BUSINESS/ECONOMY/COVER

LIVING WITH THE CRASH

D'ARCY JENISH November 2 1987
BUSINESS/ECONOMY/COVER

LIVING WITH THE CRASH

D'ARCY JENISH November 2 1987

“It was the best of times, it was the worst of times.”

—Charles Dickens, A Tale of Two Cities

For Alfred Powis, chief executive officer of Toronto-based Noranda Inc., a natural resources giant, it was unquestionably the worst of times. After last week’s cataclysm on the world’s major stock exchanges, Powis estimated that he had lost $864,000 on his personal portfolio of Noranda common and preferred shares. But for John McDonald, a senior analyst with the Toronto brokerage firm Moss, Lawson & Co. Ltd., it was the best of times. As the stock markets rebounded from catastrophic falls early in the week, McDonald began buying on Tuesday and made a $70,000 profit in 24 hours. While the dejected Powis told Maclean's, “I feel a lot poorer,” an elated McDonald said, “When you see these wild gyrations in the market, it’s like waving a steak in front of a dog.” Above all, it was a week of extremes as stock markets around the world fluctuated wildly, sparking fears of an economic collapse or, at the least, a recession. At the centre of activity was the Dow Jones industrial index, the closely watched barometer of the New York Stock Exchange, which started the week by plunging an unprecedented 508 points to 1,739 on Oct. 19, which quickly become known as Black Monday. That represented a 22.62 per cent drop in share values, a stunningly high figure even when compared to the 12.9 per cent that the New York exchange plunged in its previous record drop in the historic crash of Oct. 28, 1929. The Dow recovered significantly on Tuesday, and after a roller-coaster week it closed on Friday at 1,951, down 13 per cent from 2,246 a week earlier. But major stock markets elsewhere had taken their lead from New York and gone into their own tailspins, wiping well over $1 trillion from the value of shares worldwide on Monday and Tuesday alone.

Downward: In the tidal wave of panic selling, Santa Monica, Calif.based Wilshire Associates, a company that tracks the daily price changes of more than 5,000 American stocks, reported that share values in the United States alone plummeted $660 billion (U.S.) on Monday. At the same time, the value of the shares listed on the Toronto Stock Exchange (TSE) plummeted a staggering $37 billion. By Wednesday, speculators and bargain hunters swarmed back into the markets to snap up stocks at discount prices and drive the indexes back up. But the TSE’s 300 Composite Index, its equivalent of the Dow, dropped 14 per cent over the week to 3,080 points and, like major exchanges in Europe and Asia, was still heading downward at week’s end.

Jitters: Many analysts had been predicting a drop in stock prices after a five-year surge that pushed the Dow and other leading indexes to new highs in August. Since then, prices had begun to slip, but the severity of last week’s collapse caught most observers off guard. Many of them singled out bad U.S. trade figures and a row between Washington and Bonn over a unilateral German move to increase interest rates as specific causes of the panic (page 34). But even major initiatives to cut back interest rates, and encouraging word from Washington on Friday that the U.S. economy was growing, failed to eliminate investors’ jitters that had built up all week.

Bewildered: Amid the pandemonium, political leaders around the world tried to reassure their citizens that the Western industrial economies were fundamentally strong.

After markets rallied on Wednesday, Reagan told reporters, “Certainly when more than half of the loss has already been regained, that sounds as if someone has discovered the economy is still rather sound.” And professional economists tried to dispel the notion that the stock market crash of October, 1987, was a repeat of the crash of October, 1929, which preceded the Great Depression of the 1930s.

Despite the reassuring statements from politicians and economists, even

the top executives of some of Canada’s biggest companies frankly admitted that they were bewildered by last week’s events. “It’s certainly a massacre,” said Noranda’s Powis. “But what is it telling you?” Likewise, Peter Widdrington, president and chief executive officer of London, Ont.-based John Labatt Ltd., the brewing and food processing giant, said, “It’s such a screwy situation, who knows what’s going on?”

Nervous: But other observers said that the indicators were perfectly clear: the disaster in the stock markets would inevitably have broad, perhaps severe, economic repercussions. Anthony Boeckh, editor of The Bank Credit Analyst, a widely read, Montrealbased investment forecasting publication, said that there will be “extensive repercussions— at minimum it will be a recession, and it will probably be worse.” Shell-shocked investors will move their money from stocks to bonds, bank accounts or other safe areas, said Boeckh, while nervous consumers will save rather than spend discretionary income. Like many other analysts, he also predicted massive layoffs and financial losses within the securities industry. Said Boeckh: “We may even see a major name on Wall Street go broke.”

