On Wednesday, a wide array of stocks followed the blue chips and by 3:00 P.M. the market was up another 175 points, easily surpassing Tuesday’s one-day record and regaining over half of Monday’s 508-point drop. The market was going crazy. I had to get back in the game.
I looked at my Magic T, my moving averages, my oscillators, my channel bands. They were kaput, useless, mahullah, busted. The market had not experienced these types of fluctuations in my lifetime. There was no order in this universe, no symmetry, no high and low tides; prices were bobbing around like lifeboats in a hurricane. I had to go with my gut, and my gut told me that this dramatic rebound couldn’t last. “Debbie,” I barked, “we’re going back in. But slow and easy. Try selling a contract at the market, and let’s see what happens.”
What happened was that the market kept going up and I kept selling into it, one or two contracts at a time, with the boys in the pit filling my orders late every time, front-running me all the way, clipping me for 0.10 here, 0.15 there. The S&Ps closed at 258.25, and I ended the day short twelve contracts at an average price of 255, which, for me, was nothing. I’d often have 100, 150 contracts long or short at the end of the day, but not in this market.
At five o’clock, I dialed up the Elliott Wave Hotline to see what Bob Prechter had to say. Prechter was down in Gainesville, Georgia, and published a market advisory newsletter called The Elliott Wave Theorist. Prechter had predicted the start of the bull market back in 1982 and had become the market guru of the eighties. There was a whole cult of believers who hung on his every word. In addition to the newsletter, he had a hotline that came out on Mondays, Wednesdays, and Fridays at five. On Wednesday, October 21, 1987, Prechter was negative. According to the hotline, the tide had turned and despite the two-day rally, the market was headed south.
At the opening Thursday morning, I was on the horn with Debbie. Prechter was the guru of gurus. If he said the market was going down, there was a good chance it would. Either way, up or down, this market was so volatile that I had to be on top of it. Ding. There was the bell. The market was open. “Marty!” Debbie screamed into the phone, “Shearson just came with an order for a thousand contracts to sell, at the market!”
“Quote! Quote! Dammit, gimme a quote!”
“Offered at 240!”
“Shit, it closed at 258! What the hell’s going on? Lemme think! I gotta think!” How much was I ahead? A twelve lot short at 255, now offered at 240. Twelve times five hundred times the fifteen-point profit equaled $90,000. “Marty! Offered at 230! Offered at 225!”
“The size! What’s the size at 225?” At this price, I stood to make $180,000 if I could cover my twelve lots short. “What’s the size?”
“Marty, there’s no bids, I dunno! 220! Offered at 215!” Holy shit. What the fuck was happening? The bottom was falling out of the S&Ps. Nobody was making a bid. In over five years of trading S&P futures, I’d never seen this before. “210! 205! Marty, there’s a fill at 202!”
“The size? What’s the size?”
“I dunno, I missed it! 200! Another fill at 198!”
“COVER!!!” I shrieked. The boys in the pit were starting to buy. “Cover the twelve lot, and input it to the clearinghouse right away. I don’t want those bastards ripping up my tickets!” With the market moving like this, it wouldn’t be unusual for the boys to conveniently forget about a few of their trades. “GO!” Click.
I turned to my screen. The 202 was just coming up, then the 200. Then a 198, 197, 195. Wait a minute! 197. 200. 204. The market had turned around. But that was all right. I had to be covered at no worse than 200. What a killing!
Ring. “Debbie! Debbie! DO YOU HAVE THE TRADE?”
“Marty! I got five filled at 200, but they won’t give me the card on the other seven!”
“Where are they now? 210? They’re moving so fast, if they’re not gonna give you the card at 200, buy another five at the market! NOW!” Those fucking bastards. They’d buried my order to cover on the other seven. They’d just ripped me off for at least ten points on seven contracts, $35,000 at least, maybe more.
Ring. “Marty, I got five more filled at 210, and the last two at 215. It was the best I could do. They’re ratting out on trades left and right.”
