Party like it’s 1999
July 26, 2020 – Weekly comment
“All generalizations are dangerous, even this one.” – Alexandre Dumas (b.24 July 1802)
On Monday, I saw a tweet by Ed Bradford, @Fullcarry “Starting to feel a bit 1999 ish.”And I responded, “a bit”? Gundlach has also referred to 1999. Maybe he heard it from Bradford first. So I started to think about 1999. It’s 21 years ago. An overarching concern in 1999 was dependence on technology and the Y2K issue. The fear was that the banking system might freeze up, that air traffic would cease, that all the systems which relied on code were at risk. I’m sure there were preppers before that time, but Y2K gave that particular movement an honest kick in the ass, just as COVID has now. The Robinhooders of today were between 3 and 15 years of age at that time. So I am dusting off the ECNC story that I wrote a long time ago which captured a bit of the frenzied trading environment of that time (I’ve changed the names). It’s a lot easier than trying to come up with something clever to write about in the zero rate framework that we find ourselves in today.
First, here is a quick backdrop for 1999. CPI accelerated from 1.5 to 1.6 on a yoy basis in Q4 1998, up to 2.6-2.7 in Q4 1999, then to a peak of 3.8% in March 2000, settling back to around 3.4 in Q4 2000. The Fed therefore was in a hiking mode, raising from 4.75% to 5.0 in June’99 and continuing to hike, reaching 6.0 in March 2000, before finally putting the final flourish of a 50 bp dollop in May 2000, even after Nasdaq had topped. Unsurprisingly, the US dollar was generally firming throughout this period. The 2/10 spread was fairly stable through late 1999, ranging between 20 and 40, but inverted in Feb 2000 as tightening bit. It was the increase to 6% in March that popped the Nasdaq bubble. However, the imagery of the word “popped” is that the air was instantaneously expelled, never to be put back in again. But it was messier than that. From Sept of 1999 to the peak of 4816 in March 2000, Nasdaq had doubled. By the time of the June hike, it had dropped nearly 40% from the high to just under 3000, but then it rallied to nearly 4100 by July. The real damage occurred from Sept 2000 to April 2001, a decline of 67% (4150 to 1350). It’s worth noting that SPX had nearly matched its March high by September, and then fell only 27% by March.
There have been a lot of crazy rallies in tech stocks since the low in March of this year. But from then until this month’s high the move in NDX is 63%, and that’s at a time when the Fed has eased, not tightened, and is promising to keep rates near zero for years. The dollar is beginning to move south. The 2/10 treasury spread had inverted briefly in Aug 2019, but more recently has been between +42 and 52. There are a lot of charts that indicate stocks are more expensive than they were at the 2000 peak (see Mauldin ‘Valuation Inflation’ from this weekend). But maybe they SHOULD be. After all, in 2000, one can partially accuse the Fed of tightening too much as a catalyst for the crash. No hikes on the horizon now…
The implication for the 1999 comparisons is that we’re close to peak crazy, and that everyone who has recently said, “This can only end badly” will be able to take a somberly smug victory lap. In my opinion, it’s not overt action by the Fed that is the mostly likely culprit for a downward resumption in stocks, it’s the Federal Gov’t. The $600/weekly payout has caused the federal budget deficit to explode ($864b in June alone). It’s set to expire this week, and as of now has not been extended/replaced. The Federal Gov’t has carried the economy on its back this year, and by extension has pumped stocks. Of course, a huge amount of support has been provided by the Fed as well. The problem is that while both the Fed and the Federal Gov’t have done a yeoman’s job in manning the buckets to bail out a leaky boat, the minute they slow the pace, either by a stalled weekly payment package or by letting the balance sheet drift down, the boat is going to start to sink. It’s not proactive tightening, it’s passively slowing the pace of assistance.
The ECNC story
I was in the CME member breakroom at around 9:30. The breakroom was in the southeast corner of the building, with large windows looking out onto the corner of Wacker and Monroe, a small retreat from the cavernous, windowless trading room. There were a few CQG and newsfeed computers tucked just to the north, on the perimeter of the actual trading floor. That’s where the disheveled, elfin Indian clerk with long wavy black hair would run his charts and mutteringly dispense ideas to anyone that would listen, and I often did. For some reason there was a Quotron in the actual lounge and I was in line to get a couple of live stock quotes, with other people sitting around having a coffee or watching Sports Center. Behind me was MA, a filling pit broker in eurodollars, also waiting to get quotes on stocks…because this was the year 2000, at the height of Nasdaq mania, (but you still couldn’t just punch up an instant quote on your phone).
I had started at Refco just before the turn of the century, in late 1999. The Refco Eurodollar desk was on the east side of the floor, all the way at the top level of the tiered desks that surrounded the pit. Lehman was next to us, Chicago Capital was immediately below. There were about eight of us at the desk occupying three booths, probably 30 sq ft of floor space. Front month Eurodollars were directly in front, back months stretching to our left (south) and the ED option pit to our right. The shape of the connected pits was roughly a rectangle that spanned nearly a full city block, packed with order fillers, locals, and clerks, with back month dollars at the south end, then the 3rd and 4th contracts, then the second and then the front month, with the back months at a higher elevation to provide straight sightlines, down to ground level in the front months, and again slightly elevated at the north end, the option pit. On either side of this rectangle were desks, tiered up like a stadium.
