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Currents cross, narratives get scuttled, truth gets obscured, all because of hedge fund managers and big mutual fund trigger pullers occasionally getting on the wrong side of the trade.
One of the things I try to teach you on the show is how much stocks can diverge from the underlying value of the companies. Maybe your stocks were only going up today because some hedge fund imploded last week after eight straight days of the Philly semiconductor index being down, and we just didn't know it. With the Nire Dwell hedge fund out of the way, the stocks were free to lift by.
Maybe today's rally, with the Dow slipping 36.38 points, but the S&P gaining 0.4% and the Nasdaq jumping 1.11%, has more to do with some loser fund being blown out last week, a so-called clear event, than it does with how the businesses underneath its stocks are really doing.
This weekend, I told members of the CBC Investing Club that I thought Friday, last Friday, had all the hallmarks of a hedge fund blowing up, kind of like what happened with Situational Awareness in summer, but a kind of mini Situational Awareness. You didn't know Situational Awareness was falling apart when it happened; you only knew the day numb. But it knocked dozens of stocks off their flight path and caused tremendous havoc, as many analysts thought something had to be wrong with the underlying companies, not just the stocks.
Now I bring up this manufactured, non-fundamental selloff because today is the 39th anniversary of the crash of 1987. I know that 39, not a big deal, not a round number. Still, it's incredibly instructive. Right now, and I recall it well, a few months into the year, my great friend Larry Levy and I left Goldman Sachs to form Cramer Levy, a hedge fund. It was a very novel thing to do.
Larry was more of an outside guy raising money. I was the inside guy with a terrific relationship. But I think that once the money was raised, Larry wanted to move on, and I just wanted to settle down, pick some stocks. That was hard enough. I had a playbook of buying stocks in the best companies. So I moved the fund to Steinhardt Partners, where the legendary trader John Lanalou schooled me. But good, I was hanging on by my finger, and I was down almost 10%, where I would have had to open my fund, and I didn't help that I didn't have Larry to keep things together.
I sat down with Lanalou, who promptly called me a Harvard-trained idiot and a disciple of the research department of Goldman Sachs, which didn't know jack about how the market worked and would recommend a bunch of bonehead blue chips regardless of the tape. He told me to sell everything, start over, stay attuned to the market. I had no idea what the heck he was talking about. Tune to the market? I thought I was making the most subjective analysis of each position, but he told me that stocks had nothing to do with companies. They were just pieces of paper blowing with the stock market wind. Wouldn't you know it, he was right.
At the time, we had a market led by a few stocks that the Japanese would buy every night, and they'd keep those stocks up in the morning. Back then, Japan was on par with us for the biggest and deepest stock markets. They were challenging our wealth, and in many ways, their economy seemed a lot better than ours. The Japanese loved the waste management stocks. They thought 3M was terrific. They had an appetite for the drug stocks, especially Johnson & Johnson and Merck. They thought GE was really good. The whole thing was insane because their favorite stocks just seemed to go up every single day.
Their buying knew no bounds. In fact, the Japanese were responsible for most of the marginal buying of the whole move upward. They took the indices up to about 29 times earnings by the time October rolled around. The whole time the market was being taken up by Japan, there were these weirdo salespeople selling you basically something called stock market insurance, portfolio insurance. Yes, insurance. You could ride up the indices and be stopped out down 5% for a fee if something bad happened. If you were up big, you were able to lock in the gains with portfolio insurance, or at least they told you you could.
Most people don't remember that time or weren't alive to know it. But Larry mentioned it to me this weekend, and it reminded me just how you can't take all the moves seriously. I say that because what happened next, what happened today 39 years ago, is that the portfolio insurance didn't work. The insurance agents were shorting stock futures to stop you out. But the selling from the futures pits in Chicago, still a relatively young pit, overwhelmed the stocks in New York, and everything cascaded down.
Black Monday had arrived. Stocks totally divorced themselves from the fundamentals. But we didn't know that at the time because we figured there had to be some fundamental reason for the meltdown. It was impossible that the market could lose a quarter of its value in one day just because of weird insurance policies. The Dow Jones Industrial Average doesn't plunge 22.6% in a single session for nothing. Not possible. Or so we thought.
Yet it turns out there really was nothing fundamentally wrong of any consequence at all. Rampant automatic selling destroyed stocks even as the underlying companies were quite strong. In retrospect, it was a spectacular buying opportunity. I had by that time started working with soon-to-be fiancee Karen, and she was from the Lanalou school of thought because she worked with him. She hated the market right before the crash and urged me to keep selling until I owned nothing.
She did that because for weeks in advance of Black Monday, she said there were no real buyers, but a wave of sellers that were knocking down stocks for no reason. So after selling all my stocks earlier in the year and then buying back all different stocks, I just sold everything back again except for some puts in Johnson & Johnson. I was in cash for the crash for no reason other than a trader's judgment that something was very wrong with the market, not the companies underneath, which were fine.
She told me that we could buy all we wanted after the crash. So all I could say was, 'What crash?' She said, 'Oh, the one that's about to happen.' Then Black Monday hit, and we looked like geniuses. Best call ever.
Anyway, as people searched for reasons why stocks would go down, was it interest rates? Was it recession? We pinned the blame on the actual stock market's machinations, not the companies. Our recognition that the selloff had much more to do with the mechanics of the market, not the fundamentals, cemented us as people who must know something and not much else. But it was enough to get my hedge fund to be able to raise a ton of money, albeit very small by today's standards.
I think we're seeing the same thing happening right now: stocks having little to nothing to do with the fundamentals in some, but not all, the data center stocks right now. They all go up in bunches, even if they shouldn't, at least not this fast. And when they go down, they go down in unison really quickly, with nothing happening at the companies, just like '87.
There is a big difference between now and then, though. These data center stocks have nothing to do with the S&P 500, which is doing pretty terribly anyway. They're out on their own, and they're vulnerable to any kind of hedge fund blowout because the size of funds these days is immense, and they play with insane amounts of borrowed money.
Here's the bottom line. On the anniversary of the great crash, remember on this Green Monday that you may be seeing huge moves based on the machinations of money managers who are out over their skis or crushing the slalom, all totally divorced from the fundamentals without a shred of alimony. Dorene in New York. Dorene.
