For Whom The Bell Tolls, Sell
Is this a bull market or a mania? You never know for sure, except in retrospect.
By Andy Kessler
The Wall Street Journal
July 3, 2017
You think this market’s crazy? One day in early 1987, with Wall Street humming, a meeting after trading closed involved several cases of champagne. The Dow Jones Industrial Average had breached 2000 that day, a cause for celebration. A week and a half later, more champagne was ordered when the average passed 2100. Then again a few weeks later for 2200. Eventually my boss stopped buying bubbly when breaking records became the norm. Japanese insurance companies would show up at the brokerage firm where I was a securities analyst and ask for a list of our five favorite stocks, then hand it to their salesman and say “buy 50,000 of each.”
On Friday, Oct. 16, 1987, the average dropped 108 points. Rumors swirled that we’d celebrate with cases of Bud Light. No matter: I was with some traders and a client in a stretch limo, headed to watch Mike Tyson fight Tyrell Biggs for the heavyweight championship—an event staged by Donald Trump in Atlantic City, N.J. Man, I miss the 1980s.
The market truly crashed the next Monday, dropping 508 points, or 22.6%. In retrospect, there had been signs all over the place. How did everyone miss them? Well, as the old Wall Street adage goes, no one rings a bell at the top (or bottom) of the market.
So here we are in 2017. The stock market is supposed to be the great humbler, but the records are coming fast and easy. The Dow Jones Industrial Average is up 8% for the year and flirts with a record practically every day. Some of this is structural: Bonds are no fun, since the yield curve is flattening and three-month Treasurys are 1%. So money flows to stocks—and other weird things.
A friend of mine used to run a large-growth mutual fund. In the dot-com mania of 1999, he told me that tens of millions of new capital would flow in every single day. Trying to figure out where to put it, he would consider the new batch of initial public offerings—and then inevitably he just would buy more Yahoo or America Online or Cisco or, what the heck, Yahoo again.
Today, money is flowing into exchange-traded funds. But because ETFs are weighted by market cap, that money flows into the biggest names: Facebook , Amazon, Apple, Microsoft , Google. Classic momos, or momentum stocks. The church of what’s working now. What could possibly go wrong?
Sure, the economy is picking up, earnings are growing, and the business is being transformed by mobile, cloud and artificial intelligence. But who doesn’t already know that? On the flip side, we’re at the start of a 30-year cycle of interest-rate raising, nonhousing debt is higher than in 2008, and deciphering China’s direction is as hard as Chinese arithmetic.
Remember, bull markets end when the perception of earnings growth disappears, maybe because of a recession or even simply pending inflation. Manias, on the other hand, end when the market runs out of buyers.
In 1987, Treasury Secretary James Baker refused to support the dollar, and Japanese buyers left town. In late 1999, Federal Reserve Chairman Alan Greenspan flooded the economy with money to head off a potential panic over the Y2K computer glitch. Then in early 2000 he pulled the money back in, ending the stock-buying frenzy. In 2007, the subprime mortgage-backed security market rolled over as foreign buyers left, though because of thinly traded markets it took another year to show up in prices.
Another ding-dong: In less than a year at least 50 companies, including one named Mysterium, have raised hundreds of millions of dollars via something called Initial Coin Offerings, selling a percentage of a new cryptocurrency service in exchange for other digital coins. That’s a modern version of a blank-check company, which usually ends in tears.
So are we facing a raging bull market or a mania? Sadly, you’ll only know in retrospect. I’m not saying it’s a top today, though if it is, I’m happy to take credit. It could go on for a while. Pundits pore over charts of volatility and put-call ratios. Forget that. Real investors survey the landscape and look for signs of a market gone loco. In one week in late 1999, the hedge fund I used to run had two groups from the Middle East each insist on wiring us $500 million. Practically “The Gong Show.” We politely declined and then started returning money to our existing investors.
Are there any bells ringing now? How about a few months back when someone looked me in the eye and insisted—without cracking a smile—that Uber was a bargain at a $68 billion valuation? Or when, with shades of AOL and Time Warner , Amazon bought Whole Foods for $13 billion—and then its stock went up by more than that amount? Or when Tesla missed its numbers again and the stock rose anyway? Or when the price of a bitcoin, backed by nothing but the faith of devotees, hit $3,000, tripling over a year? Or when Hertz stock rose 14% on news of a deal with Apple for a self-driving car that is still vaporware?
