Bull!

by Maggie Mahar

  After pointing out that Dudack had earned the show’s “dunce cap” for much of the past two and a half years, Rukeyser wound up the segment by sacking her on nationwide TV. Dudack, he explained, would no longer be part of the elves’ index. He even announced her replacement on the air: “Coming in from the sidelines is that old Dartmouth basketball player, Alan Bond, who is ready and eager to try to run up a better record.”11

  Blindsided, Dudack fielded calls all weekend from friends, relatives, and colleagues. Monday morning, Dow Jones phoned to ask: “What do you have to say about what happened on Wall $treet Week?” Dudack still wasn’t sure exactly what had happened, though she had begun to piece together the story. Later she would learn that Rukeyser had instructed his producer to e-mail her late Friday, shortly before the show aired. But Dudack did not get the message, dated Friday, 5:58 P.M., until she came into her office on Monday morning.

  In the week that followed, letters began streaming in from Dudack’s fans. Mainly, they were appalled that Rukeyser had fired her on the air. But many also were upset because it seemed that Rukeyser was manipulating the index. Some believed that he had removed Dudack from his index because he wanted it to be unanimously bullish.

  As for Dudack, she saw the episode as “one of those markers that come at the top of a bull market: the last bear is gored.”

  AN ASIDE ON BEING “EARLY”

  Dudack had recognized that for much of 1998 and 1999, her short-term forecasts had been wrong, but she had not been particularly perturbed. She knew that, at any time, the Dow could crack. She was basing her recommendations on the degree of risk versus reward that the market as a whole offered, and by now, the risk had become far too high. She did not know when that risk would become visible, but she told clients: “Valuations make no sense. This quarter, next quarter, the quarter after that—no one knows when, but the market will plunge.”

  In other words, Dudack was like an insurance salesman advising customers who lived too close to the river to buy flood insurance. She didn’t know when the river would overflow, but she realized it was dangerously high—and once the deluge came, it would be too late to get out. Those who were able to follow Dudack’s advice, and got out sometime in 1998, would be grateful. A buy-and-hold investor who stuck with the S&P 500 from June of 1998 through June of 2003 would make nothing. In fact, he would lose a little over 8 percent of his savings during those five years.

  But in the fall of 1999, financial euphoria still reigned on Main Street, and Dudack sensed that Rukeyser did not want a bear casting a shadow over his purposefully upbeat show. From its beginnings in 1970, Wall $treet Week had been dedicated to making viewers feel that Wall Street was still a safe place for the “little guy” to invest his life’s savings, that, despite the bear market of the seventies, and the insider trading scandals of the eighties, the rules of capitalism had never changed. “Buy and hold” was his creed, “Keep the faith” one of his taglines. Perhaps that was why the show was so self-consciously anachronistic.

  RUKEYSER—“RAKISH RACONTEUR”?

  Rukeyser himself, with his snowy Edwardian hairdo and elegantly tailored suits, seemed to have stepped out of another time and place. The set, which appeared to be a living room decorated by an Anglophile living somewhere in Darien, Connecticut, bespoke Old Money. (The set was such a perfect backdrop for its host that viewers wrote in to ask if it was, indeed, his living room.) Even in the nineties, the guests who gathered around the show’s mahogany table seemed to represent what one observer called “the Town & Country Set—men in pinstripes, women wearing silk scarves the size of baby quilts around their shoulders.”12

  But while some might call the show stodgy—or even smug—Wall $treet Week was one of the most popular programs on the Public Broadcasting System’s lineup, and it enjoyed an enormously loyal following. When the 67-year-old Rukeyser celebrated the program’s 30-year anniversary in November of 2000, he still drew an audience four times the size of that watching either CNN’s Moneyline or CNBC’s News Center on an average day.13 If CNBC’s Squawk Box team offered the frat-house version of financial news, Rukeyser was the dean, and even as the bull market peaked, Wall $treet Week remained the nation’s most popular financial news program.

