Bull!

by Maggie Mahar

  9. “The Rebirth of Equities.”

  10. Gail Dudack made this point in Jack Egan, “The Bull Turns 5 and Roars On,” U.S. News & World Report, 10 August 1987, 54.

  11. Linda Sandler, “Heard on the Street: Liquidity Is Stoking Stock Prices, Some Say, But Others Warn It Could Dry Up Suddenly,” The Wall Street Journal, 3 August 1987. Over the six years ending in ’89, “merger and acquisition activity has risen by more than 50% on an annual basis,” Barron’s reported. “The number of deals $100 million and over has risen by 150% since 1983.” Benjamin Stein, “End of an Era? Why the Great Takeover Frenzy of the Eighties May Have Peaked,” Barron’s, 28 August 1989, 14. In a June 1989 PaineWebber report, “Beyond the Debt Deluge,” analysts Thomas Doerflinger and Edward Kerschner reported that from 1984 to 1988, 121 firms had disappeared from the S&P 500, representing 14.1 percent of the market capitalization of the index.

  12. Even though inflation was falling, real interest rates (interest rates minus inflation) remained steep enough that from a businessman’s point of view, the real cost of borrowing money to build his factory and buy his own real estate was unreasonably high. It made much more sense to scoop up an existing company.

  13. For an extended, insightful analysis of how inflation and high real interest rates drove a takeover frenzy that was fueled by junk bonds, see Benjamin Stein, “End of an Era?”

  14. Business Week described the reversal of debt/equity ratios in Sarah Bartlett, “Power Investors: Now All Street Firms Want to Hold the Company—Not Its Shares,” 20 June 1988. PaineWebber’s report “Beyond the Debt Deluge” describes how, with the advent of the LBO, managers had a “radically different goal.”

  15. Ellyn Spragins, “When Power Investors Call the Shots,” Business Week, 20 June 1988, 126.

  16. Bryan Burrough and John Helyar, Barbarians at the Gate: The Fall of RJR Nabisco (New York: HarperPerennial, 1991), 514.

  17. James Grant, “Michael Milken, Meet Sewell Avery,” Forbes, 23 October 1989.

  18. Byron Wien, interview with the author. See Chapter 16 (“Fully Deluded Earnings”) on Cisco’s earnings.

  19. James Grant, “Michael Milken, Meet Sewell Avery.”

  20. Jeffrey M. Laderman, “The Bulls Breathe Fire,” Business Week, 25 November 1985, 34.

  21. Dean Rotbart, “Market Hardball: Aggressive Methods of Some Short Sellers Stir Critics to Cry Foul: Loosely Allied Traders Pick a Stock, Then Sow Doubt in an Effort to Depress It—Gray Area of Securities Law,” The Wall Street Journal, 5 September 1985.

  22. Dean Rotbart, “Market Hardball.”

  23. Jim Chanos, interview with the author.

  24. Dow Jones News, “Young Analyst Foresaw Baldwin-United’s Ills.” (Dow Jones News Service edited Wall Street Journal stories), 28 September 1983.

  25. Dow Jones News, “Young Analyst Foresaw Baldwin United’s Ills.”

  26. Jim Chanos, interview with the author.

  27. Jim Chanos, interview with the author.

  28. Kate Welling, “Wounded Bear,” Barron’s, 3 June 1991, 16.

  29. In 1987, The Wall Street Journal reported that, according to the NYSE’s best estimate, the number of individual investors had risen from 30.6 million at the end of 1981 to 36 million at the end of 1985. Tim Metz, “Bull’s Run: Stocks Five-Year Rise Has Showered Benefits Unevenly in Economy: Institutions, Brokers, Some of Rich Gained the Most While Millions Lost Jobs,” The Wall Street Journal, 10 August 1987.

  30. The Wall Street Journal reported on a Labor Department study showing that 10.8 million Americans lost their jobs in plant closings and layoffs in the five years to January 1986. Meanwhile, the Conference Board’s researchers estimated that from 1984 through 1986, corporate restructurings and mergers eliminated 600,000 management jobs. (Tim Metz, “Bull’s Run: Stocks Five-Year Rise.”) While unemployment stood at “only” 5.9 percent in ’87—down from 9.7 percent in ’81—many relatively well paid middle-class and upper-middle-class workers had lost their jobs.

