suggesting a typical holding period of 14 years. By the end of the nineties, they were turning over 40 percent of their stock funds annually—which meant investors were holding their funds for an average of just 30 months.37 Fund supermarkets like Schwab’s “One Source,” which offered investors one-stop shopping for a wide range of funds, made it easy to skip out of last year’s winner and into this quarter’s hotshot. Inevitably, investors pursuing “The Best Mutual Fund Now” wound up buying not “The Best Fund Now” but “The Last Best Fund”—the fund that topped the charts in the previous 6 to 12 months. “This was why, although many mutual funds made great gains, most mutual fund investors did not,” observed Wyatt.38
As the public’s attention narrowed, so did the scope of the mutual fund reports. Increasingly, quarterly reports focused on just that—the performance in a particular quarter. A fund’s one-year and three-year record often appeared only in year-end rankings. The effect on mutual fund managers was predictable. They knew that they were now operating in a very narrow window. Short-term success was everything. Long-term strategies could kill a career.
In corporate boardrooms across America, executives were equally aware that in an age of up-to-the-minute information, they were only as good as their last three months’ performance. “CNBC helped promote the Wall Street game, ‘Beat the Number,’” observed Seattle hedge fund manager Bill Fleckenstein, referring to CNBC’s relentless emphasis on whether or not a company had beaten analysts’ earnings estimates in a given quarter. “If a company had a $100 stock price and was supposed to make one penny and then made two, it was a big deal. So how can 8 cents of annualized earnings support a $100 stock?” he asked. “They were pouring gasoline on a lit fire.”
CNBC producer Bruno Cohen’s defense stunned even Fleckenstein: “The fundamentals about a company back then [at the height of the boom] tended to be momentum,” he explained. “You could understand a company by understanding whether or not it was on the move or the stock price was on the move. A lot of people thought that’s all you needed to know…. Now you have to understand who its leadership is,” he explained in 2002—“how’s its balance sheet, what’s its business plan.”39
The perennial problem for the media is that balance sheets do not fluctuate on a daily basis. Once a reporter has laid out a company’s assets and debts, how does he fill the news hole the next day? Only by tracking the market’s daily performance.
Trouble is, there is usually nothing meaningful to say about a market’s day-to-day moves. “When markets are discussed daily, news becomes chatter,” Fred Sheehan, a director at John Hancock Financial Services in Boston warned his clients. “The terms of the discussion are set by CNBC, investment websites, investment magazines, and the previous day’s market summaries in the morning newspapers. The daily debate is captured in such phrases as ‘we’re testing new lows,’ or ‘the earnings surprises are coming to an end’ or ‘Greenspan will have to ease now,’ or ‘the market is 15% undervalued.’”
In other words, the news was becoming noise. “It must have been a similar string of babble,” Sheehan concluded, “that prompted the Nobel-laureate physicist Wolfgang Pauli to say of a colleague’s paper ‘This isn’t right. This isn’t even wrong.’”40
JAMES CRAMER
Ultimately, James Cramer would come to personify the Age of Noise. A fund manager turned financial pundit, Cramer became a ubiquitous multimedia presence in the late nineties. He could be found online, on CNBC, on Good Morning America—almost any day, any time. Frequently, he popped up in the pages of GQ or New York magazine. After 11 o’clock, he might turn up as a guest on Public Broadcasting’s Charlie Rose. Cramer even modeled for a Newport Shoes ad. Meanwhile, he managed some $300 million of other people’s money.41 “By Wall Street’s standards, this is an insignificant amount,” observed one longtime market watcher. “Cramer was a small money manager with a sideline in journalism whose influence was way inflated because he had been on the Harvard Crimson, and therefore knew people like Mark Whitaker of Newsweek and Walter Isaacson of Time—all of whom rose rapidly to the upper echelons of the media elite.”42
Cramer also became cofounder of TheStreet.com, a website that provided a wide range of investment analysis—some of it shrewd and insightful, some of it hype. A media personality, he was a creature spawned by the bull market’s cascade of information. And he believed in using the torrent. In his autobiography, Confessions of a Street Addict, Cramer described how he used Wall Street’s information machine to make money for his hedge fund by becoming, in his words, a “merchant of buzz.”
“We developed a style that consisted of figuring out what would be hot, what would be the next big buzz,” Cramer recalled. The strategy consisted of “getting long stocks and then schmoozing with analysts about what we saw and heard was positive. Or we would get short stocks and talk to analysts about the negatives.”