  The show’s popularity was based, in large part, on its host’s personality. Depending on who you were, you saw Rukeyser as a “rakish raconteur” (Playboy) or “relentlessly insouciant” (The New Yorker).14 But most viewers found the tall, patrician-looking Rukeyser charismatic. Modern Maturity named him one of world’s “50 sexiest men over 50.” Critics might find the show’s level of self-satisfaction grating, but millions of viewers looked forward to the arch, pun-filled opening monologue in which Rukeyser baited bears, politicians, and other “fat cats.” His tone, which one reviewer described as equal parts “irreverence and self-satisfaction,” assured viewers that he had an inside line on how the world worked.15 And he was sharing it with them.

  Eschewing financial jargon, Rukeyser was both credible and clear: he managed to explain the market in language that almost anyone could understand. For it was a tenet of the show that if an investor just paid attention to the fundamentals of investing, every right-thinking, hardworking American stood just as much of a chance as the pros.

  Yet, for all of Rukeyser’s successes in the late nineties, Wall $treet Week would fail its viewers. As the bear moved in on the market, Rukeyser had reason to regret losing Dudack, his only reliable skeptic. By the end of 1999, Wall $treet Week’s elves were beginning to disappear into the bear’s many traps. In 2000, the show’s bullish elves were wrong most of the time. By the beginning of September 2001, their track record was so abysmal that Rukeyser turned on them, calling his very own elves “comatose.” In September of 2001, following the World Trade Center attacks, Rukeyser announced, “We’re going to give the elves a rest for a little while.”16

  DUDACK’S REPLACEMENT

  Rukeyser had a second, even greater reason to wish he hadn’t fired Dudack from the elves’ panel. Her replacement, Alan Bond, proved a singularly embarrassing choice. A month after Rukeyser tapped Bond to fill Dudack’s spot, Alan Bond was indicted by the Manhattan DA, charged with taking more than $6 million in kickbacks.

  Throughout the decade, Bond had managed an impressive list of retirement plans that included the NBA’s retirement fund, a pension plan for the City University of New York, and the Ohio Police and Firemen’s Disability Pension. By 1999, Bond, 38, ran more than $600 million and had become a frequent guest on Rukeyser’s show. But in December of 1999, the U.S. Attorney’s office in Manhattan unsealed an indictment charging that when Bond placed trades, he received kickbacks from the brokers who took his orders. The brokers had siphoned the paybacks from his clients’ accounts. Allegedly, Bond told the brokerage firms to mark up the cost of each buy order; the firms, in turn, kicked back 57 to 80 percent of the markup to Bond, who instructed them not to report it on the statements that his clients received.

  According to a separate complaint filed by the SEC, Bond spent the cash building an opulent lifestyle that included 75 luxury and antique automobiles, a large home, and a beachfront condominium in Florida—not to mention frequent shopping sprees to stores such as Saks Fifth Avenue and Tiffany & Co. His American Express bills ranged from $200,000 to $470,000 a month.

  Unbowed by the indictment, Bond redoubled his efforts to profit at his clients’ expense. In 2001, while out on bail, he continued to manage pension funds, and during this time, a second indictment would allege, he began directing virtually all of his profitable stock trades to his personal brokerage account. Unprofitable trades were posted to his clients’ accounts. According to prosecutors and court documents, Bond managed the scheme by waiting until the end of the day before notifying Neuberger & Berman, the firm that posted his trades, which should be directed to his personal account and which to his clients’ accounts. Sometimes he waited until after the markets closed.

  From March 2000 to July 31, 2001, Bond
reallocated trades about 50 times, the prosecutor’s complaint alleged, canceling winning trades previously booked to clients’ accounts and moving the trades—and the gains—to his personal account. Federal prosecutors said the “cherry picking” scheme netted Mr. Bond $6.3 million and cost three clients—two pension funds and an investment advisory group—more than $56 million. In August of 2001, the complaint did not attempt to explain why Neuberger & Berman accepted more than 50 eleventh-hour changes.17

  WHY NEITHER GAIL DUDACK NOR JIM GRANT WILL EVER BECOME LOUIS RUKEYSER

  In the meantime, in the months after she left Wall $treet Week, Gail Dudack watched the bear take control of the market. But as she predicted, the fact that she had been right did not make her more popular. Instead, in the fall of 2000, six months after her firm announced that it was merging with PaineWebber, she was fired.

