Investing in the shipping sector has not been for the faint of heart recently. As commodities have lost their luster, so have the industries that are lumped in with them, such as the shippers, the fertilizers, and large industrial mining equipment manufacturers.
These 4 shippers are all Zacks #1 Rank (Strong Buy) stocks: Tsakos Energy & Navigation (TNP), Genco Shipping (GNK), TBS International (TBSI), and Paragon Shipping (PRGN). Yet investors have shown their love by selling off all four stocks.
Tsakos Energy, a crude shipper, is down 17% from its 52-week high. Genco, which ships drybulk cargo, has fallen 35%. Paragon, another drybulk shipper, lost 49%.
It’s more of the same for TBS International, a drybulk shipper that specializes in smaller ships that can service hard to reach ports, as its shares have dropped 58% over the last 52 weeks.
Are These Stocks Like the Titanic?
Coming on the heels of these sharp sell-offs, are the shipping stocks a juicy value play or a value trap? Commodities are suddenly in disfavor and Wall Street fears a greater global slowdown that will likely impact shipping rates and volumes.
Fortunately, all four of these companies recently gave insight into the shipping sector when they reported quarterly earnings. Each one had a great quarter and was bullish about the rest of 2008 as the time charter rates and spot rates continue to rise compared with 2007.
Tsakos Energy Reports a Record Quarter
Tsakos Energy reported second quarter earnings on Aug 1 that easily beat Wall Street estimates by 32%. Net income jumped 84.5% to $69.20 million, or $1.82 per share, from $37.52 million, or 98 cents per share, in the second quarter of 2007. Analysts expected $1.38 per share.
Revenues jumped 36.8% to $146.64 million from $107.22 million in the year ago period as time charter equivalent rates rose to $39,512 per day per ship compared to $30,021 in the second quarter of 2007.
The company said that the spot and period freight rate environment continued to be very strong, as tanker rates averaged levels not seen since the 1970s. However, Tsakos expects global growth to decelerate in the second half of 2008.
Genco Secures 94% of 2008 Fleet
On July 30, Genco reported second quarter earnings that beat Wall Street estimates by 13.37%, or 23 cents per share. Net income was $58.3 million, or $1.95 per share compared to analysts’ estimates of $1.72 per share.
Genco is set for 2008 as it has approximately 94% of the fleet’s available days secured on contracts. Additionally, it has 60% secured in 2009. GNK said it continues to renew vessels at attractive rates and to sign newly acquired vessels to charters prior to delivery.
Like the other shippers, GNK saw its average daily time charter equivalent, or TCE, rates soar by 95% in the quarter to $40,945 per day compared to $21,046 per day for the second quarter of 2007.
TBS International Reports Its Second Record Quarter in a Row
TBS International didn’t just have a great quarter, it had the best quarter in the company’s history. Net income rose 142.4% to $52.6 million, or $1.82 per share, compared to $21.7 million, or 77 cents per share in the second quarter of 2007. Consensus estimates called for $1.63 per share.
Revenues jumped 104.6% to $156.9 million from $76.7 million in the year ago period. Voyage revenues totaled $128.7 million, up 113.1% from $60.4 million in 2007.
Cargo volume increased 52.7% and freight rates rose 37.6%, or $25.06 to $91.79 per ton compared to $66.73 per ton in the 2007 period.
Paragon Shipping Raises its Dividend on a Record Quarter
On Aug 6, PRGN reported a record second quarter as net income for the quarter, excluding non-cash items, was 49 cents per share compared to 45 cents per share in the second quarter of 2007. This was an estimate surprise of 19.51%.
Time charter revenue jumped 196% to $40.6 million from $13.7 million in the second quarter of 2007.
The company is bullish about 2008 as it has already fixed 100% of its fleet for the year. PRGN announced it raised its dividend 14.3% for the second quarter compared to the first as growth looks strong and time charter rates continue to be high.
Do These Companies Sound Down and Out to You?
Obviously, prior quarters are not indicative of future results. But the first six months of the year have been extremely bullish for the shipping sector. Full year estimates are rising on each of these companies and valuations are attractive.
