by Maggie Mahar
Yet they were not the whole story. Like society itself, the bull market depended on a web of relationships, and that web stretched all the way to Washington.
THE NEW ECONOMY (1996–98)
—14—
ABBY COHEN GOES TO WASHINGTON; ALAN GREENSPAN GIVES A SPEECH
“STEP ASIDE, ELAINE. NOW, THE BIG NAME IS ABBY”
November 16, 1996. The Dow appeared headed for yet another record close when the rumor slithered across Wall Street that Abby Joseph Cohen was about to alter her bullish stock market forecast. As it happened, Cohen was not in New York. Instead, she was attending a conference, along with a few hundred other senior Goldman executives, in Westchester County, just an hour’s drive from Manhattan.
As Cohen listened to a speech by Goldman CEO Jon Corzine, someone tapped her on the shoulder. “There’s an emergency,” she was told. “You must call the office.” Cohen’s first thought was that one of her daughters was sick.1
When Cohen reached Goldman’s hotline, her assistant was apologetic: “They made me call.” She was referring to Goldman’s traders. The Dow already had fallen 60 points—and in 1996, 60 points was still a stomach-turning plunge. Soon, she was patched through to the intercom system linking Goldman offices around the world.
On the trading floor in New York, the very sound of Cohen’s voice calmed the room. She made it clear that she had not changed her position—and hundreds of traders picked up their phones to spread the word. The market began climbing. At the end of the day, it closed up 35 points.
Such was Abby Joseph Cohen’s power. She had not sought the notoriety. (If she had, her colleagues at Goldman Sachs, a firm that prided itself upon its reputation for discretion, would have been appalled.) But the media needed a leading lady to star in the bull market, and it had chosen Cohen.
Abby Joseph Cohen was replacing Elaine Garzarelli, the Shearson analyst who came to fame by predicting the October 1987 crash. In the early nineties, Garzarelli remained a name in the financial press, but by November of ’96 a Business Week headline announced that the media was passing the baton on to Cohen: “Step Aside, Elaine. Now, the Big Name Is Abby.”2
The two could not have been more different. Garzarelli personified the eighties: “Slim, lively and high-strung, Garzarelli favors sheer white silk blouses and suits by Tahari,” Smart Money gushed in ’88. “She is at once tough and sexy. Witnesses to a panel discussion a few years ago remember her seductively nibbling on her pearls.”3
But the flamboyant, long-legged Shearson analyst was never wholeheartedly accepted by Wall Street—especially after she appeared on television in pantyhose ads. By 1996, the Street had made its choice clear: the financial world of the nineties wanted a wise mother, not a financial femme fatale.
To imagine Abby Cohen nibbling on her pearls is to imagine Alan Greenspan clad in black leather. As noted earlier, Wall Street trusted Cohen, in part, because she was a woman who “wore sensible shoes.” “‘When I go home, I still have to do the cleaning and the laundry,’” she told Business Week. “‘Actually I like doing the laundry,’” she added, “‘it’s cathartic.’”4
But the bedrock of Cohen’s credibility was her consistency. The doyenne of the bull market, Cohen was always bullish, yet never exuberant. Serene and wise, she simply insisted that, despite the day-to-day volatility, the larger trend was positive. At the end of 1996, she wrote an op-ed piece for The Washington Post that laid out the backbone of her argument for the New Era: “The U.S. economy has re-established itself as the world’s strongest,” Cohen declared. “Our workers are the most productive, our businesses are the most profitable, and we are investing in new technologies and creating new jobs at an unrivaled pace.”
Cohen acknowledged that “with the bull market entering its seventh year, stocks are no longer undervalued and prices have become more volatile. Our recommended portfolio for professional investors now suggests putting 60 percent in equities, compared with 70 to 75 percent in late 1994 and 1995.” Yet, she stressed, “we believe that further stock price gains will be soundly based on the slower-moving but more durable economy.”5
In the future, Cohen would describe that “durable” U.S. economy as the “supertanker” of the world economy—“not fast, not showy” but, like Cohen herself, “hard to knock off course.” Her optimism seemed closely tied to her belief in the United States as a nation, her rhetoric laced with a patriotism that, while genuine, also could become dangerous. If you questioned the New Economy, were you questioning the ingenuity and productivity of the American worker?