I was shaking. I didn’t know whether to be happy or pissed. I’d made $290,000 on the twelve lot (5 × 500 × 55 points in profit, 5 × 500 × 45 points, and 2 × 500 × 40 points), and the boys at the Merc had taken about $50,000 in “slippage.” Two hundred and ninety thousand dollars on a twelve lot! That was unbelievable. What the hell had happened?
It turned out that Shearson’s thousand contract sell order at the market had been on behalf of George Soros’s Quantum B.V.I. Mutual Fund. Apparently, Soros felt like Prechter and had decided to dump all of his fund’s 2,400 S&P futures contracts at the opening bell. According to Barron’s, when the first order to sell 1,000 contracts at the market hit the pit, “the pit traders picked up the sound of a whale in trouble.” They hung back until the offer dropped to around 200, then attacked. The Soros block sold between 195 and 210 and, within minutes, the market had bounced back to 230, leaving a lot of instant millionaires celebrating in the pits. This is one of the most famous trades in the history of the Merc and many of the details subsequently came out in U.S. District Court in Chicago, where Soros sued Shearson for $160 million (subsequently settled out of court). According to Inside Skinny, Soros actually lost $800 million. “Motty. He was long up the ying yang and he panicked.” I just remember it as the day I out-traded the great George Soros.
I was still shaking when I went into the apartment. “Audrey,” I said, “you’re not going to believe this: I just made $290,000 on a twelve lot.”
“Buzzy, that’s wonderful. How long did you have to hold it?”
“Overnight.”
“Good for you. Now, will you get that briefcase out of the safe. I can’t get to any of my jewelry.”
On Friday, the twenty-third, I took the gold back to the East New York Savings Bank. As I stood all by myself in one of the little private rooms they make available to their customers, putting all of the plastic tubes of Kruggerands back into the safe-deposit box, I thought that twice now, I’d gone for the gold. And both times, the market had came roaring back and I’d made a bundle. Maybe Zoellner was right. Maybe when it gets so bad that you want to puke, you probably should double your position. I haven’t had that feeling for ten years, but the next time my gut tells me that the world’s going to end, maybe I’ll do just that. Maybe I’ll double my position, then go for the gold.
Sitting Down by the Lake, Waiting for the Tidal Wave
Bob Prechter is one of the most talented people ever to analyze the market. Bob’s very smart, a Mensa, just brilliant. He went to Yale on a full scholarship, and, after graduating in 1971 with a degree in psychology, spent several years of self-education in the field of technical analysis. That led him to a job with Merrill Lynch as a technical market specialist where he became intrigued with the work of Ralph Nelson Elliott (1871-1948).
Elliott, a former accountant and obscure technician who in the twenties and thirties developed the wave principle as a way of analyzing the market, published his life’s work (somewhat immodestly entitled Nature’s Law—The Secret of the Universe) in 1946, just two years before his death. Since then, the wave principle has fascinated a small but loyal coterie of philosophers, mathematicians, psychologists, and theologians as well as investors.
In 1977, Prechter quit Merrill Lynch and moved his family to Gainesville, Georgia, a little town on Lake Lanier about an hour’s drive north of Atlanta. From there, he started publishing a market newsletter, The Elliott Wave Theorist, and in 1978, he and A. J. Frost, an old accountant and another disciple of Elliott’s, wrote a book called Elliott Wave Principle, which predicted the big bull market of the eighties with uncanny accuracy. Over time, this book, along with his newsletter, turned Prechter into the market guru of the eighties.
I subscribed to The Elliott
Wave Theorist because I was always looking for additional information that would help me improve my methodology, and Elliott’s wave theory complimented my Magic T. It was based on mathematics and fit my fascination with bilateral symmetry, high tide, low tide, the natural order of things. For a trader like me, it was indeed a Secret of the Universe.
One day in the fall of 1983, I picked up the phone and called Prechter, the same way I’d picked up the phone and called Terry Laundry back in 1978. Bob had entered one of Norm Zadeh’s Champion Trader contests and he knew my name. We started talking about the market, I liked what he had to say, and we worked out a consulting deal where I’d pay him a certain amount every month. I really respected Bob’s intellect and it turned out that we’d talk several times a day, just like I talked to Zoellner.
