JOHN DeMONT October 17 1988



JOHN DeMONT October 17 1988




The scene would have been impossible to imagine a year ago. But on a recent Wednesday afternoon, groups of blue-, greenand yellow-

jacketed floor traders clustered idly outside the New York Stock Exchange, sipping coffee, munching jelly doughnuts and doodling over crossword puzzles. Inside, on the paperlittered exchange floor, trading activity had slowed to a crawl. John Lyden, a stock trading specialist and managing partner of New York City-based Nick, Lyden & Co., grimaced as he checked the day’s paltry share volume. Said Lyden: “This is dreadful. At this level, I doubt if anybody on the exchange is even breaking even. Something has to turn things around.”

But life on the major trading floors around the world will likely get far tougher before a stock-buying boom returns. A year after the Oct. 19, 1987, stock market crash, the traumatized financial world is still reeling from the biggest one-day share-price collapse in history. The brokerage industry was so mauled on Black Monday that industry officials say it could take years to recover. Some leading analysts predict that, following next month’s U.S. election, the market will drop by as much as 30 per cent and may even drag real estate values down with it.

Many investors, both large and small, who have already moved out of the market to the sidelines, appear ready to leave the field altogether. Last week, the influentia. New York securities firm Salomon Bros, drove stock

prices sharply lower when it urged its clients to cut back on their stock portfolios and increase bond and fixed-income holdings. But, even if stock prices do climb back to their former heights, brokerage house officials say that the nature of their investment world has changed forever. Strong concerns remain that the factors that triggered Black Monday are still deeply rooted. Said former U.S. Treasury secretary Donald Regan last week: “The ingredients are still there. The system has not been fixed.”

The memory of the stock market crash lingers in the psyche of the investment world. The calamity struck after the best five-year stock market run ever. The bellwether Dow Jones industrial average plummeted 508 points, setting off a wave of panic selling in stock markets from Toronto to Sydney, Australia, which wiped out $1 trillion in share values worldwide and changed the

lives of individual investors forever. When it was all over, the Dow Jones average had fallen by 22.6 per cent—nearly twice the 12.8-per-cent drop recorded on the worst day of the 1929 crash. The financial dreams of thousands of small investors were shattered by the share-price

collapse. Calgary businessman Ben Zalmanowitz was finalizing the details of a new $2.8-million Calgarian Hotel Entertainment Centre in downtown Calgary when the crash hit. He lost 62 per cent of the value of his holdings totalling hundreds of thousands of dollars. Zalmanowitz, 40, said that major losses among his friends and acquaintances were common and painful. “They always talked about how much they made,” he said recently. “Now they talked about how much they lost. Some were even suicidal.” Some of the biggest losers were Bay Street’s oncethriving brokerage houses, which lost $109 million during the two months following the crash. And in New York City, where one out of four private-sector jobs created since 1982 has been in the financial services industry, trendy restaurants and shops that cater to the

young professionals of Wall Street have watched aghast as business has fallen by 15 to 20 per cent since the crash. Even such long-established haunts as Harry’s Bar, located in the heart of New York’s financial district, have suffered because managements have sharply curtailed expense accounts.

The carnage has also signalled a profound social shift. The bull market that began in August, 1982, was epitomized by the breed of young, business-school-educated professionals who poured onto Bay Street and Wall Street, often earning six-figure salaries by the time they reached the age of 30. Now, with their ranks decimated by layoffs and facing their first down market ever, many of the newcomers say that they are rethinking their career plans and may leave the securities profession altogether. And fresh-faced young graduates from such institutions as Harvard and the University of Western Ontario business school are suddenly more interested in becoming accountants and financial consultants than investment dealers. Said Frank Delaney, 26, a New York City trader for ABD-NY Inc., a subsidiary of West Germany’s Dresdner Bank: “The day of the yuppie is over on Wall Street.”

In hindsight, no single factor was responsible for Black Monday. Experts say that the main reason the market plunged so far so quickly was that share prices had simply climbed to unrealistic heights. That left the markets ready to crumble when a number of negative factors converged at once last fall, including heavily institutionalized computer

trading, the failure of the U.S. government to deal with the federal budget deficit, concern over the stubbornly high U.S. trade deficit and a tight U.S. monetary policy that pushed interest rates higher.

