11,000 or Not, Signs of a Bad Dow Crash

by Mark Scheinbaum

The most horrifying thing about the vignettes to follow is not in the telling (since some of them are actually quite humorous), but in the truth of the telling. Yes, they are all true stories, with the names changed or abbreviated to protect the guilty.

Some long-forgotten 1929 guru said, in effect, "You know the stock market is about to crash when stocks trade like commodities when cabbies throw money at any stock with a story, when everyone takes their savings and buys on margin, and there is a casino atmosphere" You get the idea.

I can now clearly envision a healthy crash of about 30 percent. The actual crash will become a "correction" in the jargon of the Street, with an eventual BOTTOM around Dow 8,000 (which really isn't too bad). A run back towards 10,000 by year's end would fail, and the true, broad-based, bull won't even show his steamy breath until after the 2000 presidential election.

The very best thing to bring calm to the market would be a two- or three-year trading range of 8,000-11,000 with the rotation of sectors -- including high-tech -- we've seen in recent weeks.

Are we nearing this "crash" right now? Read on and decide.

• A prominent advertising exec and his wife, both in their 40's, took their modest IRA account out of a bank CD a little over six years ago, and asked a reputable financial planner to handle it. They claimed not to want anything "too risky" but did want more than CD rates offer.

  After four years of 15-16 percent gains, the big shot started griping about how "all my friends are making big money, and my IRA stinks." Long-term conservative strategies were explained to him, but to no avail.

  A few weeks ago he angrily called the financial planner and announced, "My friends and I have identified a 'whole bunch of funds' which have topped 25 for 10 straight years." The dubious investment executive reluctantly said his client could change to another advisor with no hard feelings, but should realize that many industry professionals use 30- or 40-year track records for their judgment.

  The busy executive demanded a written "final accounting" and hung up.

  A sales assistant went back and crunched all the numbers, including the run-up in many large-cap blue chip stocks held by the ad man in his portfolio. It turned out that over the last six-and-one-half years the big shot and his wife had actually averaged more than 24 percent -- not just 24 percent per year, but tax-deferred besides. The clients are now looking for a new advisor who will be "more aggressive" with their money.

  
  

• A 76-year-old retired New York City schoolteacher had averaged 10-15 percent over 15 years in her mutual fund. She called her broker a few months ago and said, "Some of my neighbors are making $20,000 per day in electronic trading! Why can't I do that? "

  The retired widow, with a net worth of less than $300,000, insisted on more aggressive, small cap accounts, which have actually lost her money.

  
  

• One of the most savvy day traders in the United States, a former theoretical mathematician and computer genius, has installed a bona fide Las Vegas slot machine next to his trading console. Using antique casino tokens, he feeds the one-armed bandit in a frenzy of tension relief several times a day.

  His colleagues figure it is just the visualization and reminder of the fact of trading life: trading is not about fundamentals and value, it is about gambling.

  
  

• A Miami survivor of the 1980's Age of Arbitrage does not leave his desk during the trading day. He controls his bodily functions to keep in tune with the trading clock, and brings a cooler filled with celery and carrot sticks to munch on.

  In between making mountains of cash during the day, he pays homage to a poster of Johnny Cash on the wall. Hey, cash is cash!

  
  

• An elderly widow left her realtor daughter and lawyer son $124,000 each when she died three years ago. Since the adult children are allowed up to five years to claim the death benefit under IRS rules, they decided to let the mother's trusted family broker continue to handle their money.

  Last week the daughter received a complaint from her brother, and reported to the broker that "We're not very satisfied with your work. My brother said the account really hasn't made much of anything, profit-wise, in the last three years."

  The broker checked the accounts and found that each account had grown to more than $226,000. He reported the $100,000-plus gain to the daughter, who replied, "Well, it sounds good, but I understand that's not really a good result."