  31. Tim Metz, “Bull’s Run: Stocks Five-Year Rise.”

  32. See Robert Shiller, Irrational Exuberance (New York: Broadway Books, 2000), 218.

  33. On Fidelity Magellan, see Joseph Nocera, A Piece of the Action: How the Middle Class Joined the Money Class (New York: Simon & Schuster, 1994), 337; for net sales of stock funds versus bond and income funds, see Stan Hinden, “1986, a Year of Thrills and Chills for Mutual Fund Investors,” The Washington Post, 12 January 1987, f28.

  34. Maggie Mahar, “The Case of the Vanishing Investor,” Barron’s, 10 October 1998.

  CHAPTER 5

  1. “Business Digest,” The New York Times, 14 August 1987.

  2. James Grant, Grant’s Interest Rate Observer, 14 December 1987, 11.

  3. “American Survey: Mini-Money Management,” The Economist, 6 June 1987 (no byline).

  4. Tim Metz, “Bull’s Run: Stocks Five-Year Rise Has Showered Benefits Unevenly in the Economy,” The Wall Street Journal, 10 August 1987.

  5. In May of 1987 Forbes reported, “According to Lynch, Jones & Ryan, there are more securities analysts raising 1988 earnings estimates for the companies they follow than there are analysts who are reducing their estimates. Skeptics say analysts must do this to justify the high prices they are advising their institutional investor clients to pay for stocks today.” Gretchen Morgenson, “A Checklist for Stock Market Prognosticators,” Forbes, 4 May 1987.

  6. Buffett’s letter to shareholders was quoted in “What Buffett Isn’t Buying Now: Warren Buffett Says Stocks Are Too High,” Fortune, 27 April 1987, 7.

  7. Maggie Mahar, “The Case of the Vanishing Investor,” Barron’s, 10 October 1988.

  8. John Kenneth Galbraith, A Short History of Financial Euphoria (New York: Whittle Books, in association with Penguin Books, 1990), 10.

  Galbraith points out, “The Times later relented and arranged with the Atlantic editors for publication of an interview that covered much of the same ground. However, until the crash of October 19 of that year, the response to the piece was both sparse and unfavorable. ‘Galbraith doesn’t like to see people making money,’ was one of the more corroding observations. After October 19, however, almost everyone I met told me that he had read and admired the article; on the day of the crash itself, some 40 journalists and television commentators from Tokyo, across the United States and on to Paris and Milan called me for comment.”

  9. Mark Hulbert, “The Acid Test,” Forbes, 16 November 1987. Russell was not the only market timer who saw Black Monday coming, he reported. Robert Prechter, editor of The Elliott Wave Theorist, advised his readers to sell stocks and got into cash on October 7. In early August, Martin Zweig, editor of the Zweig Forecast, recommended that 90 percent of an investor’s portfolio be in stocks; by early October, he had cut his recommendation to 20 percent and advised readers to take a small position in puts—a bet that the market would fall.

  10. Steve Leuthold, interview with the author.

  11. Richard Broderick, “Avoiding the Herd on the Street,” Corporate Report Minnesota, June 1988, 48.

  12. Byron Wien, “Knowing When the End Is Near,” Investment Strategy Letter, 24 March 1987.

  13. Maggie Mahar, “In the Pits: Reports from the Battle Scene in ’Frisco, Chicago,” Barron’s, 15 October 1987.

  14. Friday evening, Ackerman tracked the author down in a Boston hotel, where she was on assignment for a story. At that point he told her, “It’s over.”

  15. Maggie Mahar, “In the Pits.”

  16. Hank Gilman, “Fidelity Runs into a Wall: Crown Prince of Financial Services Firms Faces Cuts, Rumors of Layoffs,” The Boston Globe, 28 February 1988.