  “They called me in, thanked me for all that I had done for the firm over the years, and then explained that they had only one job—and they were giving it to Ed Kerschner, PaineWebber’s chief stategist,” Dudack told her husband that night.

  Bears are rarely appreciated—even when they are right, as Michael Lewis noted in a 2003 Bloomberg column titled “Why James Grant Will Never Become Louis Rukeyser”: “For anyone who sets out on a career of financial punditry, there is a very clear incentive to become a bull,” Lewis observed. “Louis Rukeyser, for instance. The host of ‘Louis Rukeyser’s Wall $treet’ has made a fantastically good living for going on 30 years by ridiculing bearishness in all its forms, and celebrating bullishness in most of its forms….

  “Even with the Dow falling fast, it is impossible to imagine a bearish version of Louis Rukeyser’s gaudy worldly success,” Lewis continued. “Just as we grossly exaggerate the importance of people who argue that the market is going up, even when those people are dimwits, we grossly diminish the importance of those who say the stock market is going down—even when those people are first-rate thinkers. James Grant, for instance. The editor of ‘Grant’s Interest Rate Observer,’ is one of the most interesting market analysts alive. Even in a bull market his views are far more stimulating and original than those of most bullish pundits. For going on 15 years he has argued, with wit and clarity, that the U.S. stock market is a house of cards. If there was any justice in the world right now, James Grant would be a household name, feted for his prescience, offered huge sums for his public speeches, perhaps even recognized on occasion by New York taxi drivers.”18

  ACCUMULATING ASSETS—LAUNCHING A NEW FUND

  But Jim Grant would never receive mass adulation on the streets of Manhattan, and when her firm merged with PaineWebber, Gail Dudack would not even be allowed to keep her job. It was unclear why UBS PaineWebber could not use two market strategists, one bullish and one bearish—especially since the S&P 500 already had begun to buckle. But Dudack understood why they wanted Kerschner: he had just completed a “dog and pony” show, raising over $1 billion, mainly from admiring individual investors, for PaineWebber’s new Strategic Fund.

  Kerschner launched the fund in November of 1999 and promptly poured his investors’ savings into growth stocks such as Lucent, WorldCom, and Citrix Systems. All three were clocked. By the end of 2000, the fund had shed nearly one-third of its value, placing it in the bottom 2 percent of all large-cap growth funds according to Morningstar.

  The fund then took an alias, Brinson Strategy (the name borrowed from Brinson Partners, a money-management operation owned by UBS). In the fall of 2001, The New York Times would suggest that the fund’s name may have been changed “to shield UBS PaineWebber’s reputation.”19 Early in 2001, Kerschner added names such as Intel and Juniper Networks to his portfolio, and throughout the year, technology and telecommunications remained his favorite themes. The losses mounted. By the end of 2001, the fund had lost another 21 percent.

  Like Bond, Kerschner was undeterred by experience. In 2001, he continued to urge investors to plunge their savings into stocks. In the summer of that year, UBS PaineWebber launched an advertising campaign featuring Kerschner, who appeared in full-page newspaper ads, assuring investors that, by year-end, the Dow would gain 50 percent.

  In 2002, UBS changed the fund’s name, once again to UBS Strategy, and revamped the portfolio’s scope, making it a global fund. Casting a wider net did not help: that year, the fund lost another 22 percent. Finally, at the end of 2002, UBS decided to quietly give its Strategy Fund a proper burial, merging it with its $58 million UBS Global Equity Fund.20

  THE GREEK CHORUS

  In 1999, Dudack, of course, was not the only vocal bear in the financial world—though she was one of very few who had managed to hold on to a top position at a major Wall Street firm.

  By and large, market watchers who became the bull market’s Greek Chorus worked outside of the financial establishment that runs up and down the East Coast—from Fidelity’s headquarters in Boston, through the intersection of Wall and Broad in downtown Manhattan, to the seat of power politics in Washington, D.C.—with outposts, of course, on the West Coast, in Silicon Valley, and in San Francisco, home of Charles Schwab.