But if Cohen seemed, to some, Panglossian in her confidence, her optimism appeared well founded. In the summer of 1996, while some pundits predicted a downturn, Cohen forecast Dow 6000. She was right, as she would be, throughout the nineties, proving, in Michael Lewis’s words, that “no matter how rich you are, your mother is smarter than you are.”6
WOMEN ON WALL STREET
While Wall Street embraced Cohen as its maternal muse, Goldman Sachs still had not made her a partner. In 1996, only 18 of the brotherhood’s 285 managing directors were women. Just 11 of the 18 had been tapped to be full partners. Asked about Goldman’s decision not to make Cohen a partner in its last round of appointments late in 1996, Linda Strumpf, a money manager who used Cohen’s advice to help steer the Ford Foundation’s $8.5 billion investment portfolio, answered, “Please, that’s a very sore subject.”7
Nevertheless, it must be acknowledged, women on Wall Street had, as they say, “come a long way.” Thirty years earlier, women were not even allowed to lunch on the Street. As New Yorker writer John Brooks reported at the time, not only were women barred from Wall Street’s private lunch clubs, “most astonishing…was the fact that many of the public restaurants in the area did not take advantage of the situation by encouraging women, but rather fell in line with the clubs by banning them…. Without a reservation or a long wait, a woman could scarcely get a decent lunch anywhere in the area at any price.”
Nor could a woman aspire to stardom. Of the thousands of women who got off the subway at Broadway and Wall each morning, the vast majority were secretaries or clerks. The most ambitious might hope to become research analysts, but only because “the ladies doing research could be kept hidden in a back room,” Brooks explained. As late as 1965, “professionally, prejudice against women in the financial business was wide, deep and largely unquestioned.” Wall Street was still an all-male bastion, a stony labyrinth of canyons created by narrow streets and gray buildings where “even in summer, the air lies heavy, dank and sunless” and “pretty women seemed flesh without magic.”8
In 1996, sunlight still rarely pierced Wall Street’s winding alleyways, but women had made notable progress. Not only were the ladies allowed to lunch, more than a few had been anointed as seers.
Abby Cohen and Mary Meeker stood out. Each possessed what was needed to become a guru on Wall Street: conviction. In Cohen’s case, her optimism was grounded in her faith in the American economy. Meeker’s millennial outlook, on the other hand, was founded on a nearly religious belief in the promise of the Internet.
But it hardly mattered what served as the anchor for their confidence. More than anything, Wall Street craves certainty.
Few investors, be they professionals or amateurs, wish to believe that the market is as irrational or imperfect as they are. Enter the wizards, with their charts and their numbers, their smoke and their theories. Some of these are very fine theories—and sometimes they work. But the very best of the oracles know very well that prophecy is part luck. Ultimately, the future is unknowable.
Investors, however, have little time for seers who dwell on the contradictions and inconsistencies of the marketplace. At one point, The Wall Street Journal complained that Bob Farrell, Merrill’s top-ranked technical analyst, was not quite, in the reporter’s view, “first tier,” because he “usually writes reports that are dense with hedges, conditional clauses and predictions going in several directions at once. El
aine Garzarelli,” the Journal noted, “doesn’t have that problem.”9
Like the market itself, investors abhor ambiguity. They want a seer who comes with a system for counting the cards. Like Dorothy in Oz, investors invent wizards to give them courage. Financial gurus exist because they satisfy Wall Street’s need to believe that “the market” is rational, efficient, and above all predictable—that “the market” is not us, but a higher, separate power, and that Wall Street’s shamans are in touch with that power.
On that score, investors were reassured by the fact that corporate earnings were growing so very smoothly, year after year—an important part of the illusion that markets and economies are predictable.
