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THE SINGLE BEST PIECE OF ADVICE I EVER GAVE: CALLING THE 2009 STOCK MARKET BOTTOM FOR CLIENTS TO WITHIN MINUTES

Or you can just print your own...

By Kevin Salveson

 

To be a financial writer you have to have some credibility. The other day I came across some kids soliciting editorial work for their new finance site launch and I thought I'd drop them a line to see what they were about. I offered them some ideas and asked a few basic questions.

 

They replied without even giving last names (or the address I requested either). Ha ha, turns out that they were even expecting people to work for them for free without disclosing that upfront. Then they further noted that two of them had "day jobs" anyway, but that they were "doing great" after their first two months in business.  Right.  Totally legit.  That's when I realized they were kids.

 

I won't give you the name of the site because I don't even think they deserve the click but you can email me and I'll tell you. Anyway, as a side note, that is what the job market is like out there I guess. Nothing but scams and exploiters.

 

Then I thought, though my credentials are clear, people don't know much about me in terms of my credibility beyond a former title. 

 

So I'll start with the best thing I can think of to make my case, the single best call I ever made as a financial advisor for Smith Barney (Morgan Stanley had already got its claws in Citibank Smith Barney a few months earlier but they don't deserve any credit).  That is, my advice to clients to "finally" buy stocks mere minutes after the market bottomed that day of March 10, 2009, a bottom from which it has relentlessly never looked back.

 

To be honest, I wasn't that great a stockbroker but I was a great advisor. By that I mean I was more interested in protecting my clients from the wolves of Wall Street than feeding them to the circling pack. That meant often I wasn't much of the gung-ho salesman Mr. Stanley wanted me to be. Sales are what matter to a stockbrokerage, advice is just the product which is sold.

 

You'd think good advice would sell but it's not as easy as that. In business, relationships and social graces are key and I didn't know any trust fund kids from the East coast or Pasadena prior to starting my career so it was an uphill battle but one that I fought valiantly, sometimes. Anyway, the truth is that no one can promise to guess the market right all the time and because of that it's impossible to ever know if the next bit of advice you give or get about "the market" is going to be truly worthwhile or not (that's really a whole topic for another day).

 

In fact, every broker talks about the market so often and hedges what they say so often that I'm sure my former clients could point out a lot of the bad calls I made as well.  I'll admit to one: not advising clients to sell more Citigroup, Smith Barney's parent company, more adamantly!

 

Nonetheless, people do still try to "beat the market" and they will call you, their stockbroker, asking for you to gaze into your crystal ball and make predictions for them because that's what they think brokers do. Even if you tell them that's not what brokers do, they will call you and ask you anyway. It's human nature to want to know, and an expert is supposed to know. I guess it's true that as an advisor you do have some expertise and so you take a crack at it and sometimes you hit a home run with your advice.  You hope that your minor off the cuff foul balls are trumped by advice which is consistent and occasionally hits a grand slam home run that secures your reputation as someone who knows what the hell they are doing. 

 

Such was the case in March 2009.  The background: in November 2007, I had generally started telling my clients to expect a recession and bear market. Throughout the development of the 2008-2009 Global Banking Failure I told my clients to either sell something or to at least not buy (I was reading a lot of Todd Harrison at the time) until it all played out. Of course, I wasn't selling much product because my advice to my clients was generally to not buy stocks, if you can imagine a stockbroker saying such a thing.  

 

I typically communicated through email to clients when not on the phone, and when I made an obvious "sell call" as I had in November 2007 ("Cautious On Equities" was the title of that email; thanks ECRI) I would not send another email to clients until I was ready to bookend that with a Buy call.  This was so that they would know that when I did send an email to them it was important rather than more sales spam.

 

Meanwhile, it was a fun time in the Smith Barney office. Day after relentless day the market was being dragged lower. It was like being caught by that giant squid or getting sucked into a maelstrom. Across the entire expanse of 2008 the market was on tenterhooks after Bear Sterns had failed, and then all hell broke loose and everywhere there were tenticles wrapping themselves around the ship.  By September Lehman went under.

 

Every morning you awoke with that sickening feeling that the gyre was spinning a little faster, that the Republicans and Friedmanites were insane, that Paulson and Geithner were barely holding the whole system together with gum and spit and duct tape. Then toss in a Presidential election.

 

Even when there was a false bottom in late 2008,  the stock market just dry-heaved and collapsed to its knees all over again. By March of 2009 the market was being sucked into the gurgling vortex at the bottom of the toiletbowl it was slumped up against. Citibank, our own company stock (we were actually Citi Smith Barney), went from $50 a share to $1.25 a share! The S&P hit 666 and even the rational people had to contemplate something like another Great Depression, that glorious time during Hoover's presidency when the Dow fell 89% peak to trough. People who don't lose money were going to potentially lose almost all of their money.

