Why does this market "work so poorly?" Why is it, for instance, that the utility average could be down 3% Friday, a monster move that is usually reserved for a serious blow-up of one stock and not a whole group move?
I have been pondering this and reminiscing at the same time about the Great John Whitehead, who ran Goldman Sachs (GS) when I worked there. John passed away this weekend at 92 -- part of what Tom Brokaw called the greatest generation, but another man, who, like my dad, took it all in stride and didn't talk about what he saw or did.
I knew him as the towering individual he was, presiding over a great firm, someone I got to meet in 1983 as I served as his aide de camp at a three-day offsite so everyone in the then 2000-person firm could get to know each other.
John was embarrassed to have anyone offer to help him. That was his way. I was a lowly associate, not on the totem pole but beneath it. He simply told me to go meet as many people as I could and go learn as much as I could, and he would say I did a great job in case anyone asked. He had a twinkle in his smile and I was pretty blown away. He could have had me run into brick walls for him and I would have. Instead I got to meet many a soul whom I am still friendly with from other offices around the country.
In those days, you didn't just know your division -- mine was sales and trading --but you know people in every division. That's what John and his co-CEO John Weinberg really wanted. They wanted everyone to be friendly enough to be able to work together and they regarded that as the Goldman way.
I think it still is, but with so many employees and with a public company status, it's pretty difficult to do.
Anyway, I had to work on a presentation that offsite that has direct bearing to the craziness and lunacy you see in our markets today. I had been asked to try to show that there was a difference in results if you used Goldman Sachs to get in or get out of tough situations where stocks didn't trade that well.
The idea? If you have 100,000 shares of a thinly traded stock, or a million shares of one that was liquid, Goldman Sachs would "stop you out" on some amount to get the order and then work the order over the course of the day or the hour, depending upon what was necessary, to get the best price.
Now, Goldman still does that. So do many firms. But when I worked there and when I was a good client, I would frequently ask Goldman to just take care of an order. So let's say I had 100,000 Home Depot (HD) to buy. If the last sale was $109, he might say, okay, I sold you 50,000 at $109, working the rest. I might indicate there was some give to get the order done. Usually in a matter of 15-20 minutes and almost always in line.
Same thing if I wanted to sell 100,000. Goldman would buy the first 50,000 from me, basically in line, and then work the rest.
Of course those were the days of 1/8th point spreads, but the analogy still holds. More important, even if I had a million shares for sale, Goldman would still buy a large percentage, maybe 250,000 to "work the order."
Because of this kind of "principal" work -- meaning the firm was providing the capital to get the first part of the order done if you were selling, or shorting the first part of the order to you if you were buying, and then working to find "natural" buyers or sellers within the organization -- we had orderly markets. Goldman, of course, wasn't the only one doing this kind of thing, but was trying to demonstrate at that offsite that we were the best at it as part of an overall plan to get a larger market share from other brokers.
These days, though, a broker would be insane to handle an order like that. There's way too much to lose. If I were running the desk and a trader took on that kind of risk with the firm's money to earn a measly six cents a share, I would fire him. Fire him immediately.
Same all around the street. So now you can see sellers knock down stocks on such little volume that they just cascade. Plus, without traders from these big firms facilitating, the orders hardly ever get done the first day. That's why you see that curious pattern where a stock sheds 10% in a day and I write or say "that stock's not done going down," because a stock usually can no longer handle the volume required for all to exit in one session. There's too much for sale and no one out there, like a broker, trying to find buyers. So the stock just gets knocked down and knocked down and knocked down and the seller just can't finish.
Plus these days once a portfolio manager makes a decision to sell, he doesn't seem to care what price he sells it at. So if he says "I am selling Chipotle (CMG)," and the first sale is down $30, he keeps selling even if the stock drops to down $50. Or $75 or even $100."
That's why I say, buy on the third day. That usually means the damage has, at last, run its course and the buyers are no longer overwhelmed.
But these days, that's only part of the equation. These days so many stocks are caught up in ETFs and so many ETFs are set to be sold or bought on larger criteria automatically -- the so-called "machine buying or selling" -- that it would be a ridiculous exercise for any broker to try to help a seller out of, say, any utility stock Friday. The broker would be overwhelmed by multiple sellers of the same ETFs that are linked to bonds.
So when interest rates hit a certain level because bonds are selling off, that triggers automatic selling in the utility index and there are no natural buyers for any of the stocks, because these days the other side, the big potential buyers, know to get out of the way. The sellers will just keep coming back and coming back and coming back until the circumstances in the bond market change.
Again, that's new. In the old days there might be firms, actual stock-picking firms, looking to buy a stock like American Electrical Power (AEP) or Southern (SO) or a ConEd (ED) at a certain price where it might represent value. That's out the window now, though, because once the machines turn, they destroy whatever is in their path. Consider it like war. Before the machine gun you might not be mowed down by individual rifle shots. But when the machine gun was invented, it became theoretically impossible to stand up and not be killed.
It's an apt analogy for what's happening now and happened Friday in the horrendous selling in the utility index.
These days everything back then just seem, well, quaint -- from the dignified way that John Whitehead treated his underlings, to the way we did business with individual buyers and sellers to the trust that was on both sides of the trade.
It's okay to wax nostalgic on the passing of such a great man, as long as you recognize that it is nostalgia and not something that can make a comeback ever again.
