FYI | Oct 25 2006
By Greg Peel
Well they say nostalgia’s just not like it used to be, but for this little black duck it will be a long time before I forget the frightening phone call that awoke me at 5am on the morning of October 21st, 1987: “The Dow’s down 500 points”.
And it was down 500 points from 2,200. An equivalent drop from 12,000 would be 3000 points. That would be enough to ruin your morning, wouldn’t it?
There are still a few crusty analysts around at Macquarie Bank who remember that day, and remember the state of the market in the year or so leading up to October. Back in 1986, there were two major drivers of the bull market.
Firstly, notes Macquarie, “There were lots of companies with slowing growth profiles and very strong, free-to-invest cashflows that needed to make acquisitions to sustain growth. Today, as back then, strong balance sheets and rising levels of cash are creating nervous managements who are keen to justify their roles by looking for the next add-on growth saviour.”
Secondly, there was strong lending by banks. The Hawke government had deregulated the banking industry in 1983, and the first move had been for various banks in Australia to merge into to what we now know as the four pillars – Westpac, ANZ, National and CommBank. With renewed strength, the big four were ready to take on foreign banks eyeing off Australian spoils. Part of staying ahead of the competition meant aggressive lending.
That situation is true again today, with easy monetary policy in the US having led to a global liquidity boom. For the banks to stay competitive, between themselves and other forces, lending standards have had to drop. Macquarie notes in 1986 banks were lending not on the security of assets, but on the risk of cashflows.
The takeover frenzy of 1986 was such that virtually every stock deemed poorly managed became a supposed target and rallied accordingly. Seem familiar?
As the frenzy progressed a lot of investors did very well. On October 21, 1987 I learnt that while I was fretting in the office, one investor was being scraped off the concrete below Australia Square.
Macquarie goes further into eerie similarity mode by recalling that the last big round of media consolidation, itself a spur to the overall takeover frenzy, also occurred in 1986.
History…never repeats…I tell myself…before I go to sleep.