And before the week was over, the first signs of a looming economic freeze were evident. On Oct. 20 French Finance Minister Edouard Balladur announced a delay in a $223-million issue of shares in a state-owned defence and electronics company. In London, many analysts predicted that the Thatcher government would be unable to proceed with the $15.7-billion privatization of British Petroleum PLC scheduled for this month. A senior executive with a Toronto-based brokerage firm said that 11 Canadian companies cancelled public offerings worth more than $1 billion last week.

Frenzy: Last week’s chaos actually had its beginnings on the previous Friday, Oct. 16, when the trendsetting Dow Jones average dropped a then-unprecedented 108.35 points. When the Tokyo Stock Exchange opened on Monday morning—late Sunday New York time—it was swamped with sell orders from Japanese investors who had become increasingly nervous over the weekend about the U.S. exchange’s performance. From there, fear and panic swept across trading floors as they opened in the various time zones around the globe. In London, the Financial Times Stock Exchange index of 100 shares fell 250 points on Monday, erasing $107.5 billion from the value of the stocks.

By the time the New York and Toronto exchanges opened on Monday, a tidal wave of sell orders had built up. “Listening to the radio on the way to work Monday morning you already knew there was trouble,” said a Toronto-based foreign currency trader with a major chartered bank. Still, the extent of that day’s crash unnerved even seasoned stock exchange traders. “I felt like I wanted to die out there,” said Scott Zufelt, a trader for Burns Fry Ltd., after a day of frantically shouting sell orders on the Toronto Stock Exchange (TSE). “I just couldn’t believe it. I’ve got no voice left.”

In all, a record 64 million shares traded hands on the TSE on Oct. 19, and the 300 Composite Index, the TSE’s equivalent of the Dow, lost an unprecedented 407 points. On Wall Street it was worse. The New York Stock Exchange (NYSE), which normally trades about 170 million shares a day, handled 605 million on Black Monday. As a result, by mid-afternoon the computers that indicate the value and volume of shares traded were running almost two hours behind. The Dow Jones industrial average dropped 508.32 points, or 22.62 per cent.

But when the North American markets closed on Monday the wave of fear, frenzy and pure panic still had not run its course. On Tuesday morning, both Japanese and foreign television crews jammed the spectators’ gallery in the Tokyo Stock Exchange to await the nine o’clock opening bell.

When it rang, traders surged onto the floor clenching fistfuls of sell orders. But there were no buyers and no trades.

Throughout the city, stunned brokers and investors stared at blank computer screens that normally carried stock listings. By 10 a.m. there were still no bids for such blue-chip Japanese companies as NEC Corp., Toyota Motor Corp. or Sumitomo Electric Industries Ltd.

Panic: While the Tokyo market took its pounding, the Hong Kong Stock Exchange remained closed. Its Hang Seng index of leading shares had fallen a record 420 points, or 11 per cent, on Monday, and exchange chairman Ronald Li announced that trading would be suspended for the week. But industry officials criticized the move, saying that it would damage the British colony’s reputation as an Asian financial centre. “A good casino keeps its door open even when it’s losing,” said Marc Faber, Hong Kong director of the investment firm Drexel Burnham Lambert. “This is a lousy casino.”

The London Stock Exchange, meanwhile, recorded the most active day in its 185-year history on Tuesday. In the first three minutes of trading, declining prices chopped $70.9 billion from the value of all the stocks on the exchange. By the end of the day the market was down 12.2 per cent and investors had lost a total of $92.5 billion. “We’re trying to find the bottom of the market,” said Trevor Laugharne, senior investment analyst with Kleinwort Grieveson Securities.”

Then on the North American markets, complete pandemonium prevailed again on Tuesday. By the end of the day New York’s Dow index had rallied 102.27 points, or 5.88 per cent. But many analysts attributed the gain to stock buy-back programs launched by a number of blue-chip corporations such as New York-based Merrill Lynch & Co. Inc., one of the world’s largest retail stockbrokerage firms, and USX Corp., the giant American steelmaker. And while the Dow was rising, the Montreal and Toronto indexes fell again on Tuesday. And a wave of panic selling hit the Vancouver Stock Exchange heavily on Tuesday, pushing the VSE index down 226 points, or 14.6 per cent.

