Assassins, Anarchists, and the Market
When the market turns ugly, instead of panicking, investors should go with the flow. Easier said than done, but as James Boric shows us, if you can adapt your trading strategies, you will always come out on top…
The date was September 6, 1901. President William McKinley was standing in line at the Buffalo Pan-American Exposition – the equivalent of today’s Disney World and a state fair all mixed into one.
It was a gorgeous sight.
There were over 500 sculptures by well-known artists like Roth and Vanderbilt. Scattered over the grounds were 200 outdoor flower beds filled with 20,00 fresh roses, 3,000 dahlias, and 50,000 tulips. Everywhere you looked, there were beautiful fountains adorned with golden trim and intricate figurines. The immaculate parks and walkways were peppered with people buying fresh popcorn, fudge and lemonade.
Anyone who was anyone came to upstate New York to walk these grounds – including the President of the United States, William McKinley.
McKinley had given an important speech the day before on trade policy and ending isolationism, which he delivered on the exposition grounds. And after returning from a brief visit to Niagara Falls, the president stood in line near the Music Building to greet and shake hands with his well wishers.
This friendly public gesture proved to be McKinley’s last…
While greeting people in line, Leon Czolgosz (a well known anarchist of the early 20th century), shot the 25th President of the United States twice at point blank range – once in the chest and once in the abdomen. He had hid his 32-caliber pistol beneath a handkerchief he was carrying. No one had noticed it.
President McKinley died a week later – while reportedly reciting the hymn "Nearer my God to Thee, Nearer to Thee."
It was a sad day for the United States.
The McKinley Assassination: How the Markets Reacted to McKinley’s Assassination
McKinley was known as a pro-business president – always looking out for American companies and its workers. Besides issuing a high tariff on imported goods (50% higher than anything that existed before) to encourage U.S. trade, McKinley had the backing of some of the most influential businessmen in the world – including J.P Morgan and John D. Rockefeller. So when he was shot on Sept. 6, 1901, the markets reflected the uncertain atmosphere.
The Dow Jones Industrial Average plummeted nearly 9% – from 72.72 to 66.22 in the days following the assassination. (A similar move today would push the Dow from 10,200 to 9,282).
The New York Times tried to downplay the event. Its headline on Sept. 7 read: "Confidence in Financial Circles…No Occasion For Excitement."
But the major financial gurus weren’t so sure everything would be alright.
J.P. Morgan was quoted as saying, "This is, indeed, very, very sad news. It is impossible to say anything as to the effect upon the market and upon conditions in general." And Charles Schwab (president of U.S. Steele and eventually of his own financial company) said, "Should the president die, it would certainly have a most depressing effect upon business and industry."
The market’s prospects looked ugly in Sept. 1901. That is…it looked ugly for all the perennial bulls who did nothing more than buy, buy, buy and hope the market always rose.
The McKinley Assassination: Bernard Baruch
Of course, we know the market doesn’t always rise. And in 1901, Bernard Baruch, one of the day’s greatest traders, was happy to see the market plummet.
Baruch knew you could make money on the short side of the market just as easily as you could when everything rose. To prove it he shorted one of the largest copper miners in the world – Amalgamated Copper – right after word of President McKinley’s assassination attempt.
It proved to be a financially wise decision.
Copper supply far exceeded demand after the assassination in 1901. As a result, shares of powerhouse Amalgamated Copper fell from $130 to $60 a share, and Baruch netted $700,000 from the trade – the equivalent of $15.5 million today.
Not too shabby for a 31 year-old who started his career on Wall Street making $5 a week! And his success only continued from there…
By the time Baruch was 32, he retired from Wall Street with $3.2 million in his pockets. He credited his success to two things – being able to change his investment views as the market changed, and detaching from all human emotion when it comes to making money in the stock market.
Sounds easy to do. But how many of us simply add stocks to the portfolio no matter what the market is doing? Probably most. And how many of us hold onto a position way too long because of pride or ego? Again, probably most.
The McKinley Assassination: The Prevailing Trend
If you are serious about making money, you must be willing to trade with the prevailing trend of the market. And right now, that trend is bearish.
Despite a bullish 2003 and 2004, the Dow Jones Industrial Average is still 1,267 points below where it was in Sept. 2000. The NASDAQ is off its highs by more than 2,000 points. And the S&P 500 is down 235 points.
But the problem is, stocks still aren’t exactly cheap right now. The average stock on the S&P 500 trades for 20.2 times earnings and 2.81 times book. And if you look at the NASDAQ, the average P/E is still in negative territory. Not good for our bullish friends.
So I wondered…
If Bernard Baruch was alive and trading today, what stocks would he likely short in this ugly market?
