The Market's Fine Print

What J.P. Morgan Learned From the Shoeshine Boy

Russ Quinn
By  Russ Quinn , DTN Staff Reporter
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J.P. Morgan knew when to hold them, when to fold them, when to walk away, and when to run. (Public domain photo by Edward Steichen)

The market-timing skills of J.P. Morgan, the economic colossus of the late 19th century whose powerful swagger ranged from personally restocking the U.S. Treasury with gold (thereby calming the Panic of 1893) to founding the world's first billion-dollar company (U.S. Steel), were nothing short of legendary.

Like a certain latter day troubadour of high finance, Morgan knew when to hold them, when to fold them, when to walk away, and when to run. King Midas himself could have taken lessons.

Once found safe on the sidelines of a ruinous stock market crash, reporters asked how he had known it was time to sell his holdings.

Puffing on an expensive cigar, Morgan calmly explains that exiting the market was the only option once his shoeshine boy turned bullish.

Such a delicious story rises above questions of historical accuracy: If it's not true, it should be.

I thought of J.P.'s sage advice several weeks ago when a retired minister called me under the guise of fund raising for a local charity. From polite small talk to scripted pitch to modest pledge, the entire conversation appeared to be over in a matter of minutes. Wham bam, thank you Sam.

But just when the cold call should have died a happy death, the persistent reverend launched into another round of aimless chatter. As random thoughts and awkward moments of silence played a painful game of tag, it become increasingly clear that someone had a hidden agenda.

"Your job of watching the market must be fascinating," he said, finally becoming more focused. "Much more than my low-risk/low-reward lot of marrying, burying, and potluck suppers."

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I could sense he was moving in for the free-advice kill.

"My brother's doctor told him about his nurse's cousin who knows this manager of a large hog farm in Iowa devastated by something called PED virus. It sounds like nothing short of a Biblical plague that will send pork prices into seventh heaven. My sorry pension plan could use some jazzing-up. What do you think?"

That's when the image of Morgan's shoeshine boy mushroomed on my mental radar. I could suddenly see him clear as day, speed brushing the fine Italian leather that shod the great financier while confidently touting the undervalued shares of Standard Oil, General Electric, and Global Buggy Whips.

By the time the enterprising and boisterous young lad applied the final coat of Shinola, J.P. Morgan knew that he had just encountered the last of a dying breed. If even this lowly street urchin had fallen in love with the market, who could possibly be left to fuel the bullish fire?

It was time to thank the host, grab his top hat, and head for home. Whether latecomers knew it or not, the party was over.

Of course, "party" is just another word for "market bubble." Either term serves well in describing the extraordinary price explosion in lean hog futures through the first quarter of 2014. One metric alone should suffice in this regard: From Dec. 31 to March 18, the June issue rallied 3,350 points (i.e., $13,400 per contract).

Parties don't get wilder without police raids; market bubbles don't get sudsier without popping.

In describing the recent hog market as a bubble, I am certainly not minimizing the real and tragic production damage caused by the porcine epidemic diarrhea virus. Millions of feeder pigs have died to-date, and the desperate search for an effective vaccine remains a horrifying failure.

But while market bubbles may initially be blown by a radical shift in fundamentals, the ever-thinning glycerin walls eventually swell almost entirely thanks to the trade's own momentum. Regardless of the market's initial spark of reason, the ballooning growth of a major price move often has more in common with a Ponzi scheme (e.g., buyers seducing buyers seducing buyers) than some finely balance scale of economic justice.

Frankly, that's just the way markets work.

J.P. Morgan didn't become the very icon of rich and powerful without mastering the mysterious lifecycle of markets. No company, no stock, no commodity, no market is strong enough to outlive the speculative perception of blue sky. And not even the expanding universe itself can hold the attention of stargazers who have somehow become jaded and bored.

Put in more specific terms, lean hog futures have seriously run out of gas since late March because increasingly extreme consequences of PED became very difficult to peddle. The relatively robust picture presented by the March 1 Hogs & Pigs report didn't help. Nor has larger-than-feared chain speed. Furthermore, many concede that the virus is likely to be less lethal as the seasons turn warmer.

If we're pulling into the end of this particularly bullish line (and what a ride it's been), better to be in the front of the exiting bus than stuck in the back still singing with the pep band.

For some reason, I hesitated to share the story of the shoeshine boy with the minister on the make, perhaps fearing that someone who truly believed "the last shall be first" would not have ears to hear it. So I just told him that the PEDv narrative seemed to be getting a bit long in the tooth. And right before faking the necessity of taking another phone call, I had to caution this innocent lamb about the general danger in trading commodities, especially how the devil himself has been known to lurk among overheated longs.

John Harrington can be reached at Talk@dtn.com

For more from John see www.feelofthemarket.com

(CZ/AG)

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Russ Quinn

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