You'll Never Know How Close You Came

Max Whitmore
Thursday, March 20, 2008
I believe that last weekend will be looked back on as the major watershed of the entire 2007-2008 financial market events. Last week, as I told my High-Yield Income Investing readers, the bulls and bears locked horns, much as they did in June 2003. The battle was for the supremacy of the mountain and only one would be on that mountain when it was over.

I must tell you I was at my computer listening to Bloomberg all weekend, knowing that this battle was underway. I must admit that on Saturday, I was not yet sure that the weekend was going to end with any stability. As the day progressed, I remembered two other events in my 40 years of being in this business. The first was in July 1974 and the second was in October 1987.

In 1974, I had my own venture capital company and times were getting very tough. There was no, I repeat no, money to be had by groups such as mine. All the venture cash had disappeared. I remember the ticker (they still used them in those days) had just reported that the stock market was having its worst day since WWII, and it looked like we were about to enter a full-fledged depression again.

Now remember, this was only 45 years after the Great Depression, and everyone remembered those bad days very clearly. I remember thinking that this could even mean the end of my business venture, quite possibly. To say it was frightening is an understatement. I had a home, kids, wife and employees to pay and keep happy, and how was I going to do that?

But, the first of these two dates that actually came to mind, as last Saturday progressed, was the October 1987 event many of you remember even today. I remember well that day the stock market lost 20 percent of its value in one day — the day it "crashed." If you were watching a ticker somewhere that day, like I was, it was transfixing. I watched as the brokers just let their phones ring. No one answered anything. There were no orders being processed anyway. All the lines to the exchange were clogged. We were all in a state of shock. And when the ticker showed a 500 point loss at about 2:45 p.m., not one person was standing. We just sat down and looked at each other.

Now, I survived that 1987 event and the 1974 one, of course. I won't go into all the details, but I did okay. Others didn't. Many of my friends just totally left the business. It was a mass exit. Today, I imagine most of them are retired or near retirement. I wonder what they would say to those events now.

Well, that is another story. I am here to tell you about last weekend and how 1974 and 1987 ties in with those three days.

As I said, I was quite concerned by mid-day Saturday. The story was that JPMorgan and the Fed were in deep talks to try and salvage Bear Stearns — salvage, I said to myself? Wow! It seemed that JPMorgan was resisting any deal because of the potential liabilities that might be attached to Bear's assets. And by Saturday night, the news was not very encouraging at all.

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Sunday morning, I found that they had been in talks until well after midnight and were to resume early Sunday. After church, I was back at my desk and doing all the searches on the net I could to get news. Then sometime about mid-afternoon, that funny 1974 and 1987 feeling began to make itself known. At first, I just sloughed it off. But after the second and third wave of "the feeling," I realized I better listen to this little angel on my shoulder.

If Bear Stearns failed, it would be a shocker to the Japan and Asian markets and that could set off a wave of selling that would cascade to Europe. By the time it got to the bell at the NYSE, there would be no hope of stopping a huge two- to three-day crash. Somehow, that had to be stopped, I thought! But, I am just a bystander in all this, so I could only watch.

I must tell you that I was sure that the hand of Fed Chairman Ben Bernanke was in all this action. He definitely knew better than anyone in the world what a panic can do. He is the world's best analytical mind on the panics of the past. I had no doubt that he would do whatever it took to forestall and prevent such an event. But could he, I asked myself?

Then, when I saw the news that a deal had been made about 7:10 p.m. Sunday night, I felt somewhat relieved. Then, the news of the Fed reducing the discount rate to banks hit and I felt that extra loaf was from Dr. Ben, a way of making a sharp statement to the bears. The Fed had chosen up sides — the bulls were their choice and they would pull out all the stops needed to protect their choice.

Now, stay with me here for a moment. I want to talk more about the bears. So far, I have said little or nothing about them. See, there are those among us who are just regular traders and will short a stock now and then if the charts look like it might be a good move. But, that is not who I am talking about here.

The bears I am referring to are a group of traders who make a living by destroying the stock they chose as their target. I said target. These bears are not ordinary folks. They are good at their trade, have very deep pockets, and they choose their "target" with great precision. They are the professional bears, the "hyper-bears."

First, they look for some weakness in a group of targets. Then, they pick their target, a company that has some problem that left to their own management would fix. But, having picked their target, the hyper-bears begin their program of destruction. They begin a series of articles and TV appearances by folks they hire to help spread the fear needed to undermine their target.

Rumors are planted, the write-ups become an avalanche, and investors begin to ask questions. Soon, that molehill of a problem begins to become a mountain. Then, the stock shorting is begun in earnest. The hyper-bears are not looking for a few bucks here. They are looking to destroy their target stock. Destroy is the goal because it brings the biggest rewards.

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Now look, I don't know who any of these hyper-bears are by name. All I see is the chart showing the pattern I am outlining as it develops. At some point, the hyper-bears begin an all out assault. The rumors are now represented as actual fact. The company is accused of not being honest with the public, even when they are being so. Sometimes even key clients of the target company may be contacted to "warn them" of an impending disaster at company XYZ. If all this succeeds, we see it as a Bear Stearns story. If they fail, the hyper-bears cover their shorts, make some money and begin the search for another target.

Does all this sound like fantasy? Believe me it is not. After 40 years here, the hyper-bears, the Plunge Protection Team, the hyper-bulls and even the "fixers" are all too well known to long-timers like me and guys like me in this end of the business. There is nothing we can do about those folks except report what we see. For me, the only place I see it is in the charts. Others have seen it firsthand. Some have told me their stories — hair-raising, some of them. I would surely like to have seen the list of those holding big short positions on Bear Stearns. Hmmm.

But, anyway back to last weekend. By about 10 p.m. Sunday, I saw that the S&P was down over 30 points already, and I had that 1974-87 feeling in the pit of my tummy growing by leaps and bounds. The next morning, it was worse. We were down over 40 points at one time before the open. Then, the open. It was not until 11 a.m. that I finally began to feel the tension start to subside. By the close, the feeling was gone and I knew that Dr. Ben had pulled it off. I will never know what Dr. Ben and his team did behind the scenes, but there was no panic, no crash, no financial system freeze-up!

Now, let me put it to you like this. All of you reading this came as close to a catastrophic collapse as you will likely see in your lifetime. Events like this only occur once every 40 to 50 years or so.

Had the Fed — Dr Ben — failed, I can assure you without question that today you would most likely be worried about your job, your business future, and your kids' future in a way I shudder to think about. But, you aren't. For that I am most grateful for us all. From here you will all go on about your regular business — aware that there are still some problems out there to be worked on — but that they will get it worked out eventually. But you will remain, at least for now, totally unaware of just how close we all came to a worldwide financial disaster.

I know that's pretty heavy language. But my 40 years in this business has taught me something. When that angel on your shoulder starts to talk — you better listen. Things are not alright at all. I am just glad that little angel left me with a smile and not a grimace. Let me tell you, those little angels were working overtime for all of us this weekend.

So, that's it for this week. A quite different column, I know, but remember it a year or two from now when the real facts about last weekend begin to come out. I am sure I didn't miss it by much at all.

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I do hope your coming investment week is a good one. In the meantime, you keep in touch. I do! See you next week.

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