By the crash of ’87, Bob had this huge following and was making $20,000 a speech, but then he got tired of being the “Market’s Guru.” He saw the crash as the end of the bull run and went totally negative. Even though the market recovered and kept going up, nothing could make Bob change his mind. We were at the crest of the tidal wave, the market was about to be dashed upon the rocks, there was nothing to be done.
In 1989, Bob was president of the Market Technicians Association, which is the trade association for all the technical analysts in the country, and he invited me to participate in a panel discussion with Paul Tudor Jones. Bob had been predicting gloom for so long that he was slowly losing his audience, so at the meeting, I took him aside. “Bob,” I said to him, “even if the market’s going to crash, ride it until it does. Wait until it turns down, then tell ’em it’s going down.”
He’d hear none of it. He was convinced that we were at the crest of the tidal wave and had gone into a lifeboat mentality. He was sitting high and dry in Gainesville waiting for the flood. I still had tremendous respect for Bob’s intellect, but we didn’t have much contact after that. I was a trader. I just couldn’t sit and wait for the world to come to an end.
In 1995, Bob sent me an autographed copy of his new book, At the Crest of the Tidal Wave. Even though the Dow was up more than two thousand points since 1989 when I’d told him that he had to be more positive, Bob was still negative. The book was all gloom and doom, but fascinating. Bob’s truly a genius, and a very persuasive writer. After reading At the Crest of the Tidal Wave, one of my friends was so scared that he couldn’t shit for a week. But so what, the market still kept going up.
As I read through the book, I kept thinking, Bob, look, this is crazy. You may be sure you’re right, but the market is never wrong. Sandbag the riverbank when you have to, not before. Wall Street doesn’t want to see the emperor naked. He may be old and fat and flabby, but they don’t want to know it. They want to see him regal and royal in all his majesty. And as long as they see him that way, that’s the way he is, because they keep on buying. Big ball keep on rolling.
Bob’s the classic example of somebody who’s sure he’s right and the market’s wrong. His theories are brilliant, he’s smart enough to win the Nobel Prize in Economics, and I hope he does someday, but the market doesn’t care. Bob himself has now publicly conceded that he’s been wrong for so long, he’s lost confidence in his ability to pick the top, and until he decides that it’s easier and more profitable to go with the flow, he’ll remain sitting down by the lake, waiting for the tidal wave.
12
Commodities Corp
The market had just closed and I was working furiously to finish posting my charts and calculating my ratios. I was in a hurry. The doorman would be buzzing me any minute to tell me that the big shiny limousine from Commodities Corporation was here to drive me down to Princeton. I knew I wouldn’t get home until late that evening, so I had to finish my work now or my trading would be out of sync for tomorrow.
Normally, I didn’t go out during the week. To trade successfully, I needed my rest and at least three hours of nightly preparation. But tonight was an exception. Tonight was Commodities Corporation’s Semi-Annual Trader’s Dinner, one of the few chances the top dogs in trading had to get together, gather around the hydrant, and sniff each other out. My nose was ready and I was eager to lift my leg. It was going to be my first dinner and I was looking forward to finding out what made these great traders tick. And to prove that I was as good, or better, than any of them.
Mmmmmmp, Mmmmmmp, the intercom buzzed. The stretch limo had arrived. I put on the jacket to my new Armani suit, buffed my new Bally alligator shoes, straightened my new Missoni tie, and checked myself out in the mirror. Excellent. I was ready to woof with the top dogs.
An hour and a half later, we were driving through Princeton, New Jersey. Despite the fact that I’d grown up in New Haven, Connecticut, in the shadow of Yale University, this was only my second visit to Princeton. Princeton reminded me of a classical New England town, like Amherst, where I’d gone to school. I couldn’t imagine how any place this nice could be in New Jersey.
