AUGUST 2017

AUGUST  2017
FACING DOWN THE RULERS OF WALL STREET A HUNDRED YEARS AGO. THEY ARE BACK.

Translate

Amazon Contextual Product Ads

Sunday, August 31, 2008

HIS MASTER'S VOICE

I never believed old Joe Kennedy’s story about getting a stock tip from a shoe shine boy. In 1929 Joe’s fortune was already estimated at $4 million. Joe claimed that tip convinced him the market was crowded with naive money, which is why he unloaded most of his stock before the Black Friday crash of October 1929.

In fact Joe sold out most of his stock portfolio as part of a stock manipulation, and used the profits to sell short the same stocks he had just unloaded. It was a typical manipulation that was the plague of Wall Street before the crash. But like most successful moguls, in retrospect Joe’s luck made him a shrewd investor. By 1935, feasting on the financial corpse of his competitors, the Kennedy fortune was supposed to be worth $180 million. And yet if his timing had been a little bit slower or faster Joe would have been wiped out like all those other shrewd Wall Street investors. The only time people get in trouble on Wall Street is when they start thinking they are too smart to get caught.

The classic example of the games played in those days was the RCA stock pool, formed by the brockerage house M.J. Meehan and Company. In the modern vernacular the process is called “a pump and dump”. In the slang of 1929 it was “painting the tape”, as in ticker tape. First the stock was quietly accumulated by the pool members, who also sold the stock “long”, meaning they made a behind the scenes bets that the price would go up. Then the reputation of the stock was made to look better than it actually was by sales between pool members at inflated prices, and by articles planted in newspapers. This attracted buyers from outside the pool who were either fooled by the games or who suspected what was actually happening and gambled they could follow the “smart money”.

And then the pool members would begin to quietly sell the stock short, betting it would go down, which, of course, they were about to insure that it did. In the final act the pool would suddenly dump all their stock. The RCA pool started on Saturday March 9, 1929, (the NYSE met for half day sessions on Saturdays at the time) when shares of RCA were selling at $93 each. Two weeks later, Saturday March 30, the stock was selling for $109.75 a share. It was time to pull the plug. After the dump the stock fell to $80 a share. And for what was in essence two weeks work the pool members made $5 million ($60 million in 2007 value). The only problem was that $5 million the “smart money” had just squeezed out of the market had to come from someplace. Lots of the “suckers” who had bought RCA on a standard 10% margin were suddenly caught short by the switch to “dump” mode. They would now either have to pay the 90% they still owed for the stock (which most could not do) or come up with another 10% to maintain their margins. The rush to raise cash to meet the margin calls did two things at once. First, as people sold other stock to meet their short falls on RCA, that drove down the price of lots of other stocks. The New York Daily News called it a “selling avalanche”. And two: as those who either could not or chose not to sell other stocks to avoid the “margin calls” on RCA looked for the funds to meet their margins, their demand for cash drove the price of loans higher and higher. It was an instant liquidity crises- sound familiar? In a single day, Monday, March 25th, the market abruptly dropped 4% across the board. What stopped Monday, March 25, 1929 from becoming Black Monday was that on Tuesday, March 26, 1929 at about 1:30 in the afternoon, Charles Mitchell, a member of the Federal Reserve Board, boldly walked onto the trading floor and placed a loud “buy” order for U.S. Steel at higher than the then depressed market price. He also announced that he had $25 million to stabilize the market ($300 million in 2007 value). Immediatly the panic on Wall Street stopped, and conservative Democratic Senator Carter Glass called for Mitchell’s resignation because he had violated "purity" of the market. The famous “Sleeping Prophet” Edgar Cayce would write a letter in the first weeks of April 1929 famously predicting the October collapse of Wall Street. In fact the near collapse at the end of March was repeated again with another 4% drop in value on May 22 and again on May 27 and yet again on August 9 and yet a fifth 4% drop on October 3, and a 6.3% plummet on October 23, and all of these preceding the infamous Black Monday collapse, when in a single day the market dropped 12% of its total value. You would have had to been deluded not to have seen the market collapse was just around the corner. Unfortunately, Wall Street was filled with desperate, deluded people who for lots of reasons refused to see the approaching abyss. And Edgar Cayce has been making converts ever since with his mystical prediction that doesn’t seem so mystical in retrospect.

The list of the well connected and well informed experts who continued to predict that all would be well on Wall Street is almost endless. On Friday, October 18, the editor of the Wall Street Journal said in a speech that stock manipulations on Wall Street were “impossible”. Yale Economics professor Irving Fisher observed that “Stock prices have reached what looks like a permanently high plateau”. And every time one of these “experts” predicted that the dark skies were going to clear up, the market would bounce back from the brink of disaster, reaching its all time peak on September 3 of 381.17. After the 1929 crash the NYSE would not return to that level until 1954.In the immediate aftermath of the debacle of 1929 Senator Carter Glass helped fashion legislation (The Glass-Steagall Act) that divorced commercial banks from intimate ties with brokerage firms, one of the primary fuels in the collapse. And Joe Kennedy helped write new rules that banned “insider trading”, such as pools. But the Glass-Steagall Act was largely repealed in 1999, because the magicians on Wall Street are still selling the idea that secret knowledge and magical skill can trump luck on Wall Street, and they are still finding idiots who want to believe them and are willing to pay for the idea. And where ever he is at the moment, heaven or hell, Old Joe Kennedy must be having a very good laugh about the “spike” in oil prices that the experts assure us is certainly not the product of speculation.



- 30 -

No comments:

Post a Comment

Please share your reaction.

Blog Archive

Amazon Deals