Mar

6

The cry "ship ashore," a call for action for wreckers to save the hands and cargo of a foundered boat, has traditionally galvanized coastal communities into action. Fortuitously, my recent vacation to Key West, the richest city in the US during the mid 1800s and whose economy was built in the main on the profits of the wreckers, coincided with a foundering in the market. Thus, it became appropriate, perhaps even imperative, during this visit for me to visit all the wrecking buildings and museums in the area, and see what lessons could be drawn.

To put this in perspective, a good way to start is to consider 5% declines in the market in 5-day periods, events that are current as the market declined from 1454 on 2/23 to 1372 on 3/5, a decline of 5.6%. Such events have been followed by an average move of 2.5% from the close of the event to the close 10 days later with a 75% chance of a rise, and a standard deviation of about 5%, with a t unadjusted for overlap of 3 during the period. Thus there are profits to be made, a la cane trading during such periods. This is the case despite low confidence since there were only 21 independent events during the period. And the last such decline occurred January 27, 2003.

The economics of the wrecking business were good in Key West from 1820-1900 because the Gulf area around the Keys was littered with uncharted coral reefs, currents that were among the most treacherous in the world, and lighthouses were not available. Moreover, shipping was very active as this was the major port of entry for European, South American, and Caribbean ships exporting to the US, often via the Mississippi and the Great Lakes.

It is documented that the wrecking business was so profitable during this period in Key West that along with New Orleans it was the wealthiest city per capita in US.

One of the key aspects of the wrecking business was the specialized equipment that the wreckers used to ply their trade. The most visible were the watchtowers that extended 200 feet high above the roofs of the wreckers' places of business. The watchtowers were equipped with lights and telescopes and railings to prevent being blown off. The search for the wrecks was supplemented with ships that sailed among the reefs waiting for the wrecks to occur and to provide an early warning. A signaling system between rival ships developed so that no wrecks could be missed. As might be imagined, there was considerable folklore that the wreckers themselves induced the wrecks by false lighting and even direct damages to ships in peril.

The ability to spot a wreck is crucial in the market. The attempt to spot one is determined by many technical tools, such as moving averages and breakouts. Regrettably, many of them are prone to false signals. And those who make their living by waiting and hoping for them often find the pickings very slow. Many players make their entire living by waiting for wrecks and then plundering them. Unlike the wrecking ships of the day, that were required to save the passengers on board first, the legend is that those in the wrecking business in markets today are more interested in the plunder than saving the passengers. Indeed, in the days before 1820 when American Indians served as wreckers, the custom was to take the boat-hands as slaves. Instances of this were much more common in markets in the old days. When foundering occurred the wrecked party might been asked to work as a night clerk, watchman, or sports coach for the plundering party in exchange for his liberty. However, the wreckers of Key West were kept in line by reasonable checks and balances including a good admiralty court in the area. Similar authorities seem to provide a reasonable balance today.

The specialized equipment of the wreckers consisted of ships with shallow drafts and large holds. They were able to maneuver flexibly and quickly near the wrecks, and to store the plunder once they were able to get it. The market wreckers of today use split-second communication devices to get to the wrecks quickly, and Dow Jones reports. For example, they are now coding their messages so that the content can be analyzed electronically before the message can be read, to take account of all the fast moving participants that follow critical announcements. The holds of the wreckers are large because financial resources are necessary to inventory and hold all the baggage of the wreckers. And often it takes considerable time to auction off the proceeds of the wrecks.

Other specialized equipment that the wreckers carried were heavy anchors, heavy ropes, and large fenders to secure their boats to the wreck and to stay in the area. Such equipment would correspond to the infrastructure that big firms have today to deal with the wrecks. This includes teams of lawyers, lines of credit with banks for such special opportunities, and ample capital structures to absorb the goods in an emergency.

Key to the wrecking business was getting there first. The captain that did so was entitled to orchestrate the wrecking process. This involved setting the shares for all the other boats that were required to help in the process. Divers were critical to the process, too, and in the Allertown wreck they report that the divers who could hold their breath 6 minutes were paid $500 a day versus the $1 a day for those who hauled the proceeds.

