I started playing ASA options in December 1979. Gold was skyrocketing and the action around Chickie’s horseshoe was fast and furious. Gold was the hot new commodity and blue smocks would be gathered a dozen deep, pushing, shoving, screaming, and yelling. “Fifty offered at three and a half,” Peter the Mustache would yell. “TAKE ’EM!” “TAKE ’EM!” would come the chorus. Fights would break out over who made the trade. “Take it outside.” “Take it outside.” “None of that in here.” And we’d keep trading.
Basically, I was playing the long side, buying call options on ASA’s stock, betting that ASA stock would go up along with the Canadian and American gold stocks.
There I’d be in my blue smock, with my ticket book in one pocket, red for sell, black for buy, and my ASA chart in the other pocket, packed in with the crowd huddled near Chickie’s Mesa options. I had my lozenges, because you gotta have ’em, I always had a sore throat from yelling. I’d be looking at ASA’s high, low, and close of the previous day, and the gold prices, and the stock prices of the Canadian and American mining companies, and I’d wait for the price of ASA to take out the previous day’s high, and then I’d jump on the options with both feet. I’d holler at Peter the Mustache, “Take ’em, take ’em. I’m buying!” The strike prices were at $5 intervals and on a hot day the stock price would be ripping right through them. The Mustache had a board with ASA puts (options to sell ASA stock) on one side, and ASA calls on the other side, and there’d be people draped over my shoulders, and I’d be trading away, scrawling on my buy-sell pad, with Fat Mike breathing bourbon down my neck.
“Peter! How many offered at four and a quarter? Thirty? I’ll take ’em!” Thirty ASA February 50 call options at 4¼, giving me the right (but not the obligation) to buy one hundred shares of ASA stock anytime before the third Friday in February 1980, at a price of $50 per share, $12,750 total. The price I’d paid in exchange for that right was $425 per option. And it’d be sweaty, and hot, and rubber would be burning off the crepe-soled shoes, and the stock would still be going up, and I’d catch something out of the corner of my eye, gold prices moving, the other gold stocks moving, and I’d say to myself, Holy shit. I gotta buy some more ASA.
I had two clerks, Susan and Jimmy. I paid them a couple of hundred dollars a month and for that they’d collect my tickets and input my trades onto the cards that I sent over to Bear Stearns, my clearinghouse. “Susan! Jimmy!” I’d be screaming from the pack. “Where the hell are you? Get me my count. Let me know my position. Where am I? How many of the forty-fives did I sell? How many of the fifties did I buy?” I’d be foaming at the mouth. ASA stock was so volatile, trading ASA options was like being on one continual hot streak at Vegas.
Thanks mainly to ASA options, I made $600,000 in 1980 and $1.2 million in 1981. Then in 1982, the Reagan administration began to get inflation under control and the price of gold began to fall. I stopped playing the ASA options as much because when the gold stocks slowed down, my advantage was gone. I was quick with numbers, I was disciplined, I had the charts and the methodology, and the market was moving so fast that very few people could keep up with it. When gold cooled down, any old junkyard dog in a blue smock could understand it. We moved on to trade Merrill Lynch at the start of the new bull market in 1982.
I’ve still got my Kruggerands and Maple Leafs squirreled away in a safe-deposit box. They’ve been a horrible investment. I bought most of them in the late seventies and early eighties when gold was near its all-time high. My average cost is around $500 an ounce and now, almost twenty years later, the price is close to touching $300 an ounce. I’ve come to the conclusion that unless Auric Goldfinger resurfaces and nukes Fort Knox, I’m never going to make any money by owning gold, but still, I love it. To me, gold represents security. Who knows when the Schwartzes might have to run again? Gold is in my genes.
Going for the Gold I
In August of 1982, I was living my fantasy. It was Friday afternoon, we were out at our new beach house, and I was tucked under a towel out by the pool watching my Quotron. I had Debbie Horn on my direct line to New York and was trading up a storm, making money. Then my other phone rang. It was Inside Skinny. He was as excited as I’d ever heard him.
