vendredi, 19 octobre 2012

The Crash of '87: Stocks Plummet 508 Amid Panicky Selling

Ci-dessous, l'article du Wall Street Journal tel qu'il apparaissait en première page le 20 octobre 1987 au matin...

 

SOUVENIRS-SOUVENIRS...

 

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NEW YORK -- The stock market crashed yesterday.
 
The Dow Jones Industrial Average plummeted an astonishing 508 points, or 22.6%, to 1738.74. The drop far exceeded the 12.8% decline on the notorious day of Oct. 28, 1929, which is generally considered the start of the Great Depression.
Panic-driven trading on the New York Stock Exchange reached 604.3 million shares, nearly double the prior record volume of 338.5 million shares set last Friday, when the Dow plunged a then-record 108.35 points.
Commodities prices also skidded, except for precious metals and especially gold, which surged $10.10 an ounce to $481.70, a 4 1/2-year high. The bond market, a refuge for much of the capital being wrenched out of the stock market, recovered from steep early losses to end the day sharply higher.
 
The industrial average tumbled 130 points in the final 30 minutes of the session. The decline yesterday and last week totaled 743.47 points, or 30%. By way of comparison, the total drop on Oct. 28 and Oct. 29, 1929, was 68.90 points, or 23.1%.
 
With yesterday's drop, the average has given up all its 1987 gains and now shows an 8.3% loss for the year. From its Aug. 25 high of 2722.42, it has lost 36.1%.
 
Virtually every other measure of market health and investor sentiment also set new lows yesterday. Standard & Poor's 500-stock index fell 57.86 to 224.84; the New York Stock Exchange index, 30.51 to 128.62; the National Association of Securities Dealers Nasdaq composite index of over-the-counter stocks, 46.12 to 360.21; and the American Stock Exchange index, 41.05 to 282.50-all record declines.
 
It was "the worst market I've ever seen," said John J. Phelan, the Big Board chairman, and "as close to financial meltdown as I'd ever want to see."
 
From the beginning yesterday, the market was clearly in for a tough day. Futures contracts on the S&P 500 index plunged to steep discounts from the value of the index itself, triggering sophisticated traders' sales of large baskets of blue-chip stocks. But selling by others quickly became so chaotic that this so-called program selling was sharply curtailed.
 
How chaotic? Because of order imbalances, 11 of the 30 stocks in the Dow Jones Industrial Average didn't open for about an hour after trading began. By late afternoon, the Big Board's transactions tape -- capable of handling 900 trades a minute -- was running two hours and 15 minutes late. When the dust finally settled, the ratio of Big Board stocks declining in price was an unprecedented 40 to 1 over gainers; a 3-to-1 ratio is considered a rout.
 
Mr. Phelan said that at least five factors contributed to the record decline: the fact that the market had gone five years without a large correction; inflation fears, whether justified or not; rising interest rates; the conflict with Iran; and the volatility caused by "derivative instruments" such as stock-index options and futures.
 
He declined to blame the decline on program trading alone or on reports that Securities and Exchange Commission Chairman David Ruder had said he might consider a trading halt under certain circumstances. Mr. Phelan noted that only the president and the exchange itself have the right to order a trading shutdown, but he added that if the SEC asked for one, the Big Board would give it serious consideration.
 
In the past, Mr. Phelan has publicly expressed his concern that options and futures trading on stock-market indexes could add to volatility and contribute to a cycle in which selling caused further selling. He said yesterday that such a "waterfall" effect seemed to have occurred over the past week.
 
The reaction around Wall Street, from traders, money managers and securities analysts, was mostly of stunned disbelief. "We're in the midst of a crash," said Jon Groveman, the head equity trader at Ladenburg Thalmann & Co. in New York. Added Edward Macheski, a partner with Macheski/Pappas Asset Management in Wilton, Conn.: "We are frozen. We don't want to sell what we have, and we don't want to spend the cash that we have."
 
In Japan and Europe, stock markets dropped precipitously overnight in a reaction to last Friday's plunge in New York, and they are expected to react further to yesterday's crash; indeed, stocks were falling as trading began in Tokyo Tuesday morning.
 
There was some selling by foreign investors as the U.S. market opened, but not enough to suggest that they were bailing out completely. That, coupled with the dollar's firm tone in New York trading yesterday, suggested to some observers that foreigners might not rush to liquidate their U.S. financial assets.
 
