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Dow 1,000 and Wall Street's Watergate

By Alex Planes - Nov 14, 2012 at 11:30AM

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Learning from the market's past to understand its present.

On this day in economic and financial history...

On its very first day in existence in 1896, the Dow Jones Industrial Average (^DJI 0.00%) closed at 41 points. It had 12 components then, representing the pillars of the American economy: sugar, tobacco, rubber, leather, gas, lead, cattle feed, railroads, and electricity. It would take 76 years for the index to reach a four-digit closing price, which was finally achieved on Nov. 14, 1972.

"The long-sought goal of 1,000 on a closing basis carries a mystique all its own," wrote The New York Times when the Dow reached its milestone. "Brokers have hailed it as 'magical' and 'romantic,' ever hopeful of a favorable impact on investment sentiment once the mark was shattered."

Many of the Dow's three-digit milestones were also a long time coming after its founding, in no small part due to the horrific declines seen during the Great Depression. The index hit 100 points in 1906, 300 points in 1928, 500 in 1956, 700 in 1961, and 900 in 1965, according to the Times. The grueling climb to 1,000 was cut short by two bear markets in the latter half of the 1960s, which snatched victory from the jaws of a Dow that peaked at 995 points early in 1966.

Several bad choices hurt the Dow on its climb to 1,000. A four-decade exclusion of IBM (IBM -0.91%) suppressed the Dow's growth significantly, as the company posted a staggering 22,000% return over the course of its non-index years, from 1939 to 1979. IBM's stock even tried to upstage the Dow on its milestone day, climbing 3% on strong forward guidance as the Dow eked out a modest half-percent gain. The Dow's inclusion of Anaconda Copper in 1959 is also perplexing, as copper mining suffered long-term weakness throughout the first half of the century (excepting the World War II period). Anaconda's flagship mine in Chile was confiscated by the Chilean Socialist government in 1971, and the company's stock lost 72% of its value from 1969 to mid-1972. Anaconda sold itself to an oil company less than five years later, and today it exists only as an environmental liability for BP (BP 0.81%), which acquired its acquirer.

Breaking past the 1,000-point barrier signaled a shift in the Dow's long-term momentum. In the 76 years it took to reach four digits, the Dow's annualized growth rate was 4.3%. Over the next 40 years to 2012, it would grow at an annualized rate of nearly 6.7%.

Wall Street's Watergate
It hasn't been all good news for the stock market on Nov. 14. The high-octane '80s produced plenty of investing scandals, but few were as high-profile as that which brought down Ivan Boesky on Nov. 14, 1986. Time magazine dubbed it "Wall Street's Watergate," secret tape-recordings and all. It was at the time the worst insider-trading scandal in American history.

The SEC's prosecution of Boesky, brought to light on Nov. 14, signaled a shift in its handling of insider trading. The agency's new hard-line stance resulted in a $100 million fine and two years of jail time for Boesky and brought heat down on several Wall Street big shots, including Carl Icahn and Michael Milken, the junk-bond king. Milken and his firm, Drexel Burnham Lambert, wound up ensnared in their own SEC battle, which eventually led to Milken's imprisonment and Drexel's bankruptcy.

Boesky's takedown had the secondary effect of curtailing at least one major corporate raid. British tycoon Sir James Goldsmith cut off his pursuit of Goodyear (GT -3.51%) over the "ghastly Boesky affair." He still managed a $93 million profit off of his 11.5% stake, which Goodyear agreed to repurchase with expenses included.

Boesky, for his part, made out better than he deserved. The SEC allowed him to unload a large part of the $2 billion in holdings he controlled before the prosecution announcement, which sent the Dow to one of its largest point declines on record on Nov. 14. Other investors raged about this "ultimate insider deal." Although Boesky's reputation never recovered, his saga would inspire the creation of every wannabe-marketeer's favorite character, Gordon Gekko.

A game of chicken in Washington
A shutdown of nonessential government services began on Nov. 14 of 1995. This had a direct impact on the SEC, which lost budgetary authority to charge many of its standard fees for securities registrations and filings. More than 20 times the normal amount of registrations were filed on Nov. 14, 1995, leading to nearly $10 million in lost fees for the SEC. One of the biggest winners was Chrysler Financial Corporation. A Chrysler Financial spokesman was unapologetic over the company's weaselly move, saying that it paid millions in fees each year and that the shutdown simply offered it "a way to save some money."

A savvy move, perhaps, but it did nothing to sandbag the company against the wave that hit more than a decade later. Chrysler Financial was acquired by Toronto-Dominion Bank (TD 0.17%) after taking $1.5 billion in TARP loans during the financial crisis.

What hyperinflation looks like
Most of the world was still in a panic over the unfolding global financial crisis on Nov. 14, 2008. In Zimbabwe, the panic swirled over just what to do with all its money -- its worthless piles of Zimbabwean money, which suffered one of the worst hyperinflationary episodes in history throughout 2008. On Nov. 14, 2008, the Zimbabwean dollar hit an annualized inflation rate of 89.7 sextillion percent -- that's 897 with 20 zeroes after it. At the time, prices for goods and services in the country were doubling every single day.

Over the course of Zimbabwe's hyperinflationary episode, the currency underwent three redenominations of the original, pre-inflationary Zimbabwean dollar. All in all, by the end of this madness, one new Zimbabwean dollar was effectively worth $10 trillion trillion original Zimbabwean dollars. The preferred medium of exchange in this out-of-control environment wasn't gold, as some would advocate, but the good old, stable American dollar.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$31,253.13 (0.00%) $0.00
International Business Machines Corporation Stock Quote
International Business Machines Corporation
$128.48 (-0.91%) $-1.18
BP p.l.c. Stock Quote
BP p.l.c.
$31.28 (0.81%) $0.25
The Goodyear Tire & Rubber Company Stock Quote
The Goodyear Tire & Rubber Company
$11.27 (-3.51%) $0.41
The Toronto-Dominion Bank Stock Quote
The Toronto-Dominion Bank
$71.77 (0.17%) $0.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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