* * * * * * * * * * * * REMINDER * * * * * * * * * * * * *
On the days that I don't publish, like today, you will
receive Bill Bonner's DAILY RECKONING. This will help you
to keep pace with the changes in the markets. Bonner and
I agree on most things in the field of economics, so the
two letters will reinforce each other.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
A SHORT HISTORY OF THE BEAR MARKET
THE DAILY RECKONING
PARIS, FRANCE
FRIDAY, 2 NOVEMBER 2001
* * * * * * * * * * * * * * * * * * * * * * * * *
*** Sept. consumer spending drop approaches 41-year
record...Dow leaps 188...
*** U.S. Government cans 30-year note...
*** When flight-to-quality becomes more than a fad...the
short, tragic life of a bear speculator... and more!
* * * * * * * * * * * * * * * * * * * * * * * * *
*** As if they were acting with "total clarity" in the
first place, the anti-globalization movement has been
"stunned" by the attacks on New York and Washington,
reports the International Herald Tribune. What a pity...
the Battle of Seattle was nothing if not entertaining.
And the Daily Reckoning was agin' to like dem folks.
*** Those pesky terrorists are spoiling everybody's fun.
"Terrorism Cripples U.S. Economy," says a headline in
the IHT, overtly blaming the slowdown on the Sept. 11
attacks. "Consumer spending dropped 1.8% in September,"
the article reports, "the largest drop since a similar
fall in 1987. The last time spending fell by a greater
amount was in May 1960, when consumers reduced purchases
by 1.9%."
*** A separate report released Thursday by the Commerce
Department showed manufacturing activity dropping to its
lowest level in 11 years.
*** The markets...presumably reacting to a calculated
recall of the 30-year T-bill...leapt. The Dow gained 188
to close at 9263. The Nasdaq climbed 56 points to 1424.
*** (By the way, the Daily Reckoning scorekeepers, Eric
Fry and Bill Bonner, have both jetted off for Vegas
where the Agora Wealth Symposium is in full swing. Here
in Paris, we're carrying on as usual, though our breaks
down at Le Paradis seemed to have grown in length a
bit...)
*** "Treasury officials said their decision to halt the
issuance of the 30-year bonds was intended to save the
government money," writes Gretchen Mortgensen in the NY
Times. "Traders scoffed at that explanation, viewing the
move as an almost desperate attempt to push down long-
term interest rates, and prod both corporate and
individual borrowers to spend again."
*** Prices of the long-term bonds soared on the
announcement...yields plunged. "It was the biggest
single-day move since investors fled to safety during
the stock market crash of 1987...keeping consumers
feeling flush has become a top priority." Perhaps even a
matter of national security.
*** "How much income is being lost by individuals and
companies," we wonder, as did Bill King this morning,
"because the government is intervening on the side of
the wanton at the expense of the savers and the
prudent?"
*** Reviewing yet another of the government's attempts
to revive the economy, Christopher Byron writes (in
MSNBC): "...the stimulus being proposed - roughly $100
billion at last tally - is utterly trivial when measured
against the collapsed stock values in the tech sector.
[It] doesn't even offset the $450 billion in lost value
in a single company - Cisco Systems, Inc."
*** In fact, if you add the collapsed value of all the
techs together - big and small alike - more than $4
trillion has been wiped out on the Nasdaq alone. "Which
makes it pretty clear," says Byron, "that a mere $100
billion of stimulus is not going to boost business
spending by very much."
*** Since the attacks, we at the Daily Reckoning - as
stunned as the next group of conspirators - have been
asking a question similar to one I'm sure has crossed
your mind at least once: "Why?" The Sovereign Society's
John Pugsley offers one point of view: "It is not hatred
for freedom or materialism that caused terrorists to
sacrifice their lives." Pugsley quotes Joseph Sobran:
"You delude and flatter yourself if you think someone
hates you for your virtues."
*** "Their deep hatred is rooted in years of bullying by
the U.S. government," suggests Pugsley, "whose
embargoes, bullets, bombs, and cruise missiles have been
brought to bear on them whenever and wherever American
politicians felt it in their own interests to do so."
See: Crossing The Threshold To War
http://www.dailyreckoning.com/body_headline.cfm?id=1536
*** "As events in the Mideast and Afghanistan heat up
and the economy melts down," writes John Myers in the
Resource Trader Alert, "flight-to-quality becomes more
of a necessity than a choice. And if today's paper
flight-to-quality alternatives like the dollar and U.S.
Treasuries lose their allure, investment demand for
metals - like silver - could renew and pay off big for
investors."