Listen for whom the bell tolls.
You think this market’s crazy? One day in early 1987, with Wall Street humming, a meeting after trading closed involved several cases of champagne. The Dow Jones Industrial Average had breached 2000 that day, a cause for celebration. A week and a half later, more champagne was ordered when the average passed 2100. Then again a few weeks later for 2200. Eventually my boss stopped buying bubbly when breaking records became the norm. Japanese insurance companies would show up at the brokerage firm where I was a securities analyst and ask for a list of our five favorite stocks, then hand it to their salesman and say “buy 50,000 of each.”
On Friday, Oct. 16, 1987, the average dropped 108 points. Rumors swirled that we’d celebrate with cases of Bud Light. No matter: I was with some traders and a client in a stretch limo, headed to watch Mike Tyson fight Tyrell Biggs for the heavyweight championship—an event staged by Donald Trump in Atlantic City, N.J. Man, I miss the 1980s.
The market truly crashed the next Monday, dropping 508 points, or 22.6%. In retrospect, there had been signs all over the place. How did everyone miss them? Well, as the old Wall Street adage goes, no one rings a bell at the top (or bottom) of the market.
So here we are in 2017. The stock market is supposed to be the great humbler, but the records are coming fast and easy. The Dow Jones Industrial Average is up 8% for the year and flirts with a record practically every day. Some of this is structural: Bonds are no fun, since the yield curve is flattening and three-month Treasurys are 1%. So money flows to stocks—and other weird things.
A friend of mine used to run a large-growth mutual fund. In the dot-com mania of 1999, he told me that tens of millions of new capital would flow in every single day. Trying to figure out where to put it, he would consider the new batch of initial public offerings—and then inevitably he just would buy more Yahoo or America Online or Cisco or, what the heck, Yahoo again.
Today, money is flowing into exchange-traded funds. But because ETFs are weighted by market cap, that money flows into the biggest names: Facebook , Amazon, Apple, Microsoft , Google. Classic momos, or momentum stocks. The church of what’s working now. What could possibly go wrong?
Sure, the economy is picking up, earnings are growing, and the business is being transformed by mobile, cloud and artificial intelligence. But who doesn’t already know that? On the flip side, we’re at the start of a 30-year cycle of interest-rate raising, nonhousing debt is higher than in 2008, and deciphering China’s direction is as hard as Chinese arithmetic.
Remember, bull markets end when the perception of earnings growth disappears, maybe because of a recession or even simply pending inflation. Manias, on the other hand, end when the market runs out of buyers.
In 1987, Treasury Secretary James Baker refused to support the dollar, and Japanese buyers left town. In late 1999, Federal Reserve Chairman Alan Greenspan flooded the economy with money to head off a potential panic over the Y2K computer glitch. Then in early 2000 he pulled the money back in, ending the stock-buying frenzy. In 2007, the subprime mortgage-backed security market rolled over as foreign buyers left, though because of thinly traded markets it took another year to show up in prices.
Another ding-dong: In less than a year at least 50 companies, including one named Mysterium, have raised hundreds of millions of dollars via something called Initial Coin Offerings, selling a percentage of a new cryptocurrency service in exchange for other digital coins. That’s a modern version of a blank-check company, which usually ends in tears.
So are we facing a raging bull market or a mania? Sadly, you’ll only know in retrospect. I’m not saying it’s a top today, though if it is, I’m happy to take credit. It could go on for a while. Pundits pore over charts of volatility and put-call ratios. Forget that. Real investors survey the landscape and look for signs of a market gone loco. In one week in late 1999, the hedge fund I used to run had two groups from the Middle East each insist on wiring us $500 million. Practically “The Gong Show.” We politely declined and then started returning money to our existing investors.
Are there any bells ringing now? How about a few months back when someone looked me in the eye and insisted—without cracking a smile—that Uber was a bargain at a $68 billion valuation? Or when, with shades of AOL and Time Warner , Amazon bought Whole Foods for $13 billion—and then its stock went up by more than that amount? Or when Tesla missed its numbers again and the stock rose anyway? Or when the price of a bitcoin, backed by nothing but the faith of devotees, hit $3,000, tripling over a year? Or when Hertz stock rose 14% on news of a deal with Apple for a self-driving car that is still vaporware?
Listen for whom the bell tolls.
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