19 Years-To The Gulf War.

While Monday was the worst day for blue chips the following day was actually the worst for the rest of the market because the over-the-counter traders simply ceased to function or make markets in their securities. Sell calls to these brokerage desks were simply not answered and as a result by early in that day the markets were on the verge of locking down.

A friend of mine came back from lunch and announced to the office that the Continental Bank was failing and there was a line of people stretching around the block to take their money out of the place. This was not true. There was a brokerage shop in its lobby and in those pre-internet days panicked investors were trying to find out how much money they were losing by checking out quotes. A rumor floated up from the Chicago Board of Trade that a couple of traders, convinced that the country was suffering a meltdown, had hired an armored car to go to either above said Continental or First Chicago to take out all of their cash. I never found out if this was true.

Now I was fortunate early in my career to have found a mentor whom I shall call MC. MC came by my desk and said “You have to buy something in here and a couple of years from now you will be glad you did.” With great trepidation and for the few clients that I had at that point I picked up the phone and told them to buy General Electric. Today that split adjusted cost is around $4.00 per share. Somehow the market cobbled together a gain on that day held on to a rally and with some fits and starts seemed to have gingerly found its footing.

But the damage had been done. I knew investors who went bust being unhedged in options positions. A broker that went through training with me called his boss before the open on that Tuesday and told him he quit. People who had made plans based on the past 4 years had to put them on hold. And after their initial recovery the markets muddled along. The SPX closed 1987 with about a 2% gain but all everybody ever remembers is the crash.

The markets resumed a gradual recovery in 1988 and 1989. In fact by the beginning of 1990 the markets had staged almost a 40% recovery with the SPX trading back to around 360. Stocks had made it back to the pre-crash levels but it was a period where nobody cared. It was like a switch had been thrown and investors simply went away. Real estate and certain types of yield oriented limited partnerships were the investment vehicles of choice. But stocks were a dirty word for most. It was also not a good time to be a young broker. I had been in a training class for Kidder, Peabody with 39 others. Within a year there were 6 of us left and by 1989 just 2.

Finally in 1990 both the market and the economy seemed to be gaining some traction. In fact in late summer of that year the market looked like it was ready to take out some of its old 1987 highs. Then Iraq invaded Kuwait and everything stopped. As war became inevitable the economy came to a standstill and the market fell almost 20% by October's end. As the military coalition positioned itself in the desert and the politicians tried to avert a war the markets continued to be weak. On January 12th, 1991 the US Congress authorized the use of military force. Then Secretary of State James Baker (Yes him again) met his Iraqi counterpart in Geneva in a last ditch effort to find a peaceful solution to the crisis.

It didn’t work and the markets had one final sell off in anticipation of conflict. On January 14th the SPX stood at 312.49. The market had given up all of its post crash gains and traded at the same levels it had in the summers of both 1986 and 1987. Stocks had in this 4-5 year period (absent dividends) thrown up a big fat zero in terms of growth. As all eyes turned to TV for war coverage it was expected to see more stock losses as predictions of a long war and massive casualties sapped investors of their will…..to be continued.

Long General Electric for clients & in personal accounts.