*** "This past summer," Myers offers by way of example,
"we recommended purchasing December 2002 $4.50 Comex
silver calls for 30 cents, or $1,500 each. We
recommended selling them a week after the World Trade
Center attack when they were going for 53.2 cents, or
$2,660 each." A tidy profit, indeed.
*** "October is typically a weak month for silver,
and this October was no exception. The same calls we
exited for over $2,000 are now going for roughly $1,000.
With scary October now over, we believe the time has
come to venture back into silver."
(see: The Resource Trader Alert
http://www.agora-inc.com/reports/HOTS/BetterDaysAhead
*** This morning the unemployment rate comes out...the
expected rate is 5.2% - up .3% from September. You'll
find a guest essay by the author of "Devil Take The
Hindmost" below...
Cheers,
Addison Wiggin
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The Daily Reckoning Presents: A Guest Essay in which
Edward Chancellor, author of "Devil Take the Hindmost",
considers a recent proposal for legislation in the U.S.
to temporarily ban short-selling.
A SHORT HISTORY OF THE BEAR
by Edward Chancellor
The professional life of the bear speculator is normally
short and full of misery.
Powerful forces are aligned against the bear. They
include, the bull speculators, whose capital outnumbers
that of the bears by at least one hundred to one; the
public, who perceive short-selling as an injurious
activity; and politicians, who are always eager to blame
the short-sellers for economic woes.
In addition, the bear pits himself against the forces of
economic progress, which over the past two hundred years
have been accompanied by the most tremendous gains in
share prices, so that $100 invested in the U.S. market
in 1802 would have been worth around $700m by the new
millennium.
The earliest speculative markets witnessed the tussle of
bulls and bears. In the second century before Christ,
the playwright Plautus identified two groups in the
Roman Forum engaged in trading shares. The first group
he called "mere puffers" (the security analysts of the
day), and the second group Plautus described as
"impudent, talkative, malevolent fellows, who boldly,
without reason, utter calumnies about one another." In
England, the origin of the term "bear" to describe
speculating for a fall, deriving from a trader who sold
the bear's skin before he had caught the bear, first
appeared in the early 18th century several years before
the appearance of the corresponding "bull."
Bears have always been unpopular. In 1609, Flemish-born
merchant, Isaac Le Maire, organized a bear raid on the
stock of the Dutch East India Company [even though a
founding member of the company]. Although the Amsterdam
bourse maintained that the decline in the East India
stock was due to poor business conditions - not short-
selling - in 1610 the government outlawed all short
sales. As with most laws seeking to curtail the
activities of bears - the market's natural libertarians
- this edict was a dead letter from the start. The Dutch
banned short-selling again in 1621 but to no effect.
As the stock markets became established in Britain and
France in the eighteenth century, further legislative
traps were laid to catch the bears. Following the
collapse of the Mississippi bubble in 1720, bears, who
had profited from the decline in the Mississippi stock,
were fined and a law was introduced outlawing short-
sales.
At around the same time, the English had witnessed the
startling rise and collapse of the South Sea Company,
which had risen from around �100 to nearly �1000 in the
first six months of 1720, only to fall back to where it
started in the autumn of the same year. Some thirteen
years later, a bill was brought before parliament by Sir
John Barnard, M.P. Its aim was to "prevent...the wicked,
pernicious, and destructive practice of stock-jobbing
[speculation] whereby many of his Majesty's good
subjects have been directed from pursuing their lawful
trades and vocations to the utter ruin of themselves and
their families, to the great discouragement of industry
and to the manifest detriment of trade and commerce."
Sir John Barnard's Act, as it was called, outlawed the
use of futures, options, and short sales of stock (by an
error of drafting, this was later understood by the
courts to relate only to British government stocks).
It remained on the statute book until 1860. From its
beginning, however, few paid attention to the letter of
the law: brokers continued to engage in short sales
which were enforced through a gentlemanly code of
conduct - "my word is my bond" - rather than legal
sanction.
These two early pieces of legislation against short-
selling reveal a common theme in the history of the
bears. Bubbles occur when speculators drive asset prices
far above their intrinsic value. The collapse of a
bubble is frequently accompanied by an economic crisis.
Who gets the blame for this crisis? Not the bulls, who
were responsible for the bubble and the various frauds
and manipulations perpetrated to keep shares high, while
cashing in their profits.
No, it is invariably the bears who are blamed for the
post-bubble crises and are the main objects of anti-
speculative legislation. Yet during the bubble periods
it is the bears who are generally the lone voice of
reason, warning people of the folly of investing in
overpriced markets. In the aftermath of a bubble, they
continue their forensic work of exposing unsound
securities and bringing prices back in line with
intrinsic values, a point which must be reached before
the recovery can start.