This aspect of the business brings back one of my favorite anecdotes from my employees on the floor. One, Mike Desaulniers, who is as fast as lightning, said that during a crisis when prices flew every which-way and spreads were enormous, he was often knocked down, and outrun in the pits by much older and more ruthless participants. Another of my employees, one with a very dear place in my heart, found herself blocked out from participating in crisis situations by a circle of men about 3 times her weight and 25% taller. I am also reminded of Wilt Chamberlain's report that he must have had heard 40,000 people claim to have seen him score 100 points (March 2, 1962, as a Philadelphia Warrior against the New York Knicks) when official attendance for that game was listed at 4,124. I have met hundreds who have told me that they made their entire fortune during the October 1987 or 1997 blowups at the expense of the Palindrome or of others to whom I have been or are close.

One of the key questions I had was what induces a man to risk his life to become a wrecker? The danger is great, as their trade is plied during periods when others have met disaster, the weather conditions are bad, the ships they are plundering are in danger of toppling or burning. It's a 24/7 job and there is immense competition from others sharing a life or death mentality. The answer is incentives. The wreckers received about 25 to 40% of the profits from the goods, the owners got about 25%, and insurance companies another 30%. With about 200 wrecks a year in the 1850s, it was enough to risk life and limb. Almost all the fine houses in Key West, including the Hemingway House, the Washington House, and the Audubon house, and the Taft Museum were built from the profits and, indeed, the wood and pegs of the wrecks.

Studies of the economics of individual companies that are near bankruptcy indicate a persistent tendency for them to underperform. As memorialized in an excellent paper, "A Wrecker's Theory Of Financial Distress," the key finding is that the stocks of distressed companies vastly underperform those of financially healthy firms, because the wreckers and inside controlling interests siphon off much of the profits.

Alas the wrecking business ended in the early 1900s. Indeed, Key West itself went into bankruptcy during the 1930s. The demise was caused by modern technology and light houses and railroads. A business that only receives its revenues sporadically, like buying during panics, is often not as good in the long run as one based on the steady drift of commerce.

I would suggest that whatever the profits available from the business of wrecking during market panics, they are inferior to the buy and hold.

Steve Ellison writes:

One 19th-century Key West preacher reputedly used his elevated pulpit to advantage in spotting wrecks. If he noticed a wreck during the sermon, he would call for the closing hymn and lead the congregation in a processional exit. Once outside, he would dash to the wreck ahead of all the others who were still filing out the doors. 

J. T. Holley recalls:

One of the deceptions Blackbeard would employ on the Coast of North Carolina was causing ship wrecks by raiding the lighthouse and turning the bright light off, then having men on horseback comb the beaches at night or in storms with large lanterns in hand. From afar this would be the direction that the ships would sail — right into the hands of Blackbeard and his men.

Those moving averages and fixed systems are Blackbeard's men! Wreckers that plunder and pillage.

Ken Smith adds:

The movie The Shipping News tells the story of a house once occupied by a family that made their living (killing) by moving fires that were beacons for ships sailing along the coast, some set to enter a nearby harbor. Moving the beacons set the ships on a course to ground on rocks. The family went out like pirates to slay the sailors and steal the cargo.

Great movie starring Kevin Spacey and Judi Dench. The story takes place in Nova Scotia. Bitter, howling winds, icy storms. How could they live there!?

George Zachar replies:

Nova Scotia is physically spectacular, and well-situated for shipping and fishing. Halifax was a major seaport for all of North America in the heyday of sail.

Also, given how apparently widespread the practice of false beacons was, why didn't captains adopt other navigation strategies? 

Stefan Jovanovich adds:

Until the widening of the St. Lawrence, Halifax was the principal seaport for Eastern Canada. It is the site of the greatest man-made disaster (other than a battle) in the history of North America — one for which the people of the city still hold an annual memorial.


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