As stock prices collapsed, the U.S. government stood by, powerless.
 
President Reagan cautioned against panic "because all the economic indicators are solid," and he attributed the plunge to profit taking. "Everyone is a little puzzled," he said. "There is nothing wrong with the economy."
 
But as the market continued falling, government officials made a round of upbeat comments but concluded that there was little they could do other than try to stay calm in the face of Wall Street's panic. A statement from the White House acknowledged that President Reagan was concerned, and it said he had directed members of his administration to consult with the chairmen of the Federal Reserve Board, the SEC, the Big Board, and the Chicago commodities and futures exchanges, as well as other leaders of the investment community.
 
In an unprecedented statement to Merrill Lynch & Co.'s staff, which was released to the public shortly after the close, Chairman William O. Schreyer and President Daniel P. Tully expressed their "confidence in the financial markets and in the underlying value of financial assets in this climate." The executives added that "now is the time when it is critical that reason and objectivity prevail. America's economic system is the strongest in the world, with great inherent ability to correct itself, and it remains fundamentally sound."
 
But the optimistic statements rang hollow as sell orders poured in on Wall Street. "After the 1929 crash, the universal phrase was 'The economy is fundamentally sound,'" said a skeptical John Kenneth Galbraith, the Harvard economist. "Expect to hear that out of Washington over the next few days."
 
Early in the day, SEC Chairman Ruder suggested that he might call for a temporary suspension of trading if the market fell too rapidly. But that idea was immediately blasted by other administration officials and private analysts.
 
"It seems to me that's a crazy thing for the chairman of the SEC to ever talk about," one White House official said. And Sanford Grossman, a financial economist at Princeton University, called Mr. Ruder's idea "the most frightening idea I've heard in a while. Shutting the market down for a half-hour is a sure way to cause a panic."
 
Later, the SEC issued an unusual statement saying it "is not discussing closing the nation's securities market."
 
Also rejected was the idea of asking the Fed to ease or suspend margin requirements, which govern the amount of debt that an investor can use to buy stock. Easing margin requirements would reduce the need for investors to sell stock as a way to raise the cash to meet those requirements. That, in turn, would slow down stock sales triggered by such calls.
 
In a luncheon address, Fed Vice Chairman Manuel Johnson made it clear he saw no reason for the Fed to push interest rates higher. He said "we are satisfied" with the developments on inflation since the Fed raised the discount rate -- its rate on loans to member banks -- last month to 6% from 5 1/2%.
 
And on Capitol Hill, legislators likewise felt powerless to act. "I don't know what kind of legislative reaction you can have to a stock-market decline," said House Majority Leader Thomas Foley.
 
Yesterday's thunderous collapse smashed whatever life was thought still to be in the bull market of the previous five years. Stock prices more than tripled from 776.91 on Aug. 11, 1982, to the record high of 2722.42 on Aug. 25 -- less than two months ago. The upward drive had been largely fueled by declining inflation and interest rates. It ended as interest rates were climbing again, raising investor jitters about prospects for renewed inflation and a recession that might come sooner rather than later.
 
These concerns became increasingly widespread about a month ago as bond yields approached and then surpassed 10% -- the first double-digit rate in two years. Stock prices began falling in earnest this month; over the past two weeks, the Dow Jones Industrial Average registered the sharpest weekly point-drops on record, setting the stage for yesterday's crash.
 
When will the crash end? When either the selling slows from its current torrent or when buying picks up sharply. At the same time, a complete drought of purchase orders would also halt the price declines simply because there wouldn't be any transactions.
 
There were indeed buyers yesterday,and they seemed to have enough cash to take on all sellers. Having big sums of money to invest -- a condition that market professionals term liquidity -- was as much a driving force in the market crash as it had been during much of the five-year bull market that preceded it.
 
Robert Farrell, the chief market analyst at Merrill Lynch, said his firm's third-quarter survey of a cross section of U.S. equity-investment institutions, taken in the middle of September, showed an extraordinary polarity on investment strategy. Some 44% were holding more than 15% of their assets in cash or cash equivalents, and a hefty 39% held less than 10% in cash.
 