Ever since the trauma induced by the collapse of the
Mississippi Bubble, the French have retained a more
pronounced aversion to financial speculation than the
English. Napoleon disliked bears and believed that
shorting was unpatriotic. In 1802, he signed an edict
subjecting short-sellers to up to one year in jail. The
French prejudice against so-called Anglo-Saxon
capitalism continues to the present day: after George
Soros and other speculators drove sterling from the
Exchange Rate Mechanism in September 1992, the French
finance minister, Michel Sapin, commented that "during
the Revolution such people were known as agioteurs, and
they were beheaded."
Only the other day, following the fall of the markets
after September 11, the Belgian finance minister said he
had "strong suspicions" that the UK markets were used
for speculative trading!
Bears have always operated more freely in the United
States than in Europe. Despite a ban on short sales by
the New York Legislature in 1812, the bear operator was
a familiar figure in the nineteenth century. A few
gained celebrity. Jacob Little, a saturnine figure, was
a leading bear operator in the first half of the
century. Known variously as the "Great Bear," the "Old
Bear," and the "Napoleon of Wall Street", Little also
operated on the long side, and perfected the technique
of catching shorts in corners, which became a
characteristic feature of the U.S. market. Little was
destroyed in the "Western Blizzard" crash of 1857.
His place was taken by Daniel Drew, also known as the
"Great Bear", "Ursa Major", and the "Sphinx of Wall
Street". Drew was described by a contemporary as
"shrewd, unscrupulous, and very illiterate - a strange
combination of superstition and faithlessness, of daring
and timidity - often good-natured and sometimes
generous." He was the great rival of Cornelius
Vanderbilt and a sometime partner of Jay Gould.
Drew's bear operations sometimes involved the Erie
Railroad, of which he was a director. Drew would
manipulate Erie's stock upward, sell it short and then
"water" the stock by issuing a vast number of
unauthorized shares. Drew is famous for his ditty on the
legal obligations of the bear:
"He who sells what isn't his'n,
Must buy it back or go to pris'n."
The roaring twenties, of course, belonged to the bulls.
But as the market turned in September 1929, the bears
regained control. The celebrated speculator Jesse
Livermore, who as a teenager made his first fortune
shorting the stock of the Union Pacific Railroad during
the San Francisco earthquake of 1906, made another pile
during the October crash.
[After the crash] stocks continued to fall, until by the
summer of 1932, the Dow Jones reached a floor of 41.88,
nearly 90% off its 1929 peak. By this date, the
country's national income had shrunk by 60% and one
third of the non-agricultural workforce was unemployed.
President Herbert Hoover, who came to office in early
1929 promising that "the end of poverty was in sight,"
faced an uphill task in the forthcoming election.
America needed a scapegoat.
Wild rumors spread of bear raids, of fabulous profits
made by short-sellers, and of political conspiracies
hatched by foreigners interested in bringing down the
market, the dollar and the U.S. economy. In early 1932,
the Philadelphia Public Ledger maintained that "European
capitalists had supplied much of the cash needed to
engineer the greatest bear raid in history. These
proverbially open-handed and trusting gentleman had
accepted the leadership of New York's adroit Democratic
financier, Bernard Baruch." Baruch, the best known
short-seller in the country, shrugged off the charge.
Hoover, on the other hand, apparently became convinced
that bear raids on the stock market were intended to
damage his presidency. In April 1932, a French stock
market rag was raided by Paris police, its female editor
accused of being in the pay of Russian and German
interests who were trying to induce a panic on the New
York market. In desperation, Hoover ordered the Senate
to open an investigation into the affairs of Wall
Street.
In fact, there is remarkably little evidence of
organized bear raiding on the U.S. market following the
October Crash. In order to dispel the myths, the
economist of the New York Stock Exchange, Edward Meeker,
published a book, entitled Short-Selling, in 1932.
Meeker claimed that bears had not precipitated the
crash. In November 1929, the NYSE found that around one
hundredth of one percent of outstanding shares had been
sold short. A later study in May 1931 found the short
interest had risen to 3/5 of one percent of the total
market value. More than ten times as many shares were
held on margin. Nor could the stock exchange identify
any bear raids in the subsequent market decline.
Meeker provided an eloquent defense of short sales. He
argued that the bears stabilize prices by providing
liquidity and creating demand - by covering their shorts
- in a falling market. Shorting was not illegitimate, in
his view. "A short sale," wrote Meeker, "represents a
debt contracted in goods rather than money." In this it
was similar to many other business contracts.