After snooping around on the NYSE home page, I discovered a list of the top 100 short positions – measured by monthly short interest compared to average daily trading volume. From there I separated out all the companies trading for a premium to the overall market in terms of price to sales and price to book value. I came up with a list of ten overvalued companies to place on your short list…
CryoLife, Inc. (CRY)
Enzo Biochem, Inc. (ENZ)
F.N.B. Corp. (FNB)
Pre-Paid Legal Services (PPD)
Rogers Communications, Inc. (RG)
Telstra Corp. (TLS)
The Town and Country Trust (TCT)
Triarc Companies, Inc. (TRY.B)
Universal Technical Institute, Inc. (UTI)
WMS Industries Inc. (WMS)
Collectively, these ten stocks trade for about 140% more than the average stock on the S&P 500 in terms of price-to-sales and price-to-book value. Couple that with the high amount of short interest and I’m willing to make you a gentleman’s bet…
In the coming months the people who short these ten pathetic stocks will outperform the market as a whole.
Only time will tell if I am right. But I know one thing…
The traders that can adapt their strategies and trade with the market, not against it, will walk away far richer than those who buy no matter what the market does. Bernard Baruch proved it on the early 1900s – retiring at the age of 32.
You have a chance to do it now. Can you adapt?
for The Daily Reckoning
May 04, 2005
P.S. I run a trading service called the MST Trader Alert System. I routinely recommend puts on the worst performing stocks on the market. Recently, we’ve made 33%, 11.1% and 18.75% buying puts on Micron Technology, Inc. (MU), Genetech, Inc. (DNA) and STMicroelectronics.
James Boric is one of the leading small-cap analysts in the country. He publishes Penny Stock Fortunes and Penny Sleuth – both of which highlight tomorrow’s powerhouse companies while they are still trading for pennies on the dollar today. Mr. Boric contends that two-thirds of all the great investment opportunities lie in the over-looked small-cap market.
Nothing in the news caught our eye today. Stocks went nowhere. The Fed raised rates a quarter point – to 3%. They’re still giving money away; consumer prices rise at about the same rate.
Most of what you see in the news is noise. It is not only useless; it is harmful…in that it distracts you from thinking about things that are important to you. Of course, that’s why the news is so popular; it is a diversion, an entertainment, and a distraction. You might as well watch television or take up train spotting.
Any kind of diversion is better than actual thinking. On the evidence, people would rather die than think. Wars begin on flimsy pretexts. Often people hesitate before getting involved in them. But once engaged, some primitive instinct takes over. The noise of war becomes all-important. People are deafened by it; they give up thinking altogether. The next thing you know, they are walking across a no man’s land, while thousands of enemy soldiers try to kill them. All they can do is to focus on the war itself…and how they’re going to win it…or at least, survive it. Hardly anyone is capable of turning off the news and posing the essential question: Why are we bothering to fight at all? What is so important that it’s worth dying for? And pity the poor man who asks the question! He is promptly arrested and hung as a traitor.
In retrospect, it wasn’t worth dying in hardly a single one of America’s many wars. Never did foreign invaders seriously menace the country. Pancho Villa crossed the border into New Mexico and killed a few people. But his raid was more like a bank robbery than an invasion. In 1812, the British sailed up the Patuxent and Potomac rivers – burning houses along the way and setting fire to the capitol. But they never posed a major threat to the rest of the nation. Even the bombing of Pearl Harbor – though clearly an act of war – could not have been followed up by an invasion; the Japanese didn’t have the means. The only time the country was really threatened was when Lincoln’s Yankee troops entered Virginia. Of course, every southern boy with a pulse knew what he had to do; get his rifle out and go challenge the invader. But even then, he probably would have been better off ignoring the whole affair; it ended badly for nearly everyone.
But what’s more important than protecting the honor of your country…the sanctity of your home…the integrity of your purse…the pride of your manhood…and the virtue of your women?
Ahh…that’s it, isn’t it, dear reader? If you screen out the noise of guns and cash registers …what’s left, but silence? Emptiness. Nothingness. Zero…hollow space…a hole where once there was a heart.
"Why bother to make money?" asked a colleague at dinner last night. "The things I like doing best don’t cost anything. I love surfing. When I didn’t have any money I used to surf almost every day. Now, I’m making a lot of money…but I don’t have time to surf. And surfing doesn’t really cost anything. It doesn’t really make sense."
Make sense? Why should it make sense? The important thing is to get caught up in some enterprise that holds your attention. People who’ve lived through them report that they never felt more alive…more engaged…more alert…than in wartime. They were relieved when the war was over, but they were also let down. They had to think again. They had to read the news, listen for noise…and find other diversions, other causes, and other wars. They had to get married and raise families. They had to find private wars and private terrors to fight, which were much more horrifying, for the stakes were so much higher.