Cohen genuinely believed those earnings reports. In a 1997 debate with Jim Grant, she rested her argument on the superiority of American accounting practices.
“I get a little concerned when I see technology companies paying their officers with options,” Grant ventured. “To the extent that they treat this as a balance-sheet rather than an income-statement item, they are overstating earnings. If and when these stocks come down and these companies have to pay cash compensation, it will instantly show up in the income statement.”
In Grant’s view, prosperity made investors gullible: “Bull markets have many great uses but they don’t produce much in the way of vigilance and skepticism,” he suggested. “I don’t think the Street is doing as good a job as it might in analyzing companies…. A case study in how people forgot to look under the hood is Centennial Technologies, which had a $1 billion market cap and was the New York Stock Exchange’s top-performing stock in 1996. The former CEO is now in jail, and the Feds are trying to figure out if any of the sales the company reported were real. This kind of thing happens because, in a rising tide of prosperity, skepticism doesn’t pay,” Grant added. “That being the case, I think you have to expect that many companies are guilty of shading and trimming earnings these days.”
Cohen would have none of it: “We have just done an exhaustive study that concludes that the quality of earnings is actually superb,” she replied crisply. “Accounting standards are tougher. The FASB has annoyed corporations for years and has forced them to adopt more conservative accounting…. Does this mean there’s no flexibility for companies to do things to their reported earnings? No, but on average the quality of what’s being reported is better now than it has been anytime in my professional lifetime.”10
How, without being rude, could Grant possibly counter such rectitude? By 1997, Cohen would become known as “the soothsayer who never blinked.”11
GREENSPAN WAVERS
Abby Joseph Cohen might be the most trusted voice on Wall Street, but the guru of all gurus still resided, not in Lower Manhattan, but in Washington. “In Greenspan We Trust” read the headline on Forbes cover in March of 1996.
While the nation trusted in Greenspan, by 1996, the Fed chairman was not so sure that he trusted in the market. A transcript of a Fed policy meeting in September revealed his anxiety over the market’s rapid rise: “I recognize there is a stock-market bubble problem at this point,” he allowed. Moreover, he seemed to know what he could do to deflate that bubble: “We do have the possibility of raising major concerns by increasing margin requirements,” he observed, referring to the fact that if investors were required to have more capital before buying stocks “on margin” (borrowing money from their broker to buy) that would be a signal that the Fed was concerned. Indeed, Greenspan seemed certain on this point: “I guarantee that if you want to get rid of the bubble, whatever it is, that will do it,” he declared.
But instead of stiffening margin requirements, the Fed decided to “sit on the sidelines as mere observers of the Great American Asset Bubble,” said Morgan Stanley economist Stephen Roach, after reading the transcript six years later. Roach believed that the Fed’s reluctance to raise margin requirements reflected Greenspan’s concern as to “what else [raising margin requirements] will do.” So rather than acting, the chairman decided to “keep an eye on” the bubble.12
By November, the Dow had climbed 15 percent in two months, Citicorp’s shares had gained 28 percent since Labor Day, and IBM’s shares were up 40 percent. “The sort of historical data on stock prices and profits that Fed economists examine suggests the market may be overvalued as much as 20%,” observed The Wall Street Journal in a story that began: “If you were United States Federal Reserve Chairman Alan Greenspan, wouldn’t you be worried about the soaring American stock market?”
Greenspan, however, seemed to be keeping his concerns under his hat: “The watchword among Fed officials is: Don’t use the words ‘stock’ and ‘market’ in the same sentence. No one wants the blame for a crash,” wrote the Journal ’s David Wessel. Nonetheless, he noted, a summary of the Fed’s deliberations just six months earlier showed that Fed officials “questioned the sustainability of the performance of the stock market.” Since then, the industrial average had added 700 points. “One headline-making Greenspan speech about ‘speculative excess’ would shatter the market’s complacency,” Wessel added, with remarkable prescience (emphasis mine).13
Greenspan would make that speech in less than two weeks. But first, he summoned a small circle of the financial world’s best and brightest to Washington.
