SHOCKS IN THE MARKETS
VOLATILITY IN THE MARKETS IS LIKELY TO CONTINUE AND MAY BECOME A REGULAR ROUTINE OF TRADING
Even the seasoned professionals were reluctant to participate in the volatile wheeling and dealing. Peter Anderson, rated by The Wall Street Journal as the top stock-investment manager in the United States for each of the past two years, told Maclean’s that he “simply sat back and did nothing” as stock markets around the world crashed on Oct. 13 and then bounced back again last Monday. Not wanting to take any unnecessary risks, Anderson, the president of the Minneapolis-based IDS Advisory Group, held on to the blue-chip stocks and bonds that make up the bulk of the firm’s $8.2 billion in asset holdings. But other investors were not so calm. A small Toronto investor who sold all his stocks at a $21,000 loss, and who asked not to be identified, said, “I’ll seriously never go into the stock market again.” The wild gyrations in share prices on markets in North America, Europe and Asia early last week posed threats and challenges for all investors, big and small.
Jolted by the aftershocks of the crash, which wiped $222 billion from the value of U.S. stocks in less than two hours, the markets did not settle down again until midweek. Before then, the chilling prospect of a more devastating financial explosion—a repeat of the tragic collapse of Black Monday two years ago on Oct. 19— continued to loom large.
But, by week’s end, the second anniversary of the 1987 Black Monday had passed without incident, the markets had rallied, and New York’s bellwether Dow Jones industrial average closed on Oct. 20 at 2689.14—up a record 119.88 points for the week and recovering 63 per cent ^ of the 190.58-point drop it Z suffered on Friday the 13th. 1
Despite the encouraging rally, many analysts and traders say that volatile price fluctuations will continue and may in fact become a permanent feature of the world’s major mar-
kets. Some, such as Avner Arbel, a professor of finance at Cornell University in Ithaca, N.Y., said that the existence of powerful computer trading programs, whose sudden selling wave triggered the collapse, makes an unpleasant repeat performance more than likely.
In addition, Arbel and other analysts argue that the large institutional investors, such as insurance companies and pension funds that command the computers, now account for as much as 70 per cent of all share trading. And that combination of large, concentrated stock holdings, which can be bought or sold almost instantly, is making the markets unstable and dangerous for all, especially the small investors who remain. Added John Kenneth Galbraith, the Paul M. Warburg professor emeritus of economics at Harvard University and author of The Great Crash, 1929: “One can only understand the financial world if one assumes a deep and recurring irrationality.”
Even more threatening is the fact that the computer traders and the huge and influential investors they represent are expressing continued concerns about the viability of debtfinanced takeovers and the general health of the U.S. economy. Arbel said that any sign that the economy is in trouble, or that the market is going down, could force the anxious computer traders to push the sell button. Predicted Arbel: “We are going to have a series of minicrashes like the one on Friday the 13th. And perhaps a more significant crash like 1987.” That kind of volatility appeared early last week, as trading reopened after a weekend of worry sparked by the previous Friday’s plunge in New York. At first, it appeared that a massive drop was under way. Like Black Monday, stock markets in London and Tokyo,
which open before the New York Stock Exchange, nose-dived in heavy early trading— Tokyo’s Nikkei average fell by 1.5 per cent in the first hour, and London’s Financial Times Stock Index collapsed by nine per cent in two hours.
But instead of continuing to sell, and provoking a frantic free fall as they did on Black Monday, investors in both cities soon began to take advantage of the situation by buying what had suddenly become bargain-priced shares. That, in turn, raised share prices later in the day. In Tokyo, the Nikkei closed down 1.8 per cent for the day, a significant drop, but far smaller than its catastrophic 15-per-cent collapse two years earlier. And London rallied to close at a 3.2-per-cent loss for the day.
Analysts in Tokyo attributed part of the strong performance to reports of calming weekend meetings between Japanese finance ministry officials and representatives of the nation’s four largest brokerage firms. In London, brokers said that they felt immune from the panic on Wall Street because Britain has no so-called junk-bond market, the high-risk bonds that have been blamed in part for the market’s recent fall.
When stock markets in New York City and Toronto opened later on the same day, they too were battered by waves of early selling. New York’s Dow Jones average, which had plummeted by 190.58 points, or 6.9 per cent on Friday the 13th, fell by another 64 points in the first 40 minutes. The decline was eerily reminiscent of Black Monday, when a 102-point decline on Friday, Oct. 16, led to a cataclysmic 508-point free fall when trading resumed on
Monday. Meanwhile, in the first 30 minutes of trading in Toronto, the TSE 300 composite index, an average of leading stock prices, plunged by more than 115 points from its Friday close of 3870.74.
But the selling waves abated by early afternoon as the Federal Reserve Board (or “Fed”) in the United States made more than $2 billion available to investors to help them cover partially paid-for shares before brokers could demand full payment, which would have caused widespread panic. In Canada, central bankers declined to discuss what actions they took to support stock markets on Monday. Gordon Theissen, senior deputy governor of the Bank of Canada, said only that the bank was in touch with central banks in other nations and was prepared to respond to any signs of what he called a “liquidity crunch.”
At the same time, institutional buyers began to re-enter the market in search of bargainpriced blue-chip stocks. Alfred Wirth, for one, chief investment officer of Toronto-based Crown Life Insurance Co., which administers $10 billion in assets, found just that. He said that the morning collapse in share prices on Wall Street and flamboyant New York entrepreneur Donald Trump’s withdrawal of a $140a-share takeover offer for AMR Inc., the parent company of American Airlines, provided him with an opening. He was able to purchase a bloc of shares in the company for $71 each, compared with the $98 that AMR shares traded at the week before.
