Happy Anniversary

We are approaching the ten year anniversary of the implosion of Lehman Brothers and the subsequent meltdown in the financial system that precipitated the GFC. As always it is instructive to look back in history and see what lessons can be learned. Although I will offer a spoiler – there is nothing new to be learned because the events that unfolded at Lehmans and the ripples it sent around the world are nothing new. Such events have been occurring for as long as we have had markets. Only the naive and the idiotic believe that each case is unique. I have dropped in a chart of Lehman below so you can see how events unfolded.

On this chart I have plotted the new 52 week highs and lows along with a fixed 3ATR trailing stop to give a broad sens of the overall trend. Volume has been plotted as semi log to give a better idea of the ramping up in volume as the panic unfolded.

Markets are interesting in that they are extremely generous in the amount of information they provide to participants – they tend to hide very little from you. Situations such as this require very little in the way of technical know how to analyse. You have a stock that is now making new 52 week lows, it is not just making one it is making clusters of new lows in a pronounced downtrend. At the same time volume is accelerating as investors panic out of their positions. The only means of competition that investors have is price so each new order drives prices lower and lower as the scramble to exit becomes a panic. Investing is not rocket science – despite what the quants would try and have you believe.

Lehman’s is by no means unique in its presentation of an imploding company and a share price that has been cratered. Below is the same style of chart applied to Enron, one of the greatest scams of the 20th century and one seemingly fully supported by analysts.

You can see that the same generic patterns are in pay – a break in long term trend, new 52 week lows and investor panic as the price collapses. I understand that when you are involved in the middle of this sort of collapse that judgement can often be impaired and the situation is not helped when you have supposedly expert voices telling you that things are fine. Humans have a tendency to abrogate responsibility to what they perceive to be a higher authority as such the words of analysts and professional commentators can hold sway over individual judgement. To give you an indication of the sort of things that were being said as Enron collapsed I tallied at the time a collection of recommendations by Wall Streets finest and these can be seen below.

This graphic has a few points that need explaining. Down the left hand side is the name of the firm making the recommendation, along the top is a timeline for these recommendations and along the bottom the price at which the recommendations were made. As you can see analysts continued to recommend Enron as the price collapsed. But what is interesting about this time line are the following key dates –

Oct 16 Enron reports massive third quarter loss.

Oct 17 Enron shrinks shareholders equity by $1.2B.

Oct 17 WSJ reports executives have been milking the company.

Oct 23 WSJ reports SEC probe.

Oct 31 SEC formally announces investigation.

Nov 8 Enron reduces previously reported income by $586M.

The key point is that even after it was known that Enron was an institutionalised fraud on a massive scale analysts continued to recommend it,

Just in case you think such patterns are the preserve of the US consider the chart below of ABC Learning the former darling of the local market .

As you can see the same pattern repeats itself over and over in differing markets and at differing times. History repeats itself over and over and it always will. This repetition is simply a function of being human and there is no way to circumvent that. Perceptions and emotions drive markets not cold hard logic. If we return to the collapse of Lehman’s and the GFC the question that needs to be asked is what lessons have been or could be learned from such events. On  the scale of markets there is nothing to be learnt since this is the way markets function. An example of this is the continuing rout in cryptocurrencies which at about $US600B is about the same size as the unwinding of Lehman’s. Interestingly most cryptos have more in common with Enron that they would like to admit.

From the perspective of the individual we come back to my original proposition that markets are extremely generous in what they tell you – the problem is that most people are either too arrogant to listen or the voice of the market is drowned out by other sources. As I have said before there is nothing new under the sun and in ten years time I will probably be writing about history repeating itself again because that’s what history does……