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2000
Crash:
Intro:
From
1992-2000 the markets and economy had a record
expansion period. The IPO market had new
companies trading at over a 1 billion dollar
market cap with no profits and less than 1
million dollars in revenue.
The
NASDAQ was trading at 4234.33 on September 1,
2000. From September of 2000 the NASDAQ
dropped 45.9% to 2291.86 by Jan 02, 2001.
In Oct. of 2002, the NASDAQ dropped as low as 1,108.49
which is 78.4% drop from its all-time high of 5,132.52
in Mar. of 2000. A total of 8 trillion
dollars of wealth was lost in the market
decline.
Causes
of the Crash:
1. Corporate
Corruption
A lot of companies inflated their
profits by means of fraud and accounting
loopholes and hid their debt. Corporate
officers had outrageous stock options that
diluted the company.
2.
Stocks were overvalued
Stocks were trading in the hundreds and some
in the thousands on a P/E basis. Some
companies that were losing tons of money with
no hope for profit until many years down the
road had over a 1 billion dollar market cap.
3.
A Wave of New Daytraders and Momentum
Investors
With the advent of the Internet and online
trading, this give traders a quick and cheap
way to trade the markets. This led to
millions of new investors hitting the markets
with little or no experience.
4.
Conflict of Interest by Research Firms
Analysts and investment bankers worked very
closely together. Whenever a company was
trying to raise capital, the investment
bankers made sure their research firms would
put favorable ratings on stocks. This
led to companies having favorable ratings even
though the companies was in serious financial
trouble. In some cases analysts had
favorable ratings on stock less than a month
before a company filed for chapter 11.
Reforms
after the Crash
1. New Rules for Daytraders.
Investors need at least $25,000 in their
account in order to actively trade the
markets. Also new restrictions on
marketing methods for daytrading firms.
2.
CEO and CFO accountability for their balance
sheets. CEO's and CFO's are now required
to sign off on their statements. Also
the punishment for fraud has been beefed up.
3.
Accounting reform. This included more
disclosure of balance sheet info. Things
such as stock options and offshore companies
are disclosed where investors can better judge
if the company is really producing positive
cash-flow.
4.
Separation of Investment Banking and Analyst
Research.
Fines were given to the big firms that were
mainly responsible for deceptive practices.
There was major reform to separate research
from the investment banking business.
1987
Crash:
Intro:
The markets peaked on August 25, 1987 with the
Dow hitting a record 2722.44. Then the
Dow started to head down and by September 22nd
the Dow was down 8.4%. Then the markets
rebounded and on October 2nd the Dow was up
5.9% from September 21st. Over the next
7 days the Dow would drop 13.5% from its high
on August 25th. On October 19th, 1987
the market crashed. The Dow dropped 508
points or 22.6% for the day. This was a
drop of 36.7% from the record high of 2722.44
on August 25, 1987. The stock market has
lost 1/2 trillion dollars of wealth.
Causes
of the Crash:
1. No Liquidity
During the crash the markets were not able to
handle the large volume sell orders.
Most common stocks on the NYSE were not traded
until late in the morning of October 19th.
No one knows why investors all wanted to sell
at the same time.
2.
Stocks were overvalued
Stocks were trading at a historically high P/E
ratio. Though from 1960 - 1972 stocks
were also trading at a high P/E ratio yet no
crash happened. So high P/E ratios don't
always trigger a crash.
3.
Computer Trading and Derivative Securities
Large institutional investing companies used
computers to order to automatically order
large stock trades when certain market trends
prevailed. Some analysts also claimed
that index futures and derivatives securities
buying were to blame.
Reforms
after the Crash
1. Uniform Margin Requirements
This was done to reduce the volatility for
stocks, index futures and stock options.
2.
Computer Systems
It use to take 20 - 25 keystrokes to enter a
trade. With new computer system a trade
could be done with one keystroke. And if
something were wrong, the system would just
reject it. This increased data
management effectiveness, accuracy, efficiency
and productivity.
3.
The NYSE and the Chicago Mercantile Exchange
also instituted a "circuit breaker"
mechanism by
which trading would be halted on both
exchanges for one hour if the Dow Jones
average fell more
than 250 points in a day and for two hours if
it fell more than 400 points.
1929
Crash:
Intro:
On September 4, 1929 the stock market hit an
all time high as a result of the American
industrial revolution right after the Labor
Day weekend. At that time banks were
invested heavily in stocks and individual
investors borrowed heavily on margin to buy
stocks. By October 24, 1929 the stock
market was down 20%. On October 28, 1929
the stock market was down another 13.5%.
On the historical day of October 29, 1929 the
stock market dropped 11.5% to bring the Dow
down a total of 39.6% from its high. The
market had lost 14 billion dollars of wealth.
A quote from the Wall Street Journal said
"STOCKS STEADY AFTER DECLINE
Bankers State Support Continues- Spokesman
Expresses View Hysteria is Passing. " Wall
Street Journal, 10/30/29 (The trading
floor of the New York Stock
Exchange just after the crash of 1929)
Causes
of the Crash:
1.
Stock were overvalued
Some people thought that according to P/E
ratios and price to dividend ratios that
stocks were overbought. In 1929, stocks
were trading at an average P/E of 60.
2.
Margin Buying
At that time, you could put 10% down to buy
stock. Thus if you wanted $10,000 in
stock of GE, you would also need $1,000.
Then you could make monthly payments to pay
for the rest. Margin buying accounted
for 5% of the total market value of the stock
market in 1929. This was not enough to
drag the entire market down.
3.
Fed Policy
Adolph Miller was the new president of the
Federal Reserve Board and he set out to
tighten monetary policy. He aggressively
raised interest rates on broker loans.
4.
Bad Banking Structure
In the 1920's, banks were opening up at the
rate of 4 to 5 per day. There were few
federal restrictions to determine start up
capital needed to start up a new bank or how
much of its reserve it could lend. As a
result, most of these banks were highly
insolvent. Banks were closing at the
rate of 2 a day between 1923 and 1929.
Then as banks moved to invest heavily in the
stock market, this proved to be a disaster
when the market crashed. By 1932, 40% of
all banks were wiped out.
Reforms
After the Crash:
1. The Securities and Exchange
Commission (SEC) was established to lay down
the law and punish the violators.
2.
The Glass-Stegall Act was passed which banned
any connection between commercial banks and
investment banking. Over the past decade
though, the fed and banking regulators have
softened some of the Glass-Stegall Act.
3.
FDIC was established to insure individual bank
accounts for up to $100,000.
Aftermath:
After October 29, 1929 the market began to
slowly mount a comeback. By next summer
of 1930 the market was up 30% from the low of
October 29, 1929. But no one would
realize the nightmare that would follow.
By July of 1932 the stock market would hit a
low that made the 1929 crash look like hiccup.
By the summer of 1932 the Dow had lost almost
89% of its value which was well more than 50%
lower than the low of October 29, 1929.
This drop erased almost every gain from stock
market since its birth in 1897. It would
take the stock market about 30 years to make
it back to the 1929 highs though most
investors would have recovered their losses in
the 30's through dividend returns.
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