The afternoon buying spree spurred the Dow Jones index on to an 88.12-point gain for the day, erasing almost half of the loss from the
crash. The TSE 300, in turn, climbed by 56.55 points, compared with a 141.6-point loss the previous Friday.
Clearly relieved by the recovery, brokers and traders said that a number of factors contributed to the market’s sudden climb. For one, they cited quick action by central bankers in Japan and Europe, along with the Fed’s action, to reassure brokers and dealers. The Fed’s assurances and action contrasted with its actions in 1987. Then, its offer to act as a lender of last resort was too late to stop the panic that had already been deepened by rumors of brokerage insolvencies.
Meanwhile, brokers themselves tried to project a sense of calm. Before trading opened on Monday morning, Ira Katzin, a vice-president with Toronto-based brokerage house Merit Investment Corp., sent thousands of copies of a brochure entitled An Unexpected Bonus Opportunity in Adversity to his clients by courier and by electronic facsimile machine. That evening, Wall Street brokerage house Paine Webber Inc. began airing television commercials that said that “the stock market is still the place to be for long-term appreciation.” Partly as a result, many of the individual investors who remained in the market did not panic as they
did in 1987. Larry Biancolin, a 27-year-old Toronto analytical chemist, said that he held on to about $8,000 worth of mutual funds and blue-chip stocks early last week. But on Black Monday, he frantically sold much of his holdings in gold shares and penny stocks, losing about $1,000.
By the middle of last week, the markets started to rally strongly, with some of the recovery provoked by unexpected forces. On Wednesday, shares of some U.S. insurance companies, such as General Re Corp. and American International Group Inc., shot up following the San Francisco earthquake. Investors bought those shares because of the likelihood that it will be easier for the companies— who have been battling one another in price wars—to increase their premiums in the wake of the estimated $1.2 billion in claims they will have to pay to quake victims.
But other stocks, particularly those of companies on the verge of acquiring huge debt loads through junk-bond financings and takeovers, continued to suffer. Shares in UAL Corp., the parent company of United Airlines that had triggered the collapse when it announced that a proposed $ 8-billion management buy-out had fallen through, plunged by $130.75 last week to close at $196.85.
Many analysts blamed the excesses of the junk-bond market, which resulted in the nearcollapse of Toronto-based, debt-laden Campeau Corp. last month, for the market collapse (page 75). Galbraith said that companies such as troubled Campeau Corp. are “dangerously overburdened with debt. Resources that should go to long-range planning are being used instead for short-term planning.” Added John Toth, executive vice-president of Toronto-based CIBC Investment Corp.: “Junk bonds lead to junk stocks.”
For his part, IDS Advisory president Anderson said that the fact that large institutional investors account for up to 70 per cent of the trading on Wall Street will lead to continuing instability. He added that those powerful investors “tend to listen to the same information as anyone else. And when you get all the portfolio managers on one side of the boat, the boat capsizes.”
Other brokers said that program trading should be banned. While program trading now accounts for only about 12 per cent of the daily trading volume on the New York stock exchange, Selwyn Kletz, president of Laurentian Investment Management (Canada) Inc. in Toronto, said that the sale of hundreds of thousands of shares within minutes by computers often exaggerates price drops. Added Kletz: “The direction of the market cannot be blamed on the program—but the extent of it can be.” Still, Cyril (Cap) Leahy, a broker with Wood Gundy Inc. in Toronto, said that program buying actually helped hasten the recovery on Monday.
And in the increasingly volatile environment, even some of the industry’s most wellknown gurus are reluctant to make predictions about what will happen next. Robert Prechter, the editor of the market newsletter the Elliot
Wave Theorist, who soared to stardom after he predicted on Oct. 5, 1987, that the stock market would drop, said that he is no longer willing to make prognostications for the general public. Prechter acknowledged that he has frequently been wrong this year and that factors other than the forecasts of so-called experts drove the market down on Friday the 13th. He added: “This downturn goes to show that it is underlying psychology that turns the market. The market is much bigger than Bob Prechter or Joe Guru.”
Ian McAvity, president of Toronto-based MVP Capital Corp., said that the reason gurus have faded from public view is that their audience consisted of individual investors who fled the market after 1987. And he said that those investors should be wary of entering the market again. Much of the upward climb over the past year, he added, can be attributed to unrealistic expectations generated by fragilely financed takeovers. “Why was UAL at $351 a share recently,” said McAvity, “when it was only worth $76 a few short months ago?” Other analysts were even more pessimistic in their warnings. Last week, Anderson predicted continued volatility and a 250-point decline in the New York average by the end of the year.
Still, other economists and business leaders dismissed predictions that the Friday the 13th collapse will provoke a more general economic downturn. Michael Walker, executive director of the Vancouver-based Fraser Institute, said that fluctuations in the stock market are based simply on changes in investors’ expectations about the future. He added, “The thing about expectations is that they’re not based on anything real.” Purdy Crawford, chairman of Montreal-based tobacco, retailing and manufacturing conglomerate Imasco Ltd., declared: “What is happening in the stock market will not have any effect on the real economy at all. It’s people reacting emotionally and psychologically.”
But brokers who try to raise money for small and medium-sized corporations in the stock market said that they are concerned that Friday the 13th will choke off interest in new share issues. Jean Aubert, head of the corporate finance department at Montreal-based brokerage firm McNeil Mantha Inc., said that the market for new issues collapsed after October, 1987, and that small investors were only beginning to show renewed interest in them this fall. But after last week, Aubert added, “Investors now feel quite helpless; they feel that things are out of their control.” As a result, he said, “Only better-sized companies will be able to come back to the market in the near future.” Still, the confidence of smaller investors may recover as quickly as stock prices did last week—but for brokers the process could take much longer.