“Motty, the wheels are about to come off the wagon,” he whispered hoarsely into the phone. “Volcker’s just called back all the bank presidents from their vacations. Mexico’s going under. They’ve got too much debt in the Banana Republic. There’s gonna be a run on the banks. It’s a green smoke alert!”
Rumors about Mexico going bankrupt had been floating around all summer. The one thing every trader fears more than death itself is another crash like the one in ’29. They say it can never happen again, because of all the safeguards that have been set up over the years, like margin limits, automatic trading stops, bank reserve requirements, federal deposit insurance, and a whole host of other checks and balances, but in our heart of hearts, no trader believes it.
The way the big banks had been throwing money at Latin America, who knew what was going on, but if Skinny thought he knew, I’d be crazy to ignore it. He was no barber or cabdriver; he was connected to captains of industry all over the country. He had a good track record. Listening to Skinny had made me a lot of money. Skinny’s business was to know things before they happened. He traded stocks, he traded bonds, but more important, he traded information. If you were big enough and lucky enough to get on his list, and if you were able to give information back, seven times out of ten, you’d be in the money.
I looked at my watch. It was 2:30. I had to get my gold out of the bank before it closed for the weekend. If Inside Skinny was right, it might not be opening on Monday.
I’d been building up a stash of gold ever since I’d started trading on my own three years earlier. Whenever I felt flush in the market, I’d take some money out and buy some Krugerrands or Maple Leafs, then I’d stash them away in different places like W. C. Fields. It may sound nuts, but I had gold stuffed in several safe-deposit boxes. I figured that they were like an insurance policy, something I could lay my hands on if I ever got in trouble. That’s what rich people do. They spread their wealth around. They hide some here and some there so they’re always able to get their hands on something if everything goes into the crapper. I’d thrown a dozen or so rolls of Krugerrands into my briefcase when we’d left New York City and put them in a safe-deposit box in Westhampton. Now, I only had a half hour to get them out before the bank closed at three.
“Audrey! Audrey!” I screamed. “You’ve got to go down to the bank and get the gold while I check all of my positions and put in stop losses. Mexico’s going under. There’s gonna be a run on the banks.”
“Buzzy, what the hell are you talking about? Your brother’s just arrived for the weekend, we’re going to the beach, and all of a sudden, you’re yelling about getting the gold.”
“Audrey, don’t argue with me. Just go for the gold. Take Gerry with you. He’ll be able to help you. You’ll be carrying a hundred thousand dollars plus. Get the cash. Get everything. Go!” I kept trading away, shouting orders to Debbie. “Buy, dammit!” “Sell!” “Shit. Hold!” “Get me some more of those futures.” “Gold!” “Oil! MORE OIL!!” Ding. Ding. Ding. Stocks, options, futures. I’m under my towel going wild. When I look up, Audrey and Gerry are still standing there openmouthed. “What the fuck! Why the hell are you just standing there? You heard me. Get over to the bank and get that gold. We’ve got to save our ass. I don’t know whether this thing is going to turn or burn.” They looked at me like I was totally gonzo. “This is Captain Schwartz,” I screamed. “Just do what you’re told, Private!”
“Buzzy, this time you’ve really lost it. You’re over the edge.”
“WE’LL SEE WHO’S OVER THE EDGE,” I shrieked. “When the banks close, everyone’s going to be out in the cold, but we’ll have the gold to protect ourselves and buy all the crap we’ll need to defend ourselves from the crazies.”
Audrey and Gerry headed down to the
bank and about an hour later they showed up with the gold. “Buzzy, here’s your gold,” Audrey said, dropping the briefcase on the floor with a thud. She rubbed her shoulder. “My arm’s killing me, but now that I’ve got it, where do you propose hiding it?”
“Under the bed, where else. I’m sleeping on it. If anybody wants my gold, they’re gonna have to go through me to get it.”
“Well, they’re not going through me,” Audrey said. “You can sleep by yourself.”
Over the weekend, Volcker had his meeting with the bankers and decided that the Fed would reliquefy Mexico. The crisis was over. On Monday, the banks opened as usual and except for Inside Skinny, me, and a few other people who had their ear to the Street, most Americans never knew how close they’d come to taking us down the tubes.