  Those who raised their voices in doubt tended to live outside the bureaucracy: they were money managers who ran their own shop (like Jean-Marie Eveillard, Marty Whitman, and Jeremy Grantham, to name just three); newsletter writers with a sense of history (like Richard Russell, Jim Grant, Marc Faber, Kate Welling, Fred Hickey, and Mark Hulbert), maverick columnists (like Allan Sloan, Alan Abelson, and Herb Greenberg), or independent researchers (like Steve Leuthold and David Tice) who knew how to look “behind the numbers”—and, again, answered to no one except themselves.

  To most investors, 1999 seemed an apex. Even with the benefit of hindsight, they would view ’99 as the last grand year of a spectacular bull market. With the benefit of foresight, the Greek Chorus recognized that if this was a climax, it was also an ending—and the beginning of a new cycle. In fact, the end of a bull market and the beginning of a bear market often overlap.

  Most investors did not realize a bear market had begun, Richard Russell later suggested, because the bull market topped out so gradually—over a period of two years: “The advance-decline ratio on the NYSE topped out on April 3, 1998 at 13. Both the Morgan Stanley Cyclical Index (an index of cyclical stocks) and the Dow Jones Transportation Average topped out in May of 1999—the cyclicals on the 10th at 619.09; the transports on the 12th at 3783.50.” The Dow Jones Industrial Average would not peak until January of 2000, followed by the Nasdaq and the S&P 500, three months later. “If they all topped out within say, a month or so, the effect would have been much more pronounced and dramatic,” Russell commented. Instead, this was, as Dudack had suggested, a “stealth bear market.”21

  Marc Faber, an international investor based in Hong Kong, was accustomed to tracking the bear. Faber had watched financial manias come to an unhappy end in Japan, in Latin America, and in Southeast Asia. In August of 1999, he titled his monthly newsletter U.S. Bear Market—Phase One.

  By November, Faber was certain “the first phase of the bear market is in full force. But it is well hidden,” he acknowledged, “by the continued strength of just a few stocks like GE and Microsoft. The mood is extremely optimistic. Such is the case in the first phase of a bear market: negative news is dismissed as irrelevant and immaterial.”

  This first phase could stretch on for years, Faber added: “I have experienced many bubbles and investment manias, and I can confidently say that none of them came to an end with the first lot of bad news. In early 1972, inflation began to accelerate and interest rates rose in the U.S., but the stock market continued to rise until January of 1973…. In fact, a bear market rally in September/October 1973 led to a new high for the Dow Jones.” Most remarkably, Faber continued, “the market didn’t fall immediately after OPEC announced, on October 16, a 70% increase in oil prices, but continued to rally until October 29. Only then did reality set in.”22

  Like Faber, Richard Russell realized that the bear w
as now in charge. In September 1999, Russell told his readers that the Dow Theory had sent a “sell signal.” He also warned that given the strength of the bull market, he feared this bear market might be a drawn-out, grinding affair: “The bear is in no hurry,” Russell wrote (his emphasis). “The bear is intent on wearing us out. The reason I feel this way is because it’s clear that the authorities won’t allow the markets to express themselves, or I should say the authorities will do all they can to thwart the markets’ expressing themselves…. The Fedand the politicians are committed to fighting the bear tooth and nail.” As a result, Russell cautioned, “their fighting will serve to extend the bear market far beyond what might ordinarily be expected.”23

  —19—

  INSIDERS SELL; THE WATER RISES

  TEXAS SENATOR PHIL GRAMM: “If this is the bust, the boom was sure as hell worth it. “You agree with that, right?”

  FED CHAIRMAN ALAN GREENSPAN: “Certainly.”

  —Exchange between Senator Gramm and the

  Fed chairman at a 2001 congressional hearing1

  While both mutual fund managers and small investors followed the herd, insiders began running in the opposite direction. The rush for the exits began in the fall of 1999. From September of 1999 through July of 2000, insider selling of big blocks of stock (at least $1 million worth or 100,000 shares or more) rose to $43.1 billion—twice as much as insiders sold over the same span in ’97 and ’98. Indeed, the $39 billion worth of shares that insiders unloaded in just the first six months of 2000 topped the record $39 billion sold in all of ’99.2