If the right questions to ask now look beyond the short-term actions needed in this wreckage, as I
suggested this morning, those questions begin with what led us to this point: Not looking far back through the craziness of the 1990s, but at least through the craziness of the last month or so.
Because if we can find the steps, and perhaps the chronology, that led us to this moment, perhaps next time we'll respond faster,
sooner, turn peril into opportunity. (Not necessarily, I hasten to add: myopia, denial and freezing like deer caught in the glare of the oncoming headlights are fundamental parts of the human condition. As much as I believe in the perfectibility of man, I see that as a construct, a goal, not an outcome, But we can try; we persist.)
I've filled several legal pads with my scribblings here on the deck of the
. After they plucked us the huddled wretches out of the waters where the
went down, I began listing the things I remembered, items I noted at the time but failed to understand and integrate sufficiently, as we approached that iceberg. In the end it got us, but maybe next time we can steer hard left or right in time to avoid a repetition of the last two weeks' bloodshed.
Maybe, in other words, we'll ask some
I've distilled things down to seven key events. There were many more malignant influences; this was a systemic crash, and that requires complex interaction among thousands of "reasons." But these seven are a start.
They fail the logician's "necessary and sufficient" test: Taken singly, each was a necessary ingredient in this crash, but none was by itself sufficient to do the deed. Yet in combination, these were, I think, the key events, in this order, that brought down the house of cards:
Supply Issue 1: Dot-Com IPO Strategies
It's even more clear in retrospect that the standing-orders IPO strategy, especially for dot-coms over the past two years, created demand through artificially limited supply. By offering only a relatively small percentage of a company's authorized shares in an IPO -- say, 8% to maybe 12% -- the investment bankers earned for themselves fat fees; earned for their real clients, newly public companies' founders and senior executives, great wealth on paper; and drove new-issue prices sky high -- all without producing the big net-cash-in-the-bank balances for the companies that would have helped them weather or avoid the cash crunches and going-concern-letters whirlwinds of recent weeks. That many of these companies are now trading at a tenth or a twentieth of their offering prices is perverse satisfaction, indeed.
That Barron's 'Running Out of Cash' Story on March 6
The piece in
a month and a half ago, recounting the increasingly desperate cash-on-hand positions of many companies in dot-com land, focused people on a problem many had been aware of, and already were talking about -- but not yet acting on. I believe the piece was not perfect, but I don't criticize the journalism of
here: It was fair comment. It was also, however, like yelling "Fire!" in a crowded theater.
Abby Joseph Cohen and Mark Mobius' Comments
Negative words about near-term market prospects and stability from high-profile, name-brand people in the business provided another spark of instant focus. I also do not criticize them: They were doing their jobs. Both, we should note, were generally misquoted: Cohen simply said she was no longer overweighted in tech, not that the tech sky was falling; and Mobius talked only about foreign stocks and some Internet issues. But both blew on glowing embers, and tongues of fire began to arise.
Supply Issue 2: The End of Lockups
have repeatedly warned, the end of the 180-day lockup periods for those granted stock and options at new companies' IPOs created incendiary moments in the market. A story in
The New York Times
three weeks ago pointed out that 2.4
-- yes, with a "b," shares were coming off lockups this spring, and that many of the holders of those shares could reasonably be expected to cash out major parts of their holdings. Suddenly, stock prices supported by acute and planned undersupply were eroded, then slammed, by a flood of unplanned oversupply. The flames spread, and fast.
For days, the grim reapers of the margin-clerk persuasion did their dirty work at the end of each market day. You may or may not have actually gotten the phone call, and responded, but in any case you were sold out of positions often gone deeply underwater on very short notice. These fire sales focused on raising cash for the brokers whose shares had been borrowed; they were neither cautious nor moderate, but produced the kind of results you get from wielding not a scalpel but a meat-ax.
There was no more incendiary force at work over the past two weeks than this Lizzie Borden-style margin selling
. They didn't even serve some nice fava beans on the side.
A Crummy CPI Report
For those naives convinced that inflation was a thing of the past (and that retail sales would continue to increase and joblessness would decrease, both perhaps forever), last week's March Consumer Price Index numbers were discouraging. With inflation now running around 3.7% -- unless the March numbers were an anomaly, which is possible -- I expect to see the
Fed Open Market Committee
kick us with quarter-point increases in May and June and probably again in August. And that could change to a half-point each in May and June, if things look worse. This may or may not be needed as a brake on inflation -- this time around, inflation doesn't feel like it has in the past; have you noticed that, too? -- but it will not be good news for stock prices. Hence, my forecast of little material improvement in the
until after September 1st.
Finally, Fund Redemptions
Late in the game, more gasoline was thrown on the fire by mutual-fund redemptions. It is hard to criticize investors for demanding redemptions, after they'd seen their positions slashed in some cases by a third or more in less than two weeks; and it is harder still to criticize fund managers for their desperate selling to raise the cash needed to meet those redemptions. Neither had much choice. But these wholesale dumps of big blocks aggravated every aspect of a difficult situation, because sales had to be made at
price, not rational prices related to values. Their effect continues; indeed, I suspect that net redemptions this week will be worse than those of either of the last two weeks, given the generally slower response time of mutual-fund investors to market oscillations.
The continuing fire sales at damaged-goods mutual funds, and possibly by a mortally wounded hedge fund or two, are now the single biggest threat to regaining market stability.
If those were they key factors -- you probably have your own little list, and we could argue about this endlessly -- how do they lead us to ask the right questions to learn something from this debacle?
More on that tomorrow.
Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, neither Seymour nor Seymour Group held positions in any securities mentioned in this column, although holdings can change at any time. Seymour does not write about companies that are current or recent consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites your feedback at