Although the turn of the century was punctuated by concerns about Y2K computer problems and banks had curtailed trading activity because of possible computer system issues, the Nasdaq boom was in full force. In the year from March 1999 to March of 2000, Nasdaq went from just below 2000 to just above 4800. In the meantime, rates were increasing fairly aggressively. It was way back in 1996 when Greenspan had opined “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?” Though that line got widespread notice, it was a bull market that shrugged off warnings from Central Bankers and everything else.
From mid 1999 until May of 2000, the FF rate went from 4.75% to 6.5%. I know there’s a lot of talk of the ‘Greenspan put’ but compared to current CB policies designed to instantly countervail any ill winds that buffet the market, Greenspan used his power sparingly. I would simply note that the Fed kept the FF target at 6.5% from May 2000 to December 2000 when a LOT of air was rapidly coming out of the Nasdaq bubble. I recall one of my old clients from Bankers Trust (then at DB) telling me, “It doesn’t matter what rates do, these Nasdaq companies have no debt. It’s all equity. Higher rates don’t affect them. And I would say “I don’t think that’s quite right.” But he was long a ton of stock and was riding the Nasdaq bull. Hard. Just to think of it makes me smile, because I have a few stories about this individual, who embodied everything right and funny about this particular business. Those stories are for later, in a more extensive format.
OK, let’s get back to the Quotron line and MA. I’m in my grey mesh trading jacket and he’s in green. VO is snoring in the lounge chair next to us with vending machine wrappings in his lap, having filled a bazillion options in the last 2 hours. I punched up a couple of quotes and Mike says, ‘hey Alex, do you own any of this?’ And I said, ‘what?’ ECNC. Now this was in February of 2000. I said I didn’t. He replied, ‘Everyone on the floor owns this thing.’ So I wandered back to my trading desk, having jotted down my quotes on a trading card and having ECNC on my mind. And when I got to the desk, it wasn’t busy at all, and I said, “Hey, you guys ever hear of ECNC?” I think Scooter was first to say he owned some, and someone else said I have some, and Doyle, just a junior clerk at the time said “I own a couple thousand shares.” I, of course, was incredulous. How had I not heard of this? So I turned around and logged into my account and bought a few thousand shares myself, but it had already been moving. Just to give you a flavor of the time, I didn’t know what the company DID. I don’t think anyone at the desk knew. The name of the firm (I learned later) was actually E-connect.
I don’t recall the exact price, but I paid something like 1.60. It was then that I learned that our pit clerk in the third and fourth option (3rd and 4th contract months) owned something like 50k shares (his relative in NY at Merrill had given him the tip while it was still under $1). I learned that traders in the option pit were also loaded up. Crazily, within a few days, my shares had doubled. I think I sold out half at something like $4. And then it just kept running. In hindsight I thought this took a MUCH longer time, but literally within about another week the shares had doubled again. I sold the rest of mine at a price just below 10. And of course, I was happy… for about a day. But this thing had taken on a life of its own. Craig, the futures clerk who worked for UGG, was riding the whole position as I recall. Next thing I know the stock is around $14 and moving higher, ultimately shooting over 20. And I am saying to myself, “I am a F*$%&G idiot! Why didn’t I just hold out?” But I also remember thinking, unless these guys have cured cancer there is no reason this stock should be flying like this. In any case, my self-loathing was short lived, because the stock was halted in mid-March due to creative financials. It turned into a total loss for the guys that held it. In April, Fronz told me his story. He was a jovial clerk on the other side of the pit. He said he owned it while he had gone to Florida on a vacation with the family, and was checking the stock from there. He was having a grand old time, saying “So THIS is how the big guys do it, printing money while sitting on the beach drinking cocktails festooned with umbrellas.” He of course, returned home to a halted stock, worthless, but was laughing about it and enjoyed telling the tale.
So, how does the ECNC story tie in to today? While ECNC was one of many flame-out dotcom companies, its demise came just a couple of weeks prior to the ultimate Nasdaq top. People were just buying into the story of untapped potential, riding the wave without really thinking it through. Sound familiar?
Oh, by the way. When looking back and doing some ‘research’ for this piece, I found out what E-connect did. From a blog: Econnect Holdings in the spring of 2000 at $0.96 had a quizmo to attach to your computer that you could swipe your credit card through and pay for purchases on line. Seemed to be a good idea to me….kind of like Square.
| 7/17/2020 | 7/24/2020 | chg | ||
| UST 2Y | 14.3 | 14.7 | 0.4 | w/I 14.7 |
| UST 5Y | 27.9 | 27.2 | -0.7 | w/I 27.7 |
| UST 10Y | 62.5 | 58.7 | -3.8 | |
| UST 30Y | 132.7 | 123.6 | -9.1 | |
| GERM 2Y | -66.4 | -65.1 | 1.3 | |
| GERM 10Y | -44.7 | -44.8 | -0.1 | |
| JPN 30Y | 57.9 | 57.1 | -0.8 | |
| EURO$ U0/U1 | -7.5 | -6.0 | 1.5 | |
| EURO$ U1/U2 | 4.0 | 3.0 | -1.0 | |
| EURO$ U2/U3 | 13.0 | 11.5 | -1.5 | |
| EUR | 114.38 | 116.54 | 2.16 | |
| CRUDE (active) | 40.75 | 41.29 | 0.54 | |
| SPX | 3224.73 | 3215.63 | -9.10 | -0.3% |
| VIX | 25.68 | 25.84 | 0.16 | |