 

But they were the worst of times, they were the best of times. The stress was palpable and because of that, in the office, there was somewhat of a grim comraderie. Smith Barney had taken on some new brokers prior to the crisis who had just passed their Series 7 test. They were supposed to go out there and beat down doors to sell product right at the time when when the mortgage back securities were in such hot water they were on their way to boiling over. Washington Mutual evaporated overnight. Classic It's A Wonderful Life-style runs on banks were a reality. Amidst that, two particular new brokers set up outside my office in the "bullpen" area, Naseem and David.

 

I got in the habit of chatting with them to try and show them the ropes some. One thing I told them about was the uptick rule. This was a rule that said you couldn't short a stock until someone else bought it.  Shorting a stock involves borrowing someone else's stock to produce an artificial sale and returning the stock to the real owner after it falls and can't get up. In 2005, the market did away with this rule. Suddenly, it was ok to borrow and sell, borrow and sell without conscience.

 

I remember exactly when that idiocy went down because it was one of the few times I had ever entered my boss' office unannounced. I knocked and he had waved me in. "Getting rid of the uptick rule, do you think that makes any sense?" I asked him. At the time Chris Cox, a Friedmanite Republican, was running the SEC and de-regulation was still a buzzword that conservatives were using to avoid taking the blame for their poor business acumen. He shrugged, "You know, de-regulation."

 

Anyway, four years later, the market was in its death throes, the banks were crumbling, and stuff was rotting on the docks because no on trusted anyone else's credit. As I explained to my clients, when Coke has a bad day in the markets the cola itself still tastes as sweet.  When financial stocks tank, it's different. Confidence that your money is safe IS the product and a falling stock price is a vote of no-confidence.  Meanwhile, hedge funds and anyone smart was shorting bank stocks to shit.

 

In October of 2008 emergency action was taken by the SEC. They actually outright banned shorting financial stocks. Suddenly all of them rose 200% or more in a matter of days. That sounds great until you realize that after a drop of 90% or more you're still nowhere close to getting back to where you were. For example, when you drop from 50 to 5, then go back to 15, it's meaningless. They're still going to have to just hose down your cage, you're done.

 

Then the ban ended and the market hovered through the holidays. Still, the Republicans were already whipping up more of their cacophonous self-fulfilling bad juju to sabotage Obama rather than help the American people.  Thus, by about the Ides of March or so, the market had rolled over along with the bank stocks again and Citigroup was at $1.25.  

 

I remember that day because I read that 70% of every single stock trade done that day in Citigroup shares was a short.  Everyone was circling the carcass like coyotes, yipping and snapping.  But then something finally changed for the better on March 10th 2009.

 

Why March 10th 2009?  Only in hindsight do market events make sense or at least reveal themselves. I can't say that I or anyone else truly knew how momentous that day would be because it could have turned out different.  But it didn't.  And I'll tell you why, and what I did about it at the time, which was to tell them to buy the dips from then on out.  And that was the single best piece of advice I ever gave my clients as a financial advisor.  

 

Many times markets turn for no apparent reason, an exhaustion of buyers or sellers led by (today) computers or human intuition about news or events.  Yet I think I know the real reason the market turned around that day, March 10th. I know because I was waiting for it.

 

I had told some David and Nasseem, "If there's one thing new SEC chair Mary Shapiro could do, it would be to reinstate the damn uptick rule!"  So I told them to be on the lookout for that news item. It was really just about the only thing you could pin any hope on in my mind: a structural modification of the marketplace which would curtail the crisis of confidence which the short selling was precipitating. That, and the "Obama Leadership Project" (as I called it) which would begin to repair the disasters of W. Bush starting with the Economic Rehab Act of 2009.  (How fitting, a Rehab was needed for the former alcoholic of a president, right?)

 

Then, it happened! At about noon on March 10th (after the market had started off weak that day, yet again coughing up blood) suddenly David comes excitedly into my office. "Hey, look at this headline," he says. Reuters was quoting Barney Frank saying he and Shapiro were going to look into reinstating the uptick rule.  He had seen it cross the blue Dow Jones Newswire feed which we had constantly scrolling across our screens.  Per Wikipedia: "On March 10, 2009, the SEC and Congressman Barney Frank (D-MA), Chairman of the Financial Services Committee announced plans to restore the uptick rule."

 

I jumped up from my desk and said, "That's what I've been waiting for!"  After that I got on the phone to some of my best clients, and I preached the gospel of recovery after that to anyone who would pull their Obama-frightened fingers out their ears to listen. I literally sent out an email to all my clients just a day later stating "recent weakness is finally an opportunity" with a link to the news.  Hell, I even posted it on Facebook for free soon after just to rub the Republicans' noses in it!  (Of course, no one agreed.  No one, that is, except for one of the most brilliant guys I know, who now runs his own nextgen company revolutionizing food distribution and local horticulture).  

 

And the market has never looked back.

 

04/03/2015