On Tuesday, bond prices soared as rates plunged in one of the biggest rallies on record. On Tuesday afternoon, I said to Audrey, “Audrey, sweetie, dear. I think the crisis has passed. Would you mind taking the gold back to the vault, please?”
“Ha,” Audrey said. “My arm still hurts from lugging it over here. I got it, you can bring it back.”
And this is the thanks I get for trying to save my family. But when you’re under fire, making decisions in a crisis, you have to react, no matter how absurd you might look to other people. Brokers, investment advisers, money managers, consultants, family members, and the rest of your support troops have to go along or get out of the way.
Rumors are only as good as their source, but once you’re convinced that you have information that might be reliable, you have to act on it. My family’s security is my top priority, so I envision the worst scenario and prepare accordingly.
6
Made to Trade
And let them gather all the food of those good years that come, and lay up corn under the hand of Pharaoh, and let them keep food in the cities.
And that food shall be for store to the land against the seven years of famine, which shall be in the land of Egypt; that the land perish not through the famine.
—Genesis 41:35-36
Ever since Joseph interpreted Pharaoh’s dreams to mean that there would be seven years of plenty and seven years of want, futures contracts have been the best way to protect buyers and farmers against the rising and falling prices of commodities. Historically, the game in Chicago has always been futures. That’s because the two main exchanges in Chicago, the Chicago Board of Trade (the CBOT) and the Chicago Mercantile Exchange (the Merc) were originally set up to trade farm products.
All exchanges, be they in Chicago, New York, Philadelphia, Boston, San Francisco, or even Kansas City, are like casinos. The more action they attract, the more money they make. Casinos make money because the betting odds are in their favor; exchanges make money because they charge their members fees. In both cases, the bigger the volume, the bigger the take. That’s why exchanges, just like casinos, are always trying to suck in new players.
But by the early 1970s, the CBOT and the Merc were suffering from a sustained drought. Their problem was that the new players coming into the markets after World War II weren’t interested in trading commodity futures. What did they know about wheat, corn, soybeans, live cattle, lean hogs, and pork bellies? To even the most sophisticated investors, commodities were an obscure riddle. All they could picture was the market going into the tank and a boxcar of pork bellies being dumped on their front stoop. Investors didn’t want to be buying and selling commodity futures. If they were going to play the markets, they wanted to buy and sell things that they could tuck neatly away in their safe-deposit boxes. They wanted to play financial instruments like stocks and bonds, and that meant that they were going to bet their chips in New York.
The Merc’s and the CBOT’s inability to siphon off some of the funds that were flooding into New York meant that Chicago, as a financial center, was on its way to becoming another Dust Bowl. Then, in 1969, Leo Melamed became chairman of the Merc. Melamed was the embodiment of the old cliché “any port in a storm.” His family had escaped from Poland and the Holocaust by fleeing across Siberia to Japan, and then, just months before Pearl Harbor, setting sail for America. The family settled in Chicago where Leo’s parents, Isaac and Faygl, were offered positions in the Sholom Aleichem schools teaching Yiddish. From this decidedly Jewish background, Melamed found his way to the Merc and eventually made his fortune trading, of all things, pork bellies, but fortunately for the Merc, the CBOT, and the city of Chicago, Melamed was thinking about a lot more than just the price of pork.
Melamed was a visionary who realized that investors viewed the Merc and the CBOT as farmers’ markets, and when it came to buying cows and corn, the only quotes most people cared about were those on the menu at Delmonico’s. He knew that his casino, the Merc, was going to be left in the dust unless it could come up with some new games to lure the heavy hitters west. But what new games could they offer? After he became chairman in 1969, Melamed began studying the feasibility of offering financial futures. He finally saw the opportunity he’d been waiting for when, on August 15, 1971, “President Richard Nixon stunned the international finance community when he announced that the United States would no longer honor its pledge to exchange gold for foreign-held dollars.” (Escape to the Futures, © 1996 by Leo Melamed and Bob Tamarkin, published by John Wiley & Sons, Inc.)