  17. In an interview with the author, Havey Eisen, chairman of Bedford Oak Partners, recalled: “Peter Lynch told me how they handed the stock out, alphabetically, to the traders.” In August of 1987, Lynch had told Barron’s that, if forced to sell by mass redemptions, this would be his strategy: “You just sell 10,000 of everything or 2,000 of everything. You k
now, if you only have 50 stocks, you’ve got a problem. You’ve got to sell a million shares of everything.” Jaye Scholl, “Neff and Lynch: Contrasting Styles, Comparable Success,” Barron’s, 10 August 1987.

  18. Joseph Nocera, A Piece of the Action: How the Middle Class Joined the Moneyed Class (New York: Simon & Schuster, 1994), 349. The question, of course, is whether Johnson—or anyone—could have predicted the crash. Nocera argued, “It’s obvious now—and it should have been obvious at the time—that the first eight months of 1987 marked the final, frenzied run-up that always comes before an awful fall,” and notes that “a surprisingly long list” of soothsayers saw the crash coming: “In January, and again in October, The Atlantic Monthly ran articles (one by Galbraith, the other by…investment banker Peter G. Peterson)…in Harper’s, financial writer L. J. Davis weighed in as did Michael M. Thomas in The Nation. Elaine Garzarelli, a quantitative analyst for Shearson Lehman Brothers…was so sure that the end was near that when she appeared on CNN a week before the crash, she said flatly that the stock market was on the verge of collapse. James Grant, of Grant’s Interest Rate Observer, was similarly convinced…Jim Rogers, the well-known investor…was a bear…” (344, 345).

  19. Anne Swardson, “Mutual Fund Withdrawals Slow Down; Some Funds Sell Stocks to Pay Off Customers,” The Washington Post, 21 October 1987, F1.

  20. Bill Powell with Peter McKillop, “Looking into the Abyss,” Newsweek, 2 November 1987, 24.

  21. Edward Wyatt, “Assessing the Legacy of the ’87 Crash,” The New York Times, 19 October 1997. “J. Gary Burkhead, a vice chairman of Fidelity Investments, said in an interview that Fidelity’s stock sales on Oct. 19 totaled only about 10 percent of the early trading on the Big Board,” The New York Times later reported. “In addition, he said, its trading on Black Monday accounted for just under 4.5 percent of total volume on the New York exchange, in line with the 2 percent to 4 percent of daily volume that Fidelity accounted for in all of 1987. But,” the Times noted, “according to the report of the Securities and Exchange Commission on the crash, the magnitude of Fidelity’s sell orders on Oct. 19 indicate that it did play a significant role for the day.”

  22. Maggie Mahar, “The Case of the Vanishing Investor.”

  23. Alan Murray, “A Silver Lining to the Crash?” The Wall Street Journal, 26 November 1987.

  24. Grossman did not act on Welch’s advice. “Reporters were never told of the chairman’s problem,” Grossman reported in “Regulate the Medium, Liberate the Message; Original Intent in the Electronic Age,” Columbia Journalism Review, November/December 1991, XXX, no. 4, 72. But when Grossman wrote the article in 1991, he was concerned that GE, through NBC, had just been “allowed to acquire 100 percent ownership of FNN, cable’s number-one consumer news and business service. It then promptly closed down FNN,” Grossman observed, “merging it into CNBC, GE’s newer and smaller financial cable program service, giving it a monopoly position in the field.” In Grossman’s view, “GE should certainly not be allowed to own [the major] financial cable news service. Nor, following the ITT-ABC precedent, should GE—one of the nation’s largest defense contractors, financial service companies, consumer product producers, and advertisers—have ever been permitted to own and control NBC, one of the nation’s most powerful broadcasters.”

  25. Steve Leuthold, interview with the author.

  26. Peter L. Bernstein, Capital Ideas: The Improbable Origins of Modern Wall Street (New York: The Free Press, 1991), 291. Bernstein takes his numbers from the Brady Report.

  27. Benjamin Stein, “Whimpers from the West, or, Can I Still Have Dinner at Mortons?” Barron’s, 2 November 1987.

  28. Barbara Donnelly, “Efficient Market Theorists Are Puzzled by Recent Gyrations in Stock Market,” The Wall Street Journal, 23 October 1987.