THE MEETING
December 3, 1996: Abby Joseph Cohen, Morgan Stanley equity strategist Byron Wien, David Shulman (Wien’s counterpart at Salomon Brothers), Yale economist Robert Shiller, and Harvard economist John Campbell trooped down to Washington to attend a private meeting with the chairman of the Federal Reserve. Each would be asked to outline his or her view of the market. Of the group, Cohen was the one bull you could count on. (She was also the only one who would be invited back.)
Wien came to the meeting in a bullish frame of mind, but only six months earlier, he had been a bear. This is not to say that Morgan Stanley’s chief strategist for domestic equities was mealymouthed. To the contrary, Wien took definite stands, and as a forecaster, he had been on a roll for two years. After calling 1994’s brief bear market, he predicted that the Dow would sprint to 4500 by the end of 1995. Some in the industry scoffed at his sudden change of mind, even calling his forecast “irresponsible.” In fact, the Dow broke 5000. “I wasn’t irresponsible enough,” said Wien.
At the beginning of 1996, however, Wien’s analysis told him that the market was likely to top out by midyear. In May, he predicted a 1000-point drop on the Dow. By the summer, it looked as if his forecast was coming true. In June and July the Dow sold off. The Dow did not fall as far as he expected, however, and by October, he realized that his 1000-point decline was not going to materialize. “I underestimated the market’s inherent momentum,” Wien confessed. “Maybe I’m a year early, but unfortunately, I don’t have too many years left.”14
Accounts vary as to how and why Wien changed his mind. “By late September the rebounding market made his position difficult. At the end of September he said, ‘I can’t stand it anymore,’” said Thomas McManus, an equity strategist and principal at Morgan who worked with Wien.
Certainly, it was getting more and more difficult to be a bear on Wall Street. “I have the hoof marks of the bull all over my back,” said Salomon’s David Shulman, one of the most vocal bears on the Street, a few days after meeting with Greenspan. “It requires company to be bearish,” he added, “and there are still very few people willing to take that view.”
A year earlier, Shulman had tried to come in from the cold. “Lone Bear on Wall Street Joins the Herd,” read the headline in The Wall Street Journal. But as share prices continued to climb, Salomon Brothers chief equity strategist found it hard to turn off his mind: it seemed to him obvious that share prices were outstripping realistic expectations for earnings growth. By the time he met with the Fed chairman in December of 1996, Shulman was once again advising clients to trim their stock holdings back from 50 to 45 percent of their portfolio.15
David Shulman did not share Forbes’s faith th
at the Fed chairman would be able to ensure a “soft landing” for either the market or the economy: “Very simply the economy is too big and complicated to be piloted by a few central bankers sitting in Washington and other world capitals,” Shulman explained. “The bulls seem to envision them in an airplane with an electronically controlled cockpit, steering us through a fog of economic statistics. I see the bankers riding in a bumper car in an amusement park. The link between the steering wheel and the front axle is loose.”
Despite his contrarian views, throughout the mid-nineties Shulman continued to be one of the most respected strategists on Wall Street.16 Nevertheless, in January 1998, when his firm merged with the Smith Barney unit of Travelers Group, Shulman himself would be “trimmed” from the herd. “Many of Smith Barney’s clients were individual investors—a bearish chief equity strategist wasn’t going to help the firm sell stocks,” a colleague explained.17
By contrast, economists Robert Shiller and John Campbell were free to speak their minds without fear of putting a crimp in their careers. Their bearish views would not affect either Yale’s or Harvard’s revenues. This is not to suggest that Wall Street’s market strategists should be tenured—a chilling thought—only that everyone who listens to them needs to understand that Wall Street exists to sell investments. From a business point of view, no one on Wall Street has any earthly reason ever to suggest that the market is overpriced.
Shiller’s work was based, in part, on his analysis of market psychology. Since the 1987 crash, he had been polling investors every six months, and by 1996, he saw unnerving parallels between investor sentiment in the United States and the views expressed by Japanese investors in 1989—just as that market was peaking.