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Thursday, November 1, 2007
Of tulips and bubbles

One night Uncle Maury suggested to the Putterer that perhaps he had planted the bulbs upside down and would have to go to China to see his tulips.  Allan Sherman, American musician, parodist, satirist, and television producer), 1924-1973

Lest we forget

At Alphen we have consistently expressed the view that it would have been preferable for the JSE to have undertaken its bull charge in a more measured way and over a longer period of time. It is, however, heartening to note that our market remains remarkably orderly in comparison to some bull markets of yesteryear that ended in tears.
In 1634, Holland experienced “Tulip Mania” where tulip prices escalated 5,900% over three years. By 1637, prices had declined 93% from their highs.
In 1719, a Scottish businessman named John Law acquired a controlling interest in the derelict Mississipi company which operated as a trading business with French colonies in America. The French government also granted him certain sole distribution rights for other French colonies. Mr. Law exaggerated the value of trade via a marketing scheme and his shares rose from 500 livres to 15,000 livres in just one year; 12 months later they were back at 500 livres.
Also in 1719, and not dissimilar to the Missisippi Company, the South Sea company received the right from the British Government to run a monopoly on trade with Spanish colonies. The stock in this company rose over 1,000% in 18 months and, when the bubble burst, the decline was an unhealthy 84%.
The Dow Jones Industrial Average went from a low of 191 in early 1928 to a high of 381 in September 1929. Over this period P/Es rose from around 12 to about 20. On 3rd October 1929, the Dow began to drop, declining further throughout the week of October 14th. On the 24th, people began selling their stocks as fast as they could. Sell orders flooded market exchanges. On a normal day, only 750 to 800 members of the New York Stock Exchange started the Exchange. That morning however, there were 1 100 members on the floor for the morning opening. The Dow Jones Industrial Index closed at 299 that day. The big action occurred on October 29th though, the real beginning of the crash. Within the first few hours of the stock market opening, prices fell far enough to wipe out all the gains that had been made in the previous year. The Dow Jones Industrial Index closed at 230. Since the stock market was viewed as the chief indicator of the American economy, public confidence was shattered. It took nearly twenty-five years for many stocks to recover.
Between 1965 and 1989 the Japanese market rallied 3 720%. Equities were certainly not alone in this mania as property values sky-rocketed to unbelievable levels. It is speculated that at one point in this episode, the emperor’s one hector palace was worth more than all the property on Australia’s Gold Coast. Be this true or not, what is validated is that the Nikkei collapsed 70% from its high. It is a recent development that the Japanese economy is emerging from the ravages of a deflationary spiral that followed the market’s collapse in 1989.
The NASDAQ’s implosion that started on the 11th of March 2000 is of course the most recent bear market and most real to modern managers. Having climbed to 5 000, the market later tested levels of as little as 10% of its highest levels. Here too the ramifications were devastating lead to global economic fall-outs.
There have been various other bear markets including in 1973 when US blue chips such as Disney, Avon and Polaroid lost 80% to 90% of their values; the Mexican crisis in 1978 to 1981; the Taiwan bear market of 1986 and the emerging market fall-outs of the 1990s. 
All these events provide clear evidence that historically when markets have enjoyed periods of excess, such periods have often been followed by lean times. We would be most surprised to see global markets dissipate wealth at present in line with these ugly events in history - as we stated at the outset, we are heartened by the relatively orderly state of the markets. We do, however, feel that there exist some pockets of real excess within our markets, with the Chinese stock market being a particularly likely candidate for a serious pull-back.
Whilst threats are ever present, so too are opportunities and the moral of the story is that history is a great educator on both of these fronts. Investors need to remain cognisant of the old expression that as much as things change, they stay the same.

Copyright © Insurance Times and Investments® Vol:20.10 1st November, 2007
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