Kort Session 9—The Penn Central Railroad Debacle and You…A Little Ancient History to Help You Be More Comfortable with Current Events.

BillI like this piece because in putting it together I found some press and learned journal items from the early 1970s that might make you feel more at ease with the current investment environment.  But first I digress.

My initial thought was to talk about the knee-jerk reaction Tuesday to the minutes of the January Fed meeting where that austere group debated when to wind down and reign in Quantitative Easing III.  The Dow was down over a hundred points (not really a big deal), but the media chatter immediately tacked to the negative.

Here is a sample from the mobile CNBC headlines from 8:00 AM central time Wednesday, February 20th.

  • Jobless Claims Move Up: Inflation Pressure Builds—Claims Up but “Still At Levels Consistent With Steady Improvement”…Consumer Prices Ex. Food and Energy Up .03 Percent.
  • Wal-Mart Tops Est., But Guidance Weak
  • Market Music Has Stopped, “I’m getting out”: Gartman (Dennis).
  • Should Bond Investors Brace for a 1994-Style Crash.
  • Technical Red Flags Could Signal More Selling

They didn’t even mention the Fed debate that may have prompted the down-tick, but as we pointed out “Session 8”; and, as Laszlo Birinyi articulated, you have to “Follow the Money”.  The Fed debating backing off QE and actually doing it are two different things.  I believe that on Thursday, Fed Governor Bullard reiterated that in his mind Fed monetary policy would remain easy for quite a while.  By Friday’s close we regained most of what we lost Tuesday and Wednesday.

An important aside to all of this is that some day, I think (maybe), the Fed punch bowl will be withdrawn and it will not be a bad thing, as it will signal that we are in a more vibrant economy.  Nonetheless, the Market probably will not like it.  In the meantime to ease your fear of that happening any time soon, I offer the following argument:

Fed Chair Ben Bernanke spent most of his academic career becoming a pre-eminent authority on “The Great Depression”, its causes and potential remedies.  He knows that a tremendous amount of stimulus went into the U. S. economy during the mid 1930s.  He also knows that in 1936, as the economy began to grow again, the economic authorities at the time decided to pull the “punch bowl” away for fear of over-heating the economy.  This was premature.  As a result the economy drifted back into depression mode and we really did not get out of it until the massive deficit spending associated with World War II.

Pardon my digression, but before I move on I have to say that I hate to pick on CNBC, but these guys so fit the mold of 24/7 fear and dread, I cannot resist it.

On to the Penn Central Transportation Company and why I think you should know about it.

“The Pennsy”, as folks in the trade use to call it, was an amalgamation of Northeastern railroads the largest of which were the New York Central and the Pennsylvania Railroad.  They were merged together in the late fifties and sixties to gain efficiencies. It was a dream not to be realized…defeated by burdensome union contracts and rules, the interstate highway system (more people travelling by car and more freight going on trucks), and eventually the airplane.  At the time, though most of this was readily apparent, it just was not registering, very much like the housing/debt bubble we just experienced did not register.  The Penn Central was a sacred U.S. corporate entity until it wasn’t and that happened June 20, 1970 when the company declared bankruptcy. This was at the time the largest bankruptcy in U.S. corporate history. It came as a complete surprise and shook the market to its core.

Check out this snippet from the June 1973 ABA Journal, “Last Tango At The Penn Central”.

  • “The worst feature of the disastrous bankruptcy of the Penn Central Transportation Company….is that it took so many people by surprise who should have known better.  If the staff of the Securities and Exchange Commission is right in its Staff Study of the Financial Collapse of the Penn Central Company, released in 1972, the surprise was in large part the result of corporate wheeler-dealings that would have made Ponzi stand up and salute.”

Sound familiar? Can you relate?

The fear and uncertainty that went along with an event of this magnitude was tremendous. The Dow Jones Industrials had already come off its 1966 time high of 1000 and, as the Pennsy was in its death spiral in the Spring of 1970, it hit a low around 600 (a 40% drop!).

As it pertained to the media, at the time there were only three national news networks covering the story and there were only two national newscasts per day from each.  The quality of the reporting was much different.  They were interested in getting the viewer the facts without embellishment, editorial comment or hyperbole.  It was not about keeping your eyes glued to the tube all day.  It was about informing.  The quality of the reporting was far superior with names like Cronkite, Huntley, Brinkley, Sevareid and Rudd, all career journalists.  Even though the news was scary you were not getting an emotionalized, politicized, 24/7 saturation bombing.

Now, I ask if you are my age (66) or even if you are a ten or fifteen year younger Baby boomer, were you aware of the Penn Central debacle or the really bad markets of the 1970s?  I am betting the answer for most who read this is “No”.  Trust me for my parents (the parents of all Boomers), the “Greatest Generation”, this was a very traumatic time, as traumatic as 2008 was to us.  No one knew how many other Penn Centrals might be out there or what banks might fail because they were holding oversized positions in Penn Central’s worthless commercial paper.  And as the PC was such an iconic U.S. corporation, many public and private pension funds did have position in its common stock and debt.

To the last point here is another ‘blast from the past” that might bare some resemblance to what transpired in the run-up the bursting of the Housing Bubble…i.e. ”The More Things Change the More They Stay the Same”.  We go back to the 1973 June ABA Journal.

  • “Lawsuits that have ensued named…Dun and Bradstreet, Inc., and its wholly owned subsidiary, the National Credit Office as defendants.  It appears that N.C.O., on whose ratings of corporate issuers of commercial paper investors rely heavily, gave Penn Central had the highest prime rating up to a slim three weeks before the bankruptcy.”

Again, people were scared. My parents and others of their generation had “skin in the game”.  The Baby Boomers were just starting out with no assets, ergo nothing to lose.   Now that their bucks are on the line, they too get to enjoy feeling the same concerns as their predecessors.  What is comforting for all to know is that they are neither the first nor the last to be in the position of having to husband and protect the assets they have worked a lifetime to accumulate.  It is learning how to filter and deal with these normal, sometime volatile markets (both up and down) that will help you navigate the continuing adventure of the market and owning shares in productive, growing assets.

To wrap up I give you one more snippet from memory lane.  This is from the March 3, 1974 edition of the Pittsburg Press.

  • Headline “Ex-Executives of the Penn Central Live in Clover”
  • “With one exception, the men who ran the Penn Central Railroad into bankruptcy in mid-1970 are still pretty much in clover.”

The one exception was the C.F.O who at the time had been charged with diverting $21 million in corporate funds to his own purpose.  Any of this look familiar…”déjà vu all over again”?  Check out the attached hyperlinks for more of the cited articles.

Let me know your impressions.

The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities.  I may,  from time to time, mention certain securities for illustrative purpose, names where I personally hold positions.  These are not meant to be construed as recommendations to BUY or SELL.  All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.


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