"Short-selling," wrote Meeker, "is really an expression
of opinion, subject to personal risk, as to the value of
securities...Short selling has no effect upon the assets
or earning power of operating companies, even in the
case of banks. It cannot determine value, but only
estimate what prospective values really are and will
be."
It is unlikely that many were swayed by Meeker's
argument. The politicians certainly were not. However,
the Senate investigation into Wall Street, intended to
uncover the nefarious activities of the shorts, found
little to go on. A list of 350 leading bear speculators
presented to the committee contained only one familiar
name...Having no luck with the bears, the investigation
turned its attention to the bulls of yesteryear. This
was much more fertile ground.
The Pecora hearings, as they became known (after their
lead counsel, Ferdinand Pecora), revealed the seamier
side of Wall Street during the bull market: the
involvement of leading firms and bankers in the
manipulation of share prices, the dumping of unseasoned
securities on an innocent public, the fleecing of the
firms' own clients, the preferential distribution of
shares to favored friends, and so on.
In other words, rather similar behavior to what we have
witnessed from the investment banks in recent years.
These findings led to the New Deal legislation of 1933
and 1934, which involved among other things, the
creation of the Securities and Exchange Commission and
the separation of commercial and investment banking.
The bears of the early 1930s had a mixed fate. Joseph
Kennedy, the father of JFK, was appointed the first
chairman of the SEC shortly after participating in a
bear pool in the stock of Libby Owens Ford. Roosevelt
apparently decided he needed a fox to guard the hen
coop. Jesse Livermore had a less happy time. He lost an
estimated $32 million anticipating a bull market which
never arrived. In 1934, Livermore was declared bankrupt.
He blew his brains out in the washroom of the Sherry-
Netherlands hotel in 1940. The note he left behind,
repeated over and over again: "My life has been a
failure. My life has been a failure..."
The pattern of boom and bust has continued in the post-
war years. Inevitably the bears have been blamed during
every major downturn...Japanese authorities complain[ed]
that mysterious foreign interests were responsible for
the decline in their stock market, following the great
boom of the bubble economy. (In 1998, the Japanese
imposed restrictions on short-selling in an attempt to
shore up their market).
In every instance when bears are accused of bringing
down a market, we find that it was the preceding bull
market, with its accompanying misallocation of resources
and unsustainable accumulation of debt, which was the
root cause of the decline.
Today is no different. Earlier this year, as markets
declined, there were isolated complaints of bear raids.
After September 11 these complaints assumed a more
hysterical tone. It was alleged that terrorists had
arranged to short airline and insurance stocks prior to
the attack on the United States. I do not know whether
this is true.
However, I am doubtful. As we have seen in the past,
foreigners have frequently been identified as leading a
conspiracy of bear raiders. And besides, there were good
fundamental reasons to short airlines and insurance
companies even before their position deteriorated in
September.
Nevertheless, last month lawmakers in the U.S. asked the
SEC to consider a temporary ban on short trading.
According to newspaper reports, UBS Warburg and Bear
Stearns tried to limit short sales by their clients.
It has been said that "progress in finance is cyclical
rather than linear." Certainly attitudes towards short-
selling seem to have progressed very little over the
centuries.
The most eloquent justification for the bear is provided
by the American financier Bernard Baruch, who was called
to Washington in 1916 after a market panic to explain
his short-sales of the stock of the Brooklyn Rapid
Transport Company, a go-go stock of that era. At the
time some members of Congress were calling for short-
selling to be banned. Baruch stood his ground, politely
explaining to the politicians that "bears can only make
money if the bulls push up stocks to where they are
overpriced and unsound." He continued:
Bulls always have been more popular in this
country because optimism is so strong a part of
our heritage. Still, over-optimism is capable of
doing more damage than pessimism since caution
tends to be thrown aside.
To enjoy the advantages of a free market, one must
have both buyers and sellers, both bulls and
bears. A market without bears would be like a
nation without a free press. There would be no one
to criticize and restrain the false optimism that
always leads to disaster.
Cheers,
Edward Chancellor,
for The Daily Reckoning
Edward Chancellor is the author of "Devil Take The
Hindmost: A History Of Financial Speculation." To order
a copy of the book please click here:
http://www.amazon.com/exec/obidos/ASIN/0374138583/theprudentopinio/107-2523105-1482901
A longer version of today's guest essay by Mr.
Chancellor is presented as a "guest analysis" on the
Prudent Bear website: www.prudentbear.com.
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