The autumn light was just fading into a crisp, clear evening as the limo pulled into the circular driveway in front of Commodities Corp’s bucolic headquarters. The red and gold of meticulously manicured trees reflected in the shiny glass and steel facade of Commodities Corp’s ultramodern building. I felt a knot form in my stomach as I entered through the big glass doors. I get nervous going to dinners where I don’t know a lot of people. I don’t like small talk and I usually let Audrey handle the social niceties for both of us. But Audrey wasn’t invited tonight. Commodities Corp’s Semi-Annual Trader’s Dinner was strictly stag, no spouses, please.
Cocktails were being served in the main reception area. I stopped at the door and scanned the room looking for a familiar face. The first person I recognized was Michael Marcus. He was wandering around clutching his bottle of Evian. Marcus, a 1969 Phi Beta Kappa out of Johns Hopkins with a Ph.D. in psychology from Clark, was the first of the egghead academics that Commodities Corp had recruited as traders. That was back in the early seventies when Commodities Corp was just getting started. Over the next eighteen years, Marcus had parlayed his initial $30,000 grubstake into $80 million. All that pressure had taken its toll. Marcus lived quietly in a compound overlooking a private beach in southern California and carried around his own personal bottle of Evian, probably because the Maharishi Mahesh Yogi had convinced him that every water supply east of the Rockies was contaminated. I’d had dinner with him a few months earlier and wondered if he’d gone over the edge, but with traders, you never know. We’re all weird in some way.
Bob Easton, the president of Commodities Corp, glided over to greet me. Easton had previously worked with the American Bar Association and was a Princeton grad with an M.B.A. from Columbia and a J.D. from Georgetown. He was not a trader. He was one of those guys who’d be comfortable in any social situation. He was as smooth and polished as the shiny glass and steel facade of Commodities Corp’s ultramodern building. Easton fixed me up with Bruce Kovner, one of the market’s brightest stars, and slipped off to welcome some other socially challenged trader and make him feel right at home at Commodities Corp.
Like Marcus, Kovner was another academic who had been recruited by Commodities Corp. This former political science teacher at Harvard and the University of Pennsylvania had shifted his attention from academia to the financial markets back in the midseventies. Kovner believed that his knowledge of economics and political science would give him an edge in analyzing futures markets. He’d been right. In 1987 alone, Kovner had scored profits in excess of $300 million for himself and fortunate investors like Commodities Corp, yet despite his tremendous success as a trader, he was still a professor at heart. He continually stroked his little salt-and-pepper goatee and shifted his rotund frame awkwardly in his rumpled suit while he expounded on arcane economic/political theories.
As Kovner rambled on about how he’d fallen in love with the yield curve and how his study of the markets coincided with the initial trading in interest rate futures, my mind began to wander back to the previous spring. Th
at was when Harry Denny, a broker with Shearson, first persuaded me to talk with Commodities Corp. Commodities Corp paid brokers like Harry Denny fat fees to scout out hot traders for them. Not that I needed any scouting. Thanks to all the publicity I’d received from winning a string of Norm Zadeh’s U.S. Trading Championships and a February 15, 1988, article in Barron’s that labeled me “the best there is,” I had a reputation on the Street.
I’d been thinking about the possibility of managing other people’s money for some time. Managing other people’s money would be good for me because even though I’d been successful ever since I’d started trading on my own, I felt that I’d left a lot of money on the table. I was usually right at picking the market, but my fear of losing my money and the resulting urge to take profits kept me from letting my best trades run. By playing with somebody else’s money, I was pretty sure that I’d be more aggressive and ride my winners longer. That’s why Harry Denny’s timing was perfect. When he told me that Commodities Corp was interested in having me trade for them and that I should meet with them, I was ready.
Coming out of the Roaring ’80s, big managed funds were going gangbusters. Mutual funds were exploding; “defined contribution” retirement plans like 401(k)s and IRAs were bringing millions of new investors into the marketplace. All through the early ’80s, inflation had been running rampant, so big money was desperate for big returns. New financial instruments were coming onstream all the time, and heavy hitters were always on the lookout for market pros, Champion Traders like me, who knew how to play them.
Pit Bull Page 19