Most investment experts say that Black Monday cannot be compared to the great recession of 1929, when the stock market collapse triggered a steep two-year spiral into the Great Depression. In fact, a year later, the crash has inflicted little pain on the average Canadian. Economists say that, after six years of strong economic growth, the North American economy is finally showing signs of slowing down, but even then the next recession could be two years off. Indeed, many economists believe that there is still enough momentum to carry economic growth until at least 1989. And some economists even contend that the crash actually helped strengthen the economy by forcing Ottawa and Washington to maintain a cautious grip on government spending and inflation. Said Michael Miller, an economist in Toronto with the Philadelphia-based WEFA Group: “To a certain degree, the crash purged some of the excesses in the economy.”

Still, many investment experts say that the markets will likely get far worse before getting better. Few people in the investment community expect another one-day panic of the magnitude of last year’s Oct. 19. But some of the world’s most influential market analysts, including Gainesville, Ga.-based Robert Prechter and Ian McAvity of Toron-

to, say that share prices could eventually drift lower by another 30 to 50 per cent. McAvity says that the slump, accentuated by more pessimism, could even affect the heated North American housing market, driving real estate prices down sharply. With a U.S. election next month, interest rates rising and economic growth slowing, even the less-pessimistic analysts in Canada and the United States predict that stock markets will drift downward over the next year. Ian Russell, vice-president, capital markets, for

the Toronto-based Investment Dealers Association of Canada, points out that the trade and budget imbalances in the United States that were partially responsible for the October collapse are still evident and could send the market into another steep dive. Meanwhile, many analysts say that reforms are needed

on the stock exchanges. Singled out for criticism are the U.S. computer-aided program traders who use complex systems that automatically trigger massive waves of stock market buying and selling, often sweeping along small inexperienced investors in the process. Moreover, neither U.S. presidential candidate has done much to assure the investment industry that he would know how to deal with another financial panic any better than President Ronald Reagan. Said George Boyd, head of quantitative research at New York City-based Kidder Peabody Inc. & Co.: “The markets are extremely fragile. And when things start to go wrong, the country may not have the means to deal with it.” For now, the collapse has clearly sapped the stock market’s former vigor. On the Toronto Stock Exchange, the daily average value of shares trading during the first nine months of 1988 was down 36 per cent from

the same period a year earlier. Suffering even more has been the Vancouver Stock Exchange, where daily trading volume has fallen by 60 per cent from 1987 levels, leading some analysts to speculate that the exchange may be damaged beyond repair. Indeed, in an attempt to rebuild investor confidence, VSE officials are now trying to find a way to limit speculative stock listings on the exchange. And trading on the Montreal and Calgary exchanges has also slumped badly. The latest figures from the Investment


Funds Institute of Canada show that Canadian mutual-fund sales topped purchases by $286 million during the second quarter ended on June 30, 1988—the first time since 1981 that investors sold more mutual funds than they bought. Meanwhile, on the NYSE, daily average value is down 37 per cent in the first nine months compared with a year ago. With the wounds of the crash still healing, it is not surprising that investors have lost confidence in stocks. But what has many analysts concerned is that the pessimism is so deep-seated that investors are ignoring the fact that corporate earnings are strong, and many shares are selling at historically low prices. Said Murray Grossner, head of research at Richardson Greenshields of Canada Ltd.: “There are good deals out there, if you know where to look.” In fact, institutional money managers—

who account for the greatest portion of trading on the New York and Toronto stock exchanges—are now almost completely out of the market. With further inflation and interest rate increases on the horizon, many have funnelled most of their clients’ cash into bonds, treasury bills and other interest-bearing investments that have been offering attractive—and safe—yields compared with stocks. Said Jerome McDevitt, senior vicepresident, fixed-income investments, of New York City-based Dean Witter Reynolds Inc.: “For the pros, the game is total rate of return. And right now, that is in the fixedincome markets, not stocks.” Even John Phelan, chairman of the NYSE, wonders if a fundamental shift is occurring in the way pension funds and other big institutions trade. With institutions trading shares at a sharply lower rate than in the past, Phelan says that those big investors may be thinking that “less trading produces more results.” Just as worrisome for the investment industry seems to be the loss of confidence among small investors. A string of insidertrading scandals appears to have convinced some investors that only the insiders can profit on the NYSE. Investors also have been wondering what chance they have against powerful program traders, who sometimes send stock prices soaring up and down several times in a single day. The disillusionment is so deep that George Ball, chairman of New York City-based Prudential-Bache Securities Inc., recently predicted that it may take four to five years for private investors to regain their confidence in the stock market. And some market analysts are concerned that many investors may have been driven out of the market for good. Said David Dreman, president of New York City investment advisory firm Dreman Value Management Inc.: “There is deep concern out there that the stock market is simply no

