One thing that bothers me about this 401-k driven stock investment deal is that the majority of people invested still have a long time horizon before they can take advantage of their gains in retirement---and as the article from the FT said, no one ever lost their shirt taking a profit.
Your email pal,
Tom L.
Doug Henwood wrote:
> JayHecht at aol.com wrote:
>
> >Barron's has an interesting analysis of the 1872-1874 stock debacle.
> >
> >The NY banks tried to hold it together as the RR financiers went down the
> >tubes.
>
> Since Barron's is rarely worth the $3....
>
> The author, Chris Carolan, is the guy I quote in Wall Street as defining a
> bear market as a time when money returns to its rightful owners. When I
> asked him who they are, he said, "Oh, the Rockefellers."
>
> Doug
>
> ----
>
> Barron's - May 17, 1999
>
> Setting A Bull Trap
>
> Does what happened in 1874 foretell what might occur in 1999?
>
> By Christopher Carolan
>
> The great stock-market rally of late 1998-early 1999, coming so quickly on
> the heels of last year's international financial distress, has no precedent
> in the recent past. Combined with new highs in many averages, this argues
> that the bull market is back, and bigger and better than ever.
> Unfortunately, there is a historical precedent for this rally, and its
> final act wasn't pretty.
>
> Others have noted the parallels between the declines of 1873 and 1998. Both
> were preceded by bull markets marked by speculation in a new transportation
> infrastructure -- the railroads then and the Information Superhighway now.
> Each drop occurred in a climate of falling commodity prices. And in 1873 as
> well as in 1998, the financial distress was international in scope. In May
> 1873, German and Austrian markets collapsed; a few months later, the U.S.
> stock market swooned. In 1998, the woes of Asia and Russia pushed down
> American share prices in the summer and early fall.
>
> The rallies that followed each slump were impressive, but they developed
> under very different circumstances. In 1998, the Federal Reserve Board
> headed off any crash -- and refortified the bulls -- by easing interest
> rates. In 1873, there was no Fed to stem the panic. The pivotal September
> event was the bankruptcy of speculator Jay Cooke, who couldn't sell enough
> of his Northern Pacific railroad bonds in Europe to stay afloat. Last year,
> in contrast, the Long-Term Capital Management hedge fund was rescued in
> September, even though it had made some very bad bets on bonds, among other
> things.
>
> The 1873 decline ended November 7, with prices off about 30%. Then came a
> tremendous rally, similar to the one that followed the 1998 low reached
> last October. According to contemporary accounts in the New York Times,
> stocks gained 10%-12% in the first nine days of that rally. Though there
> was no Fed to cut interest rates, New York banks -- at the time easily the
> most dominant in the nation -- played much the same role. As the Times
> noted on November 26, 1873: " ...The main stimulant to the share
> speculation at the exchange is the ease in money and the restored facility
> of clearing the immense speculative transactions between the brokers
> through the banks."
>
> ----------------------------------------------------------------------
> HISTORY LESSON
>
> While stock prices rebounded nicely after international turmoil had helped
> push them down in 1873, the subsequent rally was a prelude to a
> disappointing period for Wall Street's bulls.
>
> Share Price Snapshots 1873-74
>
> Jul. 18 Nov. 7 Feb. 9 Decline Retraced
> N.Y. Central RR 104.12 78.50 105.00 -25% +103%
> Rock Island RR 111.25 84.25 108.50 -24% +90%
> Pacific Mail 38.12 26.75 43.75 -30% +150%
> St. Paul Common 53.25 22.00 48.25 -59% +84%
> Western Union 89.75 46.25 77.50 -48% +72%
> Erie RR 58.87 26.12 49.12 -56% +70%
> Union Pacific RR 28.1215.5. 35.12 -45% +155%
> Lake Shore RR 94.00 61.00 83.12 -35% +67%
> Ohio & Miss RR 40.25 21.87 34.75 -46% +70%
> North-West RR 71.00 34.25 60.75 -52% +72%
>
> Source: The New York Times
> ----------------------------------------------------------------------
>
> One month later and with the rally well under way, the Times described a
> market that had forgotten about value just weeks after the greatest crash
> in NYSE history:
>
> "Stock Exchange speculation is rampant... . We seldom expect to report what
> would be called a consistent market on Wall Street, but there is now less
> appearance of this element, and a greater disregard of relative values and
> the outside surroundings of the Exchange than in usual seasons of
> excitement. But many of the banks (some of them nearly at death's door in
> October, and owing the clearinghouse half their capital or more) are being
> drawn into the ante -- panic practices and are ... fast forgetting the
> lessons of September. They all seem willing to help "roll the ball" and to
> certify that [money] prices are cheap... ."
>
> The table shows how far some stocks slid in the 1873 crash and the extent
> of the subsequent rally. By the time the bull stopped running in early
> February 1874, the bluest chips, the New York Central and Union Pacific
> railroads, had exceeded their old highs, as many top names have done in
> this rally. Most secondary issues had regained about 70% of their losses by
> early 1874, compared with the Russell 2000's 80% recovery now. And then, as
> today, the market shot up as fast as it had plummeted.
>
> The news accounts during the post-crash rally focused on the greenback
> question. Would Congress increase the amount of greenbacks in circulation
> and ease the developing contraction? (The term "greenback" appears in the
> financial press of the day as frequently as "Greenspan" does today.) At the
> time of the high, the bulls hoped for monetary relief. By March 1874,
> market participants realized that help from Congress wouldn't be soon
> forthcoming. Stocks no longer could escape the gravitational pull of the
> contracting world economy. The market rolled over to lose about 43% in the
> next 40 months, in what became known as the depression of the 1870s. In
> essence, the bulls had blundered into a trap that would see stock prices
> trend downward for several years (see chart).
>
> Of course, there are substantial differences between then and now. The New
> York banks were no match for the world economy then, while the Fed is a
> more formidable force now. America's central bank has more tools to "roll
> the ball," to use that elegant phrase from the 19th century. Jay Cooke's
> failure caused major harm to the financial markets in 1873, while the LTCM
> bailout averted similar systemic damage in 1998. The 1873-74 rally occurred
> after a much more devastating collapse than 1998's crashless decline.
>
> Nonetheless, the message is clear: Wall Street's ability to quickly reflate
> itself with easy money is no guarantee that the bear is defeated. History
> suggests the determining factor is whether the world economy truly has
> recovered from the previous year's shocks. In 1874, it hadn't. In 1999, as
> the continuing woes of Japan and some other nations in Asia and South
> America show, the verdict still isn't in.
>
> ------------------------------------------------------------------------
> CHRISTOPHER CAROLAN publishes Spiral Calendar Research in Gainesville,
> Georgia (chris at calendarresearch.com). He won the 1998 Charles H. Dow Award,
> presented by the Market Technician's Association, Barron's and the Dow
> Jones Newswires.