By Cramer’s own account, a colleague trawled for stocks “likely to move quickly on good news.” Another member of Cramer’s team would then “go to work calling the companies to find anything good we could say about them. I would call the analysts to see if they were hearing anything.” When his team found an unrecognized stock that looked ready to move, Cramer explained, “We would load up with call options [which gave him the right to buy the stock at a set price] and then give the news to our favorite analysts who liked the stock so they could go do their promotion…. We knew that Wall Street was simply a promotion machine,” said Cramer. And once the analysts got the “buzz” going, “we would then be able to liquidate [our] position into the buzz for a handsome profit.”43
Who would buy the stocks that he sold? Cramer urged individual investors to trade on the buzz. With all of the information available on the Internet, the individual investor “has a
veritable trading desk at her fingertips,” Cramer told the readers of Worth magazine. Investors should “pull some of [their] money out of mutual funds, and begin running it [themselves]. Just try it out—it has never been so easy to have control over your own monetary destiny.”44
Certainly, it was not Cramer’s intention that small investors buy the stocks he was unloading. But inevitably, those who read the news buy stocks from those who “manufacture” the news. (Wall Street has a long history of promotion: always, the promoters who spread the tips sell to those who consume them.)
Cramer helped fan the frenzy. Perhaps one way to sum up the difference between the bull market of the nineties and the market of the eighties would be to consider the contrast between Jim Cramer and Peter Lynch. The eighties gave us Lynch, the “Father Knows Best” of those early years, a solid, reassuring presence telling us that investing was easy—“just buy what you know.” The nineties brought us Cramer. Sweating, screaming, eyes bulging, he seemed the perfect guru for what was fast becoming an obsessive-compulsive cult of investing. During the final blow-off, Jim Cramer would upstage even Abby Cohen.
TRUE BELIEVERS
By 1996, a nearly fanatical belief in equities swept the nation. Many members of the media, like the citizens they informed, became true believers. The majority had never seen a bear market, and many younger reporters knew little of the stock market’s history. It just was not fashionable to talk about market timing or market cycles.
To others, past bear markets seemed simply irrelevant. It was, after all, a New Era. Headlines trumpeted the good news: “The Triumph of the New Economy” (Business Week, December 30, 1996); “The One Stock You Should Buy Now” (Smart Money, November 1, 1996); “U.S. Rides a Wave of Economic Stability: Recession No Longer Seen as Inevitable as Nation, Policymakers React Quickly to Changes” (The Washington Post, December 2, 1996).
Investor’s Business Daily captured the spirit of the times with a jubilantly circular headline: “Overvalued? Not if the Stock Keeps Rising.” The story began by paying homage to Just for Feet Inc., an athletic shoe retailer that “might have looked pricey by some standards” in the fourth quarter of 1994, when USAA Aggressive Growth Fund bought the $4 stock at 396 times the previous year’s earnings, but the newspaper reported, “Investors who limit themselves to common measures of value, such as trailing p/e’s [price/earnings ratios], would have missed Just for Feet—and just about every other leading growth stock.”45 It seems that the company’s earnings had sprouted wings, and it was now selling for “only” about 58 times earnings at $28 a share. Of course, an investor who wasn’t nimble might be crushed: three years later, the shoemaker had tumbled head over heel and was trading for less than $1.
Ultimately, the media’s effect on share prices was, as always, temporary. In the end, intrinsic value would out. But good press can help keep the shares of a company like Just for Feet—or Enron or Tyco—flying high on a hope and a promise for months or even years, long enough for investors to lose billions of dollars.
In truth, the press was only mirroring the public’s enthusiasm. Yet the bubble might never have grown so large, nor lasted so long, if the media had not promoted hot stocks, anointed gurus, marginalized “the naysayers,” and substituted “good news” for analysis. The cult of personality was key. Chief executives became “celebs” while Wall Street analysts were treated as shamans. You do not ask a celebrity hard questions, and you do not question a shaman at all.
William Powers, a media critic who began his career as a financial reporter at The Washington Post, marveled at the effect the bull market had on the media in a column that he wrote for The National Journal: “For almost a decade, journalists did something quite out of character: We accentuated the positive. Over the years, we had acquired a reputation, largely deserved, for loving bad news…. The age-old complaint about the media, in letters to the editor and in polls, was that we were unrelentingly negative. We laughed it off, but we knew it was true. The bull market changed all that. We stopped enjoying the bad news, and got addicted to the good. A trade that had once searched high and low for negative stories about Wall Street and Big Business, devoted most of its energy to positive ones, and the touts were our best sources.”
Most telling of all, Powers noted, was the fact that journalists hardly ever asked, “What are you selling?”
