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Quote of the Day
“When a bubble collapses, it usually gives back not just some, but all, of its gains. Over the course of the eighties, it seemed clear that returns on junk bonds would easily outstrip the profit that a cautious investor might hope to make on AAA government bonds. It was a no-brainer: high risk equals high return. What junk bond investors had forgotten is that higher risk does not guarantee higher returns; it merely offers the chance of higher returns.”
-Maggie Mahar, in the book Bull: A History of the Boom and Bust, 1982-2004
Today in 1989, the junk bubble would burst and remind another generation of investors this valuable lesson. See our “This Day in History” section below for more:
October 13th – This Day in Stock Market History
October 13th, 1857 – The US Treasury halts redemption of paper for gold as the “Western Blizzard” panic of 1857 is in full swing. The loss of confidence causes additional panic around the world as fears of the crisis spreading continue. Markets as far away as London and Paris sell off significantly.
This week in 1857 was the worst of the panic.
The 1850’s had seen a booming U.S economy. Railroads were rapidly expanding, the U.S. had grown its territory after the Mexican War, and gold was discovered in California. However by 1857 railroads were beginning to have a hard time paying their debt, land prices were dropping as railroads slowed their expansion and several banks began to fail. As depositors began trading their dollars for gold, the gold supply began to quickly diminish. The situation was made worse when the steamer Central America sank off of Cap Hatteras on September 12th, along with its much awaited shipment of $.16 million in gold from California.
By the middle of October 1857, many railroad shares were down 40% or more for the year and several banks had failed (most notably, Ohio Life and Trust on August 24th, 1857).
It would take nearly 3 years for the U.S. economy to recover for the panic of 1857, known as the “Western Blizzard”.
Image from the Library of Congress
October 13th, 1915 -The New York Stock Exchange changes the way stocks are quoted. They will now be quoted in terms of dollars per share, instead of percent of par. Although the new practice did not effect the intrinsic value of shares, it did highlight the changing perception investors had in common stocks.
October 13th, 1971 – Intel (Ticker: INTC) IPOs at $23.50, for a market value of $58 million. The company reported a profit of just $93,000 for the previous 6 months.
Today Intel has a market cap of $206 billion, and a annual profit of about $9 billion.
Since Intel’s 1971 IPO, investors have seen a total return of about 318,865%, or about 19.1% compounded annually.
October 13th, 1989 – Dow falls 190 points as junk bond/takeover bubble pops.
The decline was brought about from the failure UAL Corporation (the parent of United Airlines) to be able to get credit to complete a leveraged buyout. Shares of United Airlines had risen to over $200 a share on expectations from traders that the company would be taken private. The failure of a deal was a sign that the junk bond market’s health was deteriorating. Like any other panic, sellers all rushed for the exit at the same time.
Junk bonds and leveraged buyouts had been all the rage in the mid to late 80s, and investors saw very high returns up until the bubble popped. Despite high returns for most of the decade, junk bonds would end up underperforming treasuries over the course of the decade — 145% return vs 177%.
October 13th, 2008 – U.S. stock markets soar on an announcement by the Federal Reserve at 2 am that central banks in Europe and the U.S. would work in conjunction to provide liquidity to the financial system. Also announced, troubled bank Morgan Stanley had closed on a $9 billion financing deal with a large Japanese bank, the Mitsubishi UFJ Financial Group. The Dow Jones Industrial Average would have its largest daily point gain in history, +936 points and its 5th highest percentage gain in history, +11.08%. Morgan Stanley shares would soar 87% higher, to close at $18.10 (however, still down from over $70 per share just over a year prior).
However, investors were still feeling the pain as this record breaking day came after the worst week in the Dow’s history, when it shed 2,400 points, or 22% over the previous 5 days.
But this would not turn out to be the bottom of the selloff. The Dow would still fall nearly another 2000 points by March 2009 before reaching the bottom of the “Great Recession”.
Best October 13th in Dow Jones Industrial Average History
2008 – Up 11.08%, 936.42 points.
Worst October 13th in Dow Jones Industrial Average History
1989 – Down 6.91%, 190.58 points.
Read of the Day
As the market was in pure panic mode this period in 2008, several calm heads prevailed. I will always remember the day Jack Bogle was on CNBC and simply stated: “Don’t just do something, sit there!”
In a time where it would have been easy to freak out, I am glad it was voices like Bogle’s that stayed with me the most.
In March 2009, right at the crisis lows Jack Bogle gave a speech to students at Roxbury Latin School where he reflected on the then current crisis (along with passing on many other nuggets of his wisdom) .
“The stock market casino has become a giant—and costly—distraction to the serious business of investing. Greed, recklessness, and self-interest ride in the saddle of today’s capitalism, and it is high time we undertake the necessary reform, with federal laws that demand the return of fiduciary duty and stewardship to their traditional role in the trusteeship of other people’s money.”
You can read the transcript of his whole speech, here.