  29. Barbara Donnelly, “Efficient Market Theorists Are Puzzled.”

  30. “1962 All Over Again? It May Be Happening Says Steve Leuthold” (Q&A interview with Kate Welling), Barron’s, 26 October 1987.

  31. Steve Leuthold, interview with the author.

  32. Richard Broderick, “Avoiding the Herd on Wall Street,” Corporate Report Minnesota, June 1988, 48.

  33. Edward Wyatt, “Legacy of the ’87 Crash: Assessing the Role of Mutual Fund Investors,” The New York Times, 19 October 1997.

  34. Charles Schwab, as quoted in Maggie Mahar, “The Case of the Vanishing Investor.”

  35. In A Piece of the Action, Joseph Nocera seems, at first, to support the myth: “After the crash of 1987, small investors did not turn and run, at least not in huge numbers…” But he then clarifies what happened, confirming Schwab’s experience. The fund companies, Nocera explains, saw customers “move their money in ways that reflected a new caution, shifting assets from an aggressive fund to a less aggressive one, from an equity fund to a bond fund, from a bond fund to a money market fund. But they kept their assets in the company” (367–78). In other words, individual investors remained loyal to their mutual fund companies—which was gratifying for the companies—but they did not stick with stocks. And for the stock market, that was all that mattered.

  See Thomas Frank, One Market Under God (New York: Anchor Books, 2001), 1–88, for an extended, insightful discussion of populist myths and what Frank calls “the democracy bubble.”

  36. Hank Gillman, “Fidelity Runs into a Wall: ‘Crown Prince’ of Financial Service Firms Faces Cuts, Rumors of Layoffs,” The Boston Globe, 28 February 1998, 81.

  37. In 1968, close to 35 percent of household assets were invested in stocks, directly or indirectly, through mutual funds, defined contribution plans like 401(k)s, bank trusts, and estates, according to the Federal Reserve. In 1989, households had only about 13 percent of their assets in equities.

  38. Maggie Mahar, “The Case of the Vanishing Investor.”

  39. Interview with the author.

  40. Bryan Burrough and John Helyar, Barbarians at the Gate: The Fall of RJR Nabisco (New York: HarperPerennial, 1991), 186.

  41. Thomas Doerflinger and Edward Kerschner, “Beyond the Debt Deluge,” PaineWebber report, 1989; Burrough and Helyar, Barbarians at the Gate, 187.

  42. Sarah Bartlett, “Power Investors: Now Wall Street Firms Want to Own the Company—Not Just Its Shares,” Business Week, 20 June 1988, 123.

  43. Doerflinger and Kerschner, “Beyond the Debt Deluge.”

  44. Burrough and Helyar, Barbarians at the Gate, 512.

  45. James Stewart, Den of Thieves (New York: Simon & Schuster, 1991), 503.

  46. James Stewart attributes these numbers on junk bond gains to Lipper Analytical Services in Den of Thieves, 503–4.

  47. Burrough and Helyar, Barbarians at the Gate, 511, 512, 514.

  48. Jim Chanos, interview with the author.

  49. Bob Farrell, interview with the author.

  CHAPTER 6

  1. Goldman’s 1990 profits were reported in The Economist, which noted that “for the first time in years, Goldman is making money at every turn [with] the firm’s oil and foreign-exchange operations contributing almost one-third of the profit” (“Wall Street’s Shining Maiden,” 29 September 1990, 93). By 1991 Goldman officially would become Wall Street’s most profitable firm, with pretax profit of roughly $1.1 billion (Michael Siconolfi, “Goldman Sachs Assumes the Crown,” The Wall Street Journal Europe, 23 September 1992, 9).

  2. Abby Joseph Cohen, interview with the author.

  3. On attire and manners at Goldman in 1990, see William Power and Michael Siconolfi, “Who Will Be Rich? How Goldman Sachs Chooses New Partners: With a Lot of Angst,” The Wall Street Journal, 19 October 1990, A1.

  4. “Wall Street’s Shining Maiden,” 93.

  5. Jack Willoughby, “Can Goldman Stay on Top?” Forbes, 18 September 1989, 150.