“What are you buying now?” or some variant of that question, was one of the most frequently uttered sentences on CNBC, on Wall $treet Week with Louis Rukeyser, and all the other TV and radio shows on which touts appeared,” he reported. “Money, Smart Money, and other financial magazines were obsessed with stocks and funds we should be buying right now. The buy focus spilled over into the general media: the big newspapers and networks…They almost never spoke of selling…. And we almost never asked. It was rude to bring it up, like walking into a wild party and talking about death.”
Yet of course, unless a company was issuing new shares, every time someone bought a share of stock, someone else was selling it. “In order for a lot of people to obey the touts and purchase Amazon.com at more than $400 a share, a lot of other people had to sell the stock at the same price,” Powers observed. “Who were those people? Why didn’t we cover them as assiduously as we covered the touts? Because the sell story was bad news, and we’d lost the taste,” he concluded.46
Powers felt that the very best print journalists were more likely to look under the rocks: “At The New York Times and The Wall Street Journal, you have some excellent reporters doing very fine work,” he said in a 2003 interview. “The problem is that financial investigative journalism is time-consuming and requires specialized knowledge. Only the biggest news organizations can afford to pay a reporter to spend so much time on one story, and if their best financial minds don’t look into a particular story, odds are nobody will. The media are full of people with the ability and willingness to do investigative work on the government, but there are too few investigative journalists reporting on business.”47
Powers did not blame individual reporters. “Daily beat reporters can’t be expected to be crusading investigators, too,” he noted. “All their sources would dry up.”48
Powers’s comments underlined the problem implicit in the “beat” system of reporting. Each reporter is assigned a particular industry, and like the cop with a beat, he gets to know the people in the neighborhood. But the danger is that he begins to feel that he is part of that industry. The PR people and Wall Street analysts who promote that industry become his sources. Over time, some may become his friends. In any case, to gain access to corporate executives he needs their goodwill. This puts a damper on investigative reporting.
“During the bubble, many reporters just weren’t doing their own critical thinking. They outsourced it to Wall Street analysts—dial-a-quote reporting,” explained Jonathan Weil, the reporter who flagged Enron in September of 2000, writing a critical story for the Texas edition of The Wall Street Journal.49
The Journal did not publish the story in its national edition. “That article is an example of what my late broker used to call truffles lying on the forest floor,” noted Newsweek and Washington Post financial columnist Allan Sloan.
This is not to say that no one tried to caution investors. In 1996, Fortune, for example, ran a story that asked, “Market Mania? How Crazy Is This Market?” As 1997 began, Forbes published a story headlined “Reality Check: What Could End the Bull Market? A Crash in Tech Stocks. Don’t Rule It Out.”50
But the fact that the bull market lasted so long presented problems even for the most skeptical reporters. “You can only say that price/earnings ratios are too high so many times,” reflected a business writer at The New York Times. “Eventually, you lose credibility.” Weil agreed: “There was widespread thinking among skeptical financial writers—this can’t go on—but it has. What are we supposed to do about it? How many times can you say it? The problem is, if you’re a daily newspaper, you have to come up with something dif
ferent to say every day.” Moreover, “in a public marketplace, if you write a story that doesn’t resonate with the marketplace—you have to question the story,” said The Wall Street Journal ’s Kansas. “Reporters can get hesitant about their own convictions.”51
Meanwhile, “journalism changed,” said Mark Hulbert, a financial columnist for Forbes and, later, for The New York Times. “Publishers and editors started talking to each other. In the past, publishers worried about what readers wanted to hear, and editors worried about what they needed to know.”52 Another Chinese Wall was falling.
For newspapers, the bull proved to be a cash cow. By 1997, the financial services industry accounted for an estimated 30 percent of national newspaper ad revenues.53
At the same time, “there is more and more emphasis on selling the product—which means telling people what they want to hear,” Hulbert continued. “Why did CNBC and The Wall Street Journal focus on information that has no statistical significance?” he asked, referring to the media’s focus on the short term. “The answer is that they can’t afford to focus on things that have statistical significance. Those things don’t change. But in order to get advertising,” Hulbert explained, “they need to send the message that this is a publication you need to read every day.”54
It was not a new problem. “The function of the press in society is to inform, but its role is to make money,” media critic A. J. Liebling wrote in 1981.55 But by the mid-nineties, some observers felt that the good news was getting out of hand. “I’ve been watching the stock market (blush) since 1945, I’ve never seen anything like the current market super-hype,” Richard Russell told his readers at the end of 1996. “Magazines, newspapers, TV, radio, books, all extolling the wonders, indeed the absolute necessity, of being invested in common stocks or mutual funds.”56