Hysteria: As the upheavals and aftershocks continued, the financial crash began to take on the macabre appeal of a huge natural disaster. On Tuesday afternoon curious onlookers, many of them noninvestors, I packed the spectator z galleries at markets § across North America TSE trader: massacre while others stood the crowds milling outside the stock exchange to sell souvenirs, including purple buttons bearing the words, “Don’t panic.”

But for the investors, floor traders and brokers inside, it was bedlam.

“The whole thing is just insane,” said Thomas Burke, a discount broker with Guardian Trust Co. in Montreal. Said TSE floor trader Thomas Milligan, a 33year veteran of the markets: “I have been here through Eisenhower’s heart attack and Kennedy’s assassination and I have never seen anything like this.” After the VSE closed on Tuesday, exhausted floor traders trudged silently out of the exchange in single file. Most simply glared at the pack of reporters looking for comments. One sighed in seeming disbelief, “God, the carnage.”

During Tuesday’s trading, five U.S. stock-index options and futures mar-

kets, which speculate on future share prices, announced that they were closing for one hour because they could not get up-to-date quotes from the NYSE. That statement unleashed a new wave of hysteria among Canadian brokers, who were already trying to cope with an avalanche of sales orders. “It was chaotic bedlam,” said a senior executive at one Toronto firm who asked not to be identified. “People were screaming at each other.” But when the options and futures markets closed, according to one participant, there was a brief lull on the company’s trading floor as employees sat sweating and shaking like athletes after a hard game.

Collapse: European and other international investors were bailing out on a huge scale, and senior executives of the firm constantly appeared on the trading floor to monitor sales. But they could not stop the avalanche of selling. Prices were dropping so fast that they kept triggering automatic

sell orders, which clients place with brokers to ensure that stocks are unloaded if prices drop to a certain predetermined level. The collapse also triggered hundreds of margin calls—demands to investors who have bought stocks with borrowed money to either repay the loan or sell the stock. Last week those people were selling and contributing to the chaos in the markets. Throughout the week the industry marched to the tinging of bells signalling emergency bulletins from the Reuters and Dow Jones stock wires. Said the brokerage executive: “A ring for these people means money; it’s their bonus, it’s their car, it’s their firm’s profits, it’s their client’s profit.” Deluge: But unlike the situation in Tokyo, there were buyers for the falling stocks on the North American exchanges. During the worst moments of frenzied selling, market makers—brokers who are responsible for maintaining stability on specified stocks—were responsible for about 80 per cent of the buying on the TSE. Those traders normally account for 20 per cent of the purchases, said John Kolosky, the exchange’s director of market operations. There are 170 market makers on the floor of the TSE. Their role, introduced

in the 1960s in an effort to stabilize the markets, is to sell their assigned stocks in a rising market and to buy them in a falling market. Most market makers are affiliated with a brokerage firm, and if they incur huge losses, the trader’s company usually absorbs at least some of the debts. George Chisholm, president of the brokerage firm Hector Chisholm & Co. Ltd., said that one TSE market maker lost $2 million on Oct. 20 but recouped $1 million the next day. Some others reportedly lost $5 to $6 million.

But while the Toronto

“BLACK MONDAY”

Oct. 19/87

Down 508 points to 1,739

floor traders persevered through the deluge of selling, at least two NYSE traders simply could not handle the wave of sell orders. Chisholm said that on Monday afternoon the NYSE market maker for one oil company ran out of money after buying millions of dollars worth of the stock. He simply walked out. The following day, the market maker for Alcan Aluminium Ltd. did the same thing.

Still, even in the bleakest bear market some canny investors saw golden opportunities. Toronto physician Morton Shulman, an astute investment manager, had built up cash reserves of $20 million over the past two weeks by selling out while the market was still strong. But last week Shulman said that he began buying in again on the NYSE at 3 p.m. Monday, while the market was crashing at a ferocious rate. Then on Tuesday morning he spent $2 million on the TSE. And on Wednesday he sold everything at what he said was a considerable profit as the markets were rising.

As bargain-seekers returned to the

market, a second force fuelled the midweek rally—the so-called corporate buy-backs, in which companies repurchase their own stock. Between 40 and 50 Canadian corporations announced buy-back plans last week, though most will have to wait at least 10 days for regulatory approval before proceeding—and can cancel the purchase in that time. Another 60 companies had previously been granted approval to acquire their own shares. And some were buying through subsidiaries or in U.S. markets where their stocks were listed. “I personally bought our stock yesterday,” said Gerald Schwartz, president and chief executive officer of Toronto-based Onex Corp., a diversified management company. Onex shares were issued at $20.50 apiece last spring but were trading at $9 to $11 last week. In the United States, at least 90 companies were engaged in buy-backs, said Lawrence Wachtel, a vicepresident of PrudentialBache Securities Inc. of New York.