They had to confront what the existentialists call the "abyss" – the realization that there may be nothing more to life than how we pass our days. Many people take up hobbies. Others take up professions…or charitable projects…religion…love affairs. Still others…pick up newspapers and become engaged in maniacal, lame-brained world-improvements…or destruction.
Ghenghis Khan’s generals told him that the greatest thrill in life was falconry. He is said to have replied:
"You are mistaken. Man’s greatest good fortune is to chase and defeat his enemy, seize his total possessions, leave his married women weeping and wailing, ride his gelding and use the bodies of his women as a nightshirt and support."
More noise…we mean, more news, from our team at The Rude Awakening…
Tom Dyson, reporting from Baltimore:
"Since January 2004, the gold price has gone up yet the stocks that mine it have fallen over 30%. Evidence is mounting that a trend change maybe at hand…"
Bill Bonner, back in London…
*** A reader writes:
"Subject: Re: Should You Sell Your Home?
"Obviously you have not checked out the San Diego, CA area where I moved from a few years ago. My daughter started out paying $750 a month rent, in a crummy area, about four years ago for a 650 sq ft apartment. It has just been raised to $1300! She has a good position, making in the mid $40,000 but CANNOT afford to move to a nicer area because rents are out of sight!!!!!
"And to buy, forget it, she could never qualify although she has good credit, for any type of house. San Diego, she says, is losing mid-income people. They are moving out in droves. These people are not aware that San Diego is one of the highest costs of living for the lowest wages in this country, if not #1. It is beautiful there and weather perfect (I lived there for 32 years) and they think oh, wow, lets move to San Diego, only to become very discouraged and finally moving back to where they came from where rents or homes are affordable. Check it out."
*** Another reader comment:
"The article, ‘Globalization and its Discontents’ struck a particular note with me, as I have recently published a book, ‘Globalization: Myth, Miracle, Mirage’ (University Press) that covers a lot of the same themes, but introduces a few novel ideas. First, I believe it is time to change the macro-economic accounting of nations from the traditional geographical point-of-view to national capital control over the output of GDP, foreign trade, employment, etc. regardless of political geography.
"This would show, for instance, that much of the American economy as defined now is actually in the hands of foreigners: 15% of the GDP, 20% of her exports, and 30% of her imports. As U.S. FDI has to be added in that was done also. But, if America wanted to use economic globalization as a key instrument in its drive for global hegemony, it was a dismal failure. Only 2.5 – 3.0 percent of the global output of GDP outside the United States itself is accounted for by its foreign subsidiaries. Therefore, the decisive switch of her foreign policy to the political/military means under Bush, also called the neo-con policy.
"I close the book with the parallel to King Croesus of Lydia who set out to conquer the world 2500 years ago by misreading the Oracle of Delphi. Bush’s fate will be the same. In only four short years he has alienated all former friends of America, launched a losing war in Iraq that will melt down the country’s strength and resources, and helped to form the largest coalition of economic and military power the world has seen, and it is solidly anti-America. His dreams of American superiority and world leadership are turning to dust in his own hands."
*** A German reader spots an error:
"Being occasionally interested in financial matters and therefore and because of other reasons being a regular (from Germany) of your thoughtful and interesting newsletter, I noticed a funny mistake, Mr. Bonner made in Friday’s column.
"Herr Bonner wrote in an article called ‘A Thousand Clowns’ about man’s tendency to believe in humbug, a topic with many good examples from history. In it, he recalled several famous quotations from different times; he e.g. mentioned the slogan of the Nazis about Germanys need for ‘Lebensraum’ (Living space), a good example for a ridiculous thought, which nonetheless believed many people through propaganda.
"Only that he changed the word to "Liebensraum" (loving space), which gives the topic a new direction.
"I don’t know if Herr Bonner or a member of his family had the pleasure of joining young Germans on the love parade in Berlin and therefore found out, that Germans are not the sausage-eating, beer-drinking and swastika-wearing people they are still being thought of in the Anglo-Saxon world – however, it was a rather subtle and sensitive way of letting us Germans know, that 50 years of democracy have finally made us partners of the West."
Editor’s comment: We make mistakes in all languages. Once, in an Italian restaurant, we ordered ‘spaghetti carabinieri’ instead of "spaghetti carbonara." We had asked for spaghetti with policemen on it.
In England, we were once asked at a hotel by a pretty woman at the front desk: "Would you like to be knocked up in the morning?"
"Well," we replied, "we don’t know if it will work, but we’d be happy to try."