longer the place for the small investor to be.” Many investment advisers say that there is some justification for that view, given the volatile nature of today’s market. During the five-year

bull market, when strong demand was pushing stock prices steadily higher, investors could profit with almost any stock. In fact, some market professionals claim that the only way small investors should play the market is by buying professionally managed mutual funds, which distribute the risk by buying a wide variety of stocks, bonds or other investments. Still, Warren Buffett, one of the United States’ most astute investors, said recently that he believes it is wrong to say small investors have no chance in markets. Said Buffett: “Dominated by the erratic behavior of the big boys, such markets are ideal for any investor, small or large, so long as he sticks to basics.”

But investors are not the only people suffering. The stock trading malaise has made it difficult for corporations seeking to expand to raise capital on stock markets. For the first six months of 1988, new common share issues in Canada totalled $985 million, only a fraction of the $5.4 billion raised during the same period last year.

At the same time, takeover activity has increased dramatically as institutions, which have sold off much of their share position, use their enormous cash reserves to buy companies selling at bargain-basement prices. According to Toronto management consultants Harris-Bentley Ltd., the total value of major mergers and acquisitions in Canada during the first half of 1988 was $15 billion—almost as much as the $19.3 billion worth that occurred during all of 1986. In the United States, the takeover action is running at a record $294-billion pace for the first nine months of 1988.

But the most obvious casualty of the collapse of investor confidence is the global brokerage industry, which is in the midst of the worst slump since the mid-1970s. In Canada, 1,864 jobs have been slashed in the investment industry over the past year. On Wall Street, more than 15,000 jobs have already been lost. In London, up to 7,500 investment industry jobs have been cut since Black Monday. And both Wall Street and Bay Street are bracing for another round of layoffs due to the trading malaise. Said Albert Thompson, a Toronto-based analyst with Prudential-Bache Securities Canada Ltd.: “This is a boom-or-bust business. Most people staff up during a bull market and cut back when things slow down. And many companies are still overstaffed.”

Stock exchanges around the world are now working hard to restore investor confidence. Last January, the Toronto exchange launched a magazine advertising campaign aimed at reassuring small retail investors. Since then, the TSE has also beefed up its market surveillance operations—a move that is designed to catch more trading violations in the hope that

it will reassure small investors. Canada’s Investment Dealers Association is also considering giving the National Contingency Fund, the industry-sponsored fund that protects individual investors when a securities firm collapses, a larger budget and a bigger staff.

Meanwhile, in July, the NYSE approved a so-called express delivery service that allows individuals with orders of 2,000 shares or

less to bypass bottlenecks caused by large institutional orders. That gives small investors a better chance to trade their shares during high-volume and panic situations. The NYSE has also proposed a procedure whereby all trading on the exchanges stops for one hour if the Dow Jones falls 250 points in a day.

The industry itself is resorting to some oldfashioned salesmanship to rein in new customers and reassure old ones. Canadian bro-


kers are stressing financial planning and tax shelters in their sales pitches. In the United States, brokers such as Merrill Lynch & Co. have launched new advertising campaigns in newspapers and magazines to draw wary investors back into financial markets. Merrill, which has more brokers than any other U.S. brokerage firm, will even stage a special

closed-circuit television seminar on Oct. 17 for its 125,000 clients and other interested investors. They will receive the company’s latest investment advice, along with soothing words from the likes of legendary mutualfund manager John Templeton. In Los Angeles, several financial firms have invited 250 wealthy clients to A Melt-Down Anniversary Symposium. Meanwhile, in Boston, a bar named Stocks and Bonds will hold an anniversary cocktail party.

Still, the industry’s efforts are meeting with uneven success. A survey conducted by the Quebec Securities Commission reports that the number of Quebecers who owned shares after last Oct. 19 fell marginally to 15 per cent from 16 per cent. Another U.S. survey, conducted in May for the National Association of Securities Dealers, shows that more than 60 per cent of U.S. individual investors polled think that the stock market is riskier now than it was a year ago.

But for all their tinkering, both the regulators and brokerage houses clearly know that only a dramatic change in perceptions will coax investors back into the markets. With an economic downturn looming, it could be years before the painful memories of Black Monday fade.

JOHN DeMONT in New York City