Futile: Regardless of what happens next on the world’s stock exchanges, most experts agreed that last week’s crash and subsequent volatility ended one of the longest and strongest bull markets of this century. On Aug. 13,

1982, which is generally viewed as the starting date of the big upswing, the Dow Jones index closed at 776.92 points. On Aug. 25 this year the Dow hit an all-time high of 2722.42 points. “At a minimum, you can say it’s the end of the financial mania,” said market watcher Boeckh in the midst of last week’s frenzy.

The sudden and dramatic collapse in stock prices early last week raised the spectre of an economic collapse similar to the Great Depression of the 1930s. Political and business leaders around the world tried to downplay such fears. And almost everyone was relying on the same argument: the economic fundamentals remain strong. Inflation is under control, corporate profits are healthy, and unemployment, while high, has levelled off. While Canada and U.S. interest rates have risen this year, both governments moved swiftly last week to lower them. As well, both governments pumped money into their economies to enhance the financial systems.

Still, those efforts could prove futile

if consumer confidence is shattered by the upheavals in the stock markets, according to several experts. “What we have seen doesn’t mean that a major recession or depression is a foregone conclusion,” said George Vasic, chief economist with Toronto-based Data Resources of Canada, an economic forecasting company. Vasic said that in mid-1987 personal savings among Canadians were 8.8 per cent of disposable income, the lowest level since early 1973. By comparison, Canadians were saving 19 per cent of their disposable income in early 1982 due to high interest rates and an economic reces-

sion. A return to higher savings levels could slow consumer spending and hurt the economy.

Slump: Even if saving and spending habits remain the same, average investors are expected to abandon the stock markets in favor of safer investments following last week’s turmoil. “It significantly undermines small investor confidence in the stock market,” observed Onex president Schwartz. In fact, some investment analysts predicted record purchases of Canada Savings Bonds, which were scheduled to go on sale on Oct. 26 with an attractive interest rate of nine per cent. One U.S. bank’s new ads are dominated by a picture of a bear’s face and the message: “Chemical Bank. For people who are finding the market unbearable.”

While an economic recession may still be avoidable, it appeared almost certain by week’s end that the securi-

ties industry is headed for a slump. One Toronto stockbroker said that one-third of his colleagues were hired in the past three years. “There’s not an empty desk in here,” he said, adding ominously, “but in three months there will be.” Another broker said that the crash will kill the alreadyshaky market for any new stock issues. In fact, three Canadian brokerage firms had purchased an entire $96-million issue of common shares in Montreal-based Domtar Inc., a pulp and paper, packaging and chemicals company, just prior to the crash. But with the likelihood of finding any investors diminished on Black Monday, Domtar let the brokers off the hook by cancelling the issue.

Losses: In the United States, exchange officials were investigating computerized trading, which allows rapid purchases and sales based on price discrepancies in different markets. “It’s had a tremendous impact on the marketplace,” said Michael Simms, vice-president of options marketing at Toronto-based Nesbitt Thomson Deacon 5 Inc. As the week ended, thousands of investors were still counting 0 their losses. And in z some cases, the losses 1 were gargantuan. By Friday the stock markets had stabilized

with the levelling of both the volumes traded and price fluctuations. But the Wilshire Index, tracking the share prices of more than 5,000 U.S. companies, reported that American stocks ended the week an astronomical $512 billion lower than they started. And some observers warned that troubled times lie ahead. “In my opinion, Monday’s crash did a tremendous amount of damage that has not yet become apparent,” said Shulman. Like many experts, he predicted that consumers will strictly limit their spending and resume saving in earnest. That could mean a tough Christmas for retailers and perhaps a grim new year all round.

—D'ARCY JENISH with RIC DOLPHIN and RICHARD KELLY HEFT in Toronto, LARRY BLACK in New York, PHILIP WINSLOW in London, JOHN KEATING in Hong Kong and PETER McGILL in Toyko

RIC DOLPHIN

RICHARD KELLY HEFT

LARRY BLACK

PHILIP WINSLOW

JOHN KEATING

PETER McGILL