This surprise announcement marked the beginning of the end of the gold standard. World currencies, which previously had been tied to the dollar, which in turn had been tied to gold at $35 an ounce, would be allowed to float. Suddenly, money was becoming a commodity, and as Melamed relates in his book, it was time to “forget about pork bellies, forget about agriculture, think money—the ultimate commodity—all kinds of money.”
Knowing that others were bound to reach the same conclusion, Melamed leapt into action. In January 1972, the Merc launched the International Monetary Market, a separate exchange designed for the trading of currency futures. Not to be outdone, the CBOT, the Merc’s older sister and greatest rival, lured Richard Sandor, a distinguished professor of economics from the University of California at Berkeley, out of his ivory tower and made him the CBOT’s chief economist. Like that of Professor Henry Higgins in My Fair Lady, Professor Sandor’s challenge was to transform the CBOT from a country girl clothed in agricultural commodities to a seductive debutante decked out in financial futures, one who’d certainly outclass the Merc and would rival the grandes dames of New York.
Professor Sandor figured that since the Merc had staked out its claim to currencies, he’d try something tied to interest rates. His first effort was a mortgage-backed futures contract called the Ginnie Mae which the CBOT launched in 1975, but the Ginnie Mae had delivery problems, so in 1977, Professor Sandor remade his brainchild into the thirty-year Treasury bond futures contract. He figured that with all the debt that the government was issuing, the thirty-year T-bond had the potential of turning the CBOT into another Eliza Doolittle.
By the end of the 1970s, the Merc with its currencies and the CBOT with its T-bonds felt that they had come up with the games that could lure some of the big money away from New York, but the transformation from cows and corn to currencies and T-bonds didn’t happen overnight. The heavy hitters still weren’t coming west to bet their chips. Why go to the weeds to play futures with farmers when they could stay on Wall Street and play stocks and bonds with captains of industry?
As is often the case in trading, what eventually saved the Merc and the CBOT was Melamed’s ability to turn what at first appeared to be a big loss for the Chicago exchanges into a big gain. A good part of the CBOT’s and the Merc’s business came from tax straddles, a technique that the designers of tax shelters had been using during the seventies to secure huge tax savings for their clients. “Wash sale” and “short sale” rules forbade the selling of securities at year end in order to establish tax losses if essentially the same securities were immediately reacquired after the first of the year. But these rules didn’t apply to commodit
y futures. By juggling profits and losses through year-end commodity trades, rock stars, movie stars, big-time athletes, and traders like me were able to use tax straddles to postpone millions of dollars in taxes. Tax straddles had become so popular that major brokerage firms like Merrill Lynch had set up special departments to design them for their customers. In the early 1980s, the Internal Revenue Service decided that enough was enough and that it was time to close this loophole.
Tax straddles generated a lot of big commissions for the CBOT and the Merc, and to the boys in Chicago the legislation that the IRS was proposing read like Grapes of Wrath. Something had to be done. The CBOT and the Merc were notorious for fighting among themselves, but when trouble came from the outside, they were family. They’d pull together, favors would be exchanged, disputes would be settled, problems resolved. When the IRS launched its attack on tax straddles, the first thing that Melamed and Les Rosenthal, head of the CBOT, did was run to Dan Rostenkowski, the chairman of the House Ways and Means Committee and the congressman from Chicago. According to Melamed, Rosty’s first question was always, “Is this important for Chicago?” and “over the years, Dan Rostenkowski was the Chicago futures markets’ tallest and most effective soldier.”
Rosty put up a good fight, but eastern liberals, led by Senator Daniel Patrick Moynihan from New York, were too strong. As Melamed notes, when the issue came to a vote on the Senate floor, Moynihan exclaimed that until then, he’d assumed that “a butterfly straddle must refer to a highly pleasurable erotic activity popular during the Ming dynasty.” That was it for tax straddles. They were defeated in the Senate, and the best that Rosty could do was to get the Conference Committee, of which he was chairman, to throw the boys in Chicago a bone.
Oh, but what a bone! Buried deep in the bowels of the Economic Recovery Tax Act of 1981 was a little miscellaneous provision that, as of June 23, 1981, “all futures contracts were to be marked to market at year end, and any capital gain or capital loss was to be treated as if 40 percent were short term, and 60 percent long term.”
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