China In Reenactment of 1929 Playbook-------Tepid Bounce Now, Another Big Plunge Ahead

Grotesque Crash Prevention Attempts in China …

Last week China’s officialdom tried every trick in the book to somehow stop the crash (sorry, “correction”) in China’s stock market from continuing – however, as we have pointed out a week ago already (see: Bubble Trouble Strikes in China):

 

It is to be expected that China’s authorities will take steps to prop up confidence, possibly before any important chart points have a chance to break. This has been a pattern that could be observed on occasion of previous corrections. However, one must be careful not to fall prey to the potent directors fallacy. Once the herd begins to stampede in the other direction, nothing is likely to stop it.”

 

china traders

Photo credit: Reuters

After cutting interest rates and reserve requirements, as well as altering margin requirements and issuing official statements calling on “investors” to “act rationally” (really) all failed to stop the decline, China’s assorted movers and shakers  finally decided to pull exactly the same trick on Saturday that Wall Street tried to pull in October of 1929:

 

“China froze share offers and set up a market-stabilization fund on Saturday, the Wall Street Journal said, as Beijing intensified efforts to pull stock markets out of a nose-dive that is threatening the world’s second-largest economy.

Beijing’s reported suspension of initial public offers (IPOs) came a few hours after extraordinary announcements by major brokers and fund managers, which collectively pledged to invest at least $19 billion of their own money into stocks.

China’s government, regulators and financial institutions are now waging a concerted campaign to prop up the nation’s two main share markets, amid fears that a meltdown would rock the financial system and inflict heavy losses across an economy where annual growth is already running at a 24-year low.”

 

(emphasis added)

So far this hasn’t helped either – after surging by more than 7% on Monday morning, the Shanghai Composite Index ended the day a mere 53 points or just 1.42% higher:

 

SSECThe Shanghai Composite Index: Another rescue attempt fails, at least for now – via BigCharts, click to enlarge.

 

A Blast from the Past

Back in 1929 the following happened in the middle of the crash:

 

“‘Black Thursday’ initially continued where Wednesday had left off – prices just fell into a bid-less void. Trading volume exploded to 12,9 million shares, more than double the previous record. After an uneventful open during which prices actually rose a tad, volume suddenly began to swell, and with it, prices began to sag. The rest of the morning hours was characterized by a blossoming panic. Once again the ticker tape was far behind the action, but word of an enormous collapse in prices got out anyway. This was accomplished via the bond ticker, which contained sporadic updates on stock prices that were more up-to-date than the ticker tape’s. Margined speculators contributed heavily to the selling frenzy, often involuntarily. Shortly before noon the DJIA had plummeted to an intra-day low of 272 points, down a huge 33,5 points from Wednesday’s close.

That was when the ‘organized support’ went to work. A meeting was convened at the Morgan offices, with the presidents and chairmen of the biggest NY banks present (Sunshine Charley of National City, Albert Wiggin of Chase, William Potter of the Guaranty Trust Co., Seward Prosser of Bankers Trust, and Morgan senior partnerThomas Lamont). After the meeting, Lamont met with reporters, stating that ‘there has been a little bit of distress selling on the stock exchange’ but that this was only ‘due to technical conditions’, and of course, the ‘fundamentals remained sound’ and the situation was clearly prone to ‘betterment’. The agency about to procure the betterment was the consortium of NY banks.

Prices immediately began to firm when word of Lamont’s interview reached the exchange. Shortly after noon,Richard Whitney, vice president of the NYSE and floor trade for Morgan, went to the post for US Steel and left a limit order for 200,000 shares. He then proceeded to leave similar orders for other key stocks at their respective posts. It was clear that the banks had moved in to support the market, and prices shot upward for most of the remainder of the afternoon. The fear of losing everything had been replaced by the fear of missing the rally. A small selling wave appeared again shortly before the close, but all in all the operation was deemed a great success. The DJIA closed with a relatively tame loss of 6,38 points, just under 300 at 299,47.

The ticker tape was over 3 hours behind that day, and many margined speculators had been sold out at the lows, so the recovery meant nothing to them. In the evening, the press was informed by the cast of usual suspects that the situation was well in hand, the fundamentals sound, and the ‘technical break’ over. A contemporary account of these events can be found in this article by Time Magazine, ‘Bankers vs. Panic’.

On Friday October 25, prices actually rose a tad, with the DJIA closing up 1,75 points. They softened again slightly in Saturday’s shortened session with the DJIA closing at 298,97. In terms of price movement, these two days were quite uneventful. In terms of trading volume they were anything but. Over 6 million shares traded on Friday, and over 2 million in Saturday’s short session. The weekend following the bankers’ market intervention is an interesting curiosity for students of market psychology. Apparently, the previously predominating feelings of fear had almost entirely evaporated. It was as if someone had thrown the ‘maximum optimism’ switch.

A veritable who’s who of the banking and industrial elite sounded off on the ‘sound fundamentals’ and the fact that ‘stocks were now cheap’. Even president Hoover chimed in, insisting that ‘the fundamental business of the country’ was on a ‘sound and prosperous basis’. The papers were full of stories about ‘buying orders piling up at the brokers for Monday’s open’ and exuded strong conviction that speculation could be resumed forthwith. 

A few articles spoke of divine retribution that had been visited upon speculators, a warning shot that had done its sad, but necessary work. The CEO of Associated Gas and Electric, Howard Hopson, likewise sung from this hymn sheet, declaring that ‘it is without a doubt beneficial to the business interests of the country to have the gambling type of speculator eliminated’. Several brokers joined in a concerted advertising campaign in Monday’s papers, urging people to buy. This, so they said, could now be done ‘with the utmost confidence’. The banking consortium seemed to have succeeded – faith in the stock market was restored.

As it turned out, the weekend before October 28 was one of the biggest exhibitions of wishful thinking in market history. On Monday October 28, stocks went into free-fall – losing more on that single day than in the entire week before. Volume was once again very heavy at 9,25 million shares, with 3 million traded in the last hour alone. Once again the ticker tape was way behind the action, but it was clear to everyone that things had to be bad. Shortly after 1 p.m., Sunshine Charley was observed entering the Morgan office, which the news ticker duly reported. 

A brief recovery in prices ensued, but Richard Whitney didn’t appear on the floor this time. The market finally closed about 4 points off its lows, but the DJIA had lost over 38 points at the end of the day, a decline of 12,8%. 

 

whitney

Richard Whitney on the cover of Time Magazine in 1934 (he was president of the NYSE before falling from grace and being indicted for embezzlement in 1935). He was one of the “consortium” of potent directors who tried in vain to stop the crash of 1929.

 

Conclusion

China’s market is severely oversold, and the odds-on bet should be that it will soon rebound. However, as the example from 1929 shows (and as the 2008 crash has actually shown as well), sometimes major concerted efforts to stop a market from declining can turn out to be utterly in vain. Panicked speculators merely use the bounces to sell into while the getting is still (relatively) good.

 

 

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