The implications of that split are that the number of institutions holding back investment funds -- presumably in the belief that prices would go lower and bargains could be found -- was about offset by those that had already put about all their available assets into the market.
"The buying in this market is coming from that {the 44%} group with high liquidity," Mr. Farrell said. He said these buyers are the so-called value players, who search for bargains and avoid stocks whose prices have risen to levels that seem high relative to the market as a whole.
 
Mr. Farrell believes that much of the selling came from the 39% group with relatively small amounts of cash. "From the indications I get, a large number of institutions -- especially the truly long-term investors -- are on the sidelines."
 
Among the most prominent casualties yesterday was International Business Machines Corp. IBM -2.83% stock, which nosedived 31 3/4 a share to close at 103 1/4. By one of the ways investors hunt for buying opportunities, that new price amounts to just 13.9 times IBM's per-share earnings over the past four quarters; IBM's price-earnings ratio was 18 on Friday and 24 at the market's high point two months ago.
 
Investors will be sifting for similar situations among other Dow industrial stocks, all of which fell yesterday: USX Corp., formerly U.S. Steel, X +0.13% collapsed 12 1/2 a share to end at 21 1/2; Eastman Kodak Co., EKDKQ 0.00% down 27 1/4 to 62 7/8;General Motors Corp., GM +2.00% off 6 to 60; Philip Morris Inc., off 14 5/8 to 88 1/8; Du Pont Co., off 18 to 80 1/2; Merck & Co., off 24 to 160; Goodyear Tire & RubberCo., GT -0.47% off 17 to 42 1/2; International Paper Co., IP +1.71% off 12 1/2 to 33 7/8; Procter & Gamble Co., PG 0.00% off 22 7/8 to 61 3/8; Westinghouse Electric Corp., off 20 1/4 to 40 1/4; and Exxon Corp., off 10 1/4 to 33 1/2.
 
Technology issues also were bludgeoned. Apple Computer Inc. AAPL -1.86%plunged 11 3/4 to 36 1/2; Digital Equipment Corp. dropped 42 1/4 to 130; and Texas Instruments Inc. TXN +1.02% fell 18 1/4 to 49. Among financial stocks hit hard wereChase Manhattan Corp., JPM -0.72% which fell 8 3/4 to 28, and BankAmerica Corp., which dropped 3 1/8 to 8.
 
Throughout the day, prices on institutional trading desks were falling faster and further than those flashing on electronic quote services, said a big bank's equity-investment manager, who asked not to be identified. Institutional investors with their own trading desks, such as this big bank, deal directly with one another on big blocks of stock rather than rely on their electronic quotation equipment and place orders on the exchange floor. In effect, they trade among themselves, then simply log their trades with the appropriate Big Board specialists, who enter them officially into the trading flow.
 
Such were the downward momentum and panic yesterday that these "upstairs" trades on Wall Street were taking place "mostly at prices well below those on the Quotron screen at the time," the bank's equity-investment manager said late yesterday morning.
 
While the huge delay in reporting transactions on the Big Board tape doubtless made traders edgy, it didn't actually interefere with most trading, since big institutions rely on their frequent contacts with major trading desks for price information. And electronic quotation equipment available to brokers and individual investors get information directly out of the Big Board's computer database, and hence are current.
 
In dealing with the market's collapse, the ad ministration was handicapped because its principal economic policy maker, Treasury Secretary James Baker, was away on an official trip to Sweden. Last week, Mr. Baker decided not to cancel the weeklong trip, which had been arranged months ago, for fear of making the administration appear to be in a panic.
 
But he wound up holding a surprise meeting on the dollar and interest rates with top German officials before reaching Sweden. And he spent much of yesterday on the phone in consultation with White House Chief of Staff Howard Baker and with senior Treasury officials. Ultimately, he decided to cut short his trip, and he will return to Washington today.
 
Although Washington took no action yesterday, some analysts and officials said the market collapse could ultimately spark more securities regulation. "It's tough to predict what shape it will take, but you will see a lot of response from the regulatory agencies," said Gregg Jarrell, the SEC's chief economist until last year. "You want to do some serious move -- unprecendented moves -- to show you're in charge."
 
Rep. Charles Schumer, a New York Democrat, said the market's collapse might lead Congress to increase the regulation of credit and trading limits for stock-index futures. And Roger Ibbotson, a Yale professor of finance and the co-author of a history of the stock market, predicted that the crash would result in closer regulation of corporate debt, especially junk bonds and leveraged buyouts.
 

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