  
  

• A former furrier in New York hears about "everybody making money" in the market, so he changes careers in his sixties to become a broker and tout penny stocks to his friends. Since many of his stocks not only trade in 1/16ths or 1/32nd of a dollar, but even less, he has to call on other brokers to interpret the quotes of stocks under a dollar, which are trading in 1/128th of a buck and less. The decimal point and fractions have become too tiny for him to compute.

  Recently, he told a veteran broker that a stock trading at less than 1 cent "is going to do great in the next few weeks, just keep listening and watching CNBC!"

  
  

• A sophisticated manufacturer's rep for a major fashion house complained that in her discretionary account one stock, astill investment grade but rocked by the Asian recession, was down $4,000 in the last year. She called the CEO of the brokerage company and insisted on changing brokers.

  The CEO obeyed her request, but upon examination learned that the "paper loss" was the only loss in the account in its three years of existence, and the account had averaged +16 percent per year. He also saw it was a retirement account which required more conservative handling than a trading account.

  The response from the businesswoman was that she knew best; she wanted to trade Internet stocks; she wanted to increase the margin account that her husband had set up for her, and by the way, she asked, "What exactly is margin, and how does it work? Can I lose any money?"

  
  

• A former unsuccessful stockbroker, who became a pizza deliveryman and moved into a condo his late father left him in a large retirement community, depleted all of his investments for living expenses. Fortunately, he located 200 shares of stock, which had been long forgotten but would come in handy for expenses.

  He called an old colleague at a full-service brokerage firm and sold the $5,000 worth of investment grade stock with a $50 commission charge. The next day he began the procedure to transfer the account to an on-line electronic broker.

  He opened both a margin and option account, and in the first three days averaged eight trades a day, with commissions -- even at a discounted rate -- exceeding his gains, if any.

  
  

• A nationally syndicated radio talk show host told an old family friend in the investment business he was "tired of seeing everyone making money in the market, including a friend who made $165,000 so far this year." Although he had never asked for investment help before, would the friend accept $30,000 and "manage it aggressively in the hottest Internet and computer stocks?"

  The broker asked if the radio host understood he could lose all or part of his money, and he said, "Of course, but I know you'll do great." The account was established with stocks such as Microsoft, Compaq, Dell and Lycos. With covered call writing the account was up to $33,000 in a week. Then the sector took a big hit and the account dropped to $26,000.

  The broker started getting several calls a day from the client about his money. On one occasion the client told him that he could not "sleep a wink when he thought about his account being down $4,000." When the account went back to $29,000 the client goaded his broker to be "more risky."

  In subsequent discussions the broker got to chat with the whiz kid friend who made a killing in the market. She confided, "Oh, that was just on paper. I actually lost $90,000 in value this week, but I wouldn't dare mention that to any of my friends. I just don't feel comfortable telling my friends how much I've actually lost in the market."

  The radio friend was shocked, and noted, "I took her at her word. I just assumed that she and the other people I know tell me the whole truth about their success. But, come to think of it, no one has ever admitted losing any money."

  
  

• A local television "financial" host who buys and barters time on local stations called the internal wholesaler of one of America's largest mutual fund families with a problem. It seems he sold a Flexible Premium Tax-Deferred Variable Annuity product to an 85-year-old widow.

  In an attempt to show off his supposed knowledge, after a year of average-yet-competitive results, he called her with an enthusiastic new strategy. He said the lackluster international sector was about to pop big time. He got her to agree to put 100 percent of her money into the annuity's "emerging growth" portfolio.

  This was more than a year ago, a year in which Indonesia, Thailand, Japan, Russia, and other established and "emerging" economies had crumbled. Not only did the elderly woman lose money during the market decline last summer, but she's down much more due to the new "strategy," which seems dubious for any 85-year-old.

  The financial whiz begged the mutual fund executive to speak personally to the woman and explain how good the strategy was going to be in the long term. To her credit, the fund exec refused to endorse the bizarre theory or explain away the unsuitability of this fund for this client.