I have not been a believer in the parallels between the present market and the 1987 crash. The back drops are too different, and the impact of portfolio insurance too significant to draw a good analogy. (A Demon of Our Own Design does an excellent job explaining this).
However, today is the 20th anniversary of Black Monday and the ’87 crash. The media are having an orgy of retrospectives:
Barron’s (Black Monday)
WSJ (Looking Back, Persistence Is the Lesson; Exorcising Ghosts of Octobers Past)
New York Times (A Pause to Recall the 1987 Crash)
BusinessWeek (Lessons from the ’87 Crash)
NYPost (TWENTY YEARS AFTER)
UK Guardian (The lessons of Black Monday).
I’m sure more are to follow.
Of all the reviews I have seen, the most interesting was this weeks Barron’s cover story. Andrew Bary managed to find the right context for explaining the relative size of the Black Monday, and what it meant to investors in terms of opportunity.
Here’s the Ubiq-cerpt:™
"IT’S FITTING THAT AS THE 20TH anniversary of the ferocious 1987 stock-market crash approaches, most major U.S. equity averages are at or near record levels, and many markets in the developing world at boiling points. – The prevailing view on Wall Street is that the monumental drop on Oct. 19, 1987, when the Dow Jones Industrial Average plunged 508 points – 22.6% — on then-record volume, won’t be repeated. There’s good reason for the widespread optimism. But, then again, Wall Street seemingly is always optimistic until something goes terribly wrong. Not that the bulls don’t have some good arguments. The Dow’s drop on Oct. 19, 1987, was unprecedented, and hasn’t come close to being equaled since then.
The largest percentage decline in the current decade was 7.1% on Sept. 17, 2001, and the biggest drop in the past two years was 3.3% on Feb. 27, 2007. Even the historic 1929 crash, while deeper, broader and longer-lasting, didn’t produce a one-day downdraft as vicious as 1987 did. The Great Crash included a 12.8% one-day loss on Oct. 28, 1929, followed by an 11.7% slide the following day and one of 9.9% on Nov. 6. So, the 22.6% drop 20 years ago was truly a statistical outlier.
In fact, to the extent that Wall Street looks back at that disastrous fall day in 1987, it’s probably to scoff with amazement that investors were foolish enough to dump stocks on what turned out to be one of the great buying opportunities. By the end of that year, the Dow had regained 11 percentage points of its loss. And by Dec. 31, 1988, the DJIA was almost 25% higher than it was at the end of Black Monday.
Good stuff.
Dow: Key Events, 1987 to Present.
Legend:
1. Alan Greenspan becomes Fed chief
2. Oct.19, 1987 crash
3. Iraq invades Kuwait
4. Yahoo! IPO
5. Dow hits 11,750.
6. Sept.
11, 2001 terrorist attacks
7. Second Gulf War.
8. Ben Bernanke
succeeds Greenspan
>
Source:
Black Monday
ANDREW BARY
Barron’s October 15, 2007
http://online.barrons.com/article/SB119222900783957839.html
We might not have a repeat of October, 1987 but we could see this top heavy market roll-over into an environment that sees troubles all around – slumping dollar,foreigners stop buying tresuries, forcing up long term interest rates; causing an even bigger problem in the housing and financial sectors. Of course we all can go on believing the the U.S. consumer is going to continue to borrow and spend, borrow and spend, and Paulson, is going to help the banks keep glossing over their responsibilities. Go ahead keep throwing good money after bad, keep making our “capital” markets less and less effective.
Magazine indicator – US News & World Report Cover Story…”Profiting from the Global Boom”
Using the magazine covers as a contrary indicator the bullish case could be made.
pssst… the 19th, not the 15th.
~~~
BR: Yah, but I wanted the Black Monday, not a random Friday . . .
by the time a topic reaches the cover of a general interest/news magazine, it, the topic, is widely known and out of gas per Paul Montgomery’s study. It peaks within 30 days.
Do your own homework but please cite something to back your views.
Corporate taxes receipts down, deficit up= treasury sales to rise 50%.
http://www.bloomberg.com/apps/news?pid=20601103&sid=afVWVDuyv0j0&refer=us
Hello yield, goodbye price.
goodbye price indeed. This super conduit SIV bs is not going to help. It’s designed to put a bid into a market where no bid exists.
Think of it this way. The banks, under the direction of the US Treasury, are setting up a master fund to buy from themselves. And Citibank is it is largely designed to bail out is charging fees on it to the other participating banks.
Financial alchemy got us into this mess, it is not going to get us out. Again, banks set up a bigger fund to buy from themselves. Left pocket to buy from the right pocket, …thing is they only report the books on the right pocket which charges fees to the left pocket. Why banks were allowed to set up these SIVs off their balance sheet in the 1st place is a question that I have seen few openly ask and discuss. For this to ultimately to be corrected, this practice needs to be discontinued ASAP, not set up a Super fund to worsen it. I have no faith anymore whatsoever in the Treasury, Fed or financial leaders in this country..none. If anything the past few months have shown, is that they are no different than any white collar fraud artist trying to cover their tracks.
Excellent write up on this Super SIV conduit. When this blows up, 1987 will be a walk in the park by comparison.
http://globaleconomicanalysis.blogspot.com/
We forget how scary that day was for most. And how profitable it was for a few.
I know a guy who had gone short the S&P a few weeks before Black Monday. He covered at the end of the Friday before. He still jokes that he bought a BMW with the money he made, but if he’d just waited one more day, he could have bought the whole dealership.
Comments from another blog that are succint and to the point and why I think when this blows, 1987 will seem like a walk in the park. The epitome of moral hazard!
……………….
If a mutual fund bought the short-term paper, and they don’t want to roll it over when it matures because they think the assets are trash, then they have to be paid. If the SIV can’t or won’t sell assets to pay off the noteholders, then the Big Bad Bank who covenanted to backstop the SIVs pays off the noteholders. The “liquidity problem” at the moment seems to be that the MFs are, precisely, not rolling over those notes. They’re out. That means, if nobody else is in, Citicorp owns the problem.
If the Big Bad Bank doesn’t want to own a bunch of junky assets that it promised it would fund if the worst happened, then it goes whining to Paulson and we come up with a way for a SIV squared to buy the assets of the original SIV so that the pain never actually touches Citicorp’s balance sheet.
Maybe just a blue Monday for now.
But the $85 a barrel oil is gonna smart.
As a person highly interested in repetition (from theoretical point of view) will follow up the news of this week.
Are the numbers in the ‘Then and Now’ comparison graphic adjusted for inflation?
you really need to use log scale in such charts…
If I remember correctly, Bill Gates net worth dropped from $4 Billion to $3 Billion on Black Tuesday. As of 10/15 he is at 26.65 Billion and has since 1987 sold A LOT of stock.
http://evan.snew.com/ecgi/gates.cgi?1608720609124590741320811189030710
Anxiety is good
Today, October 19, 2007, is the 20th anniversary of the 1987 stock market crash, still the worst one-day percentage drop in NYSE history. The NYSE itself has embraced the event in part by e-mailing to all financial reporters several…