All four trade at under 10x forward earnings. TBS International has a forward P/E of only 4.16.
TNP, GNK and PRGN also pay healthy dividends. Currently, Tsakos is yielding 5.30%, Genco 6.90% and Paragon 11.40%.
Dow components Hewlett-Packard (HPQ) and Home Depot (HD) headline the last official week of second-quarter earnings season. Joining them will be S&P 500 members Gap (GPS), Lowe’s (LOW), Limited (LTD) and Target (TGT).
Overall, we have confirmed reports from 106 companies, 13 of which are in the S&P 500. Retailers will again be prominent, with 40 listed to release results.
There is not much on the economic calendar, though we will get inflation numbers on Tuesday. Key data will include:
• Tuesday: July producer prices (PPI), July housing starts, July building permits
• Wednesday: Weekly crude inventories
• Thursday: July Leading Indicators, August Phili Fed survey, weekly initial jobless claims
• The Kansas City Fed will hold its economic symposium at Jackson Hole, WY. Fed Chairman Fed Ben Bernanke will speak about financial stability on Friday.
• Volume could be modest through Labor Day as traders try to get in late summer vacations. Late August can be tricky for the markets, so be prudent. Oil remains a wildcard and it is hurricane season.
• Companies That Could Issue Positive Earnings Surprises during the Week of Aug 18 – 22
• Aeropostale (ARO) enjoyed a 13% increase in August same-stores sales, at a time when many other retailers were struggling. The strong performance led the teen apparel chain to raise its second-quarter EPS guidance by 5 cents to between 30 and 31 cents per share. Brokerage analysts believe the company will report 31 cents per share. ARO has surprised to the upside for 3 consecutive quarters, so current projections may prove to be conservative. Aeropostale is scheduled to report on Thursday, Aug 21, after the close of trading.
• Discount retailer Ross Stores (ROST) credited bargain-hunting consumers, the stimulus checks and favorable weather for driving July same-store sales 4% higher. Given last month’s good performance, the company believes quarterly profits will total between 53 and 54 cents per share, a slight increase over previous guidance. Revisions by 5 brokerage analysts pushed the consensus earnings estimate 2 cents higher to 54 cents per share. ROST has topped expectations for 3 consecutive quarters. Ross Stores is scheduled to report on Wednesday, Aug 20, before the start of trading.
• Companies That Could Issue Negative Earnings Surprises during the Week of Aug 18 – 22
• Trends were not favorable for Saks (SKS), which experienced a 5.3% drop in August same-store sales. The company observed that business trends worsened as the second quarter progressed and, as a result, brokerage analysts have been steadily lowering their projections. The second-quarter consensus estimate calls for a loss of 18 cents per share, reflecting cuts from a majority of the 7 covering analysts. SKS missed expectations last quarter by a margin of 4 cents per share. Saks is scheduled to report on Tuesday, Aug 19, before the start of trading.
The five best performing stocks on the Zacks #1 Rank List last week were: Hanger Orthopedic Group, Inc. (HGR), The9 Limited (NCTY), Big Lots, Inc. (BIG), Knoll, Inc. (KNL) and Urban Outfitters, Inc. (URBN).
Hanger Orthopedic Group, Inc. (HGR) was a Zacks #1 Rank Top Performer for the week ended Sep 5 as shares gained 6.3%. Earnings estimates for this year and next are up 6.5% and 6.8%, respectively, over the past 2 months.
Furthermore, analysts currently expect next year’s earnings to improve approximately 14.6% from this year, which is an encouraging sign for the future.
HGR, which provides orthotic and prosthetic patient care services, has a habit of meeting or beating Wall Street’s quarterly earnings expectations. Over the past 4 quarters, the company has put together an average surprise of 15%.
Most recently, HGR reported an earnings surprise of 25% in its second quarter, as EPS of 25 cents topped the consensus by a nickel. The result also eclipsed the year-ago result of 17 cents. Net sales increased 13% year over year to $181.2 million from $160.4 million.
Shares of The9 Limited (NCTY), an online game operator and developer in China, gained 5.9% last week. Earnings estimates for this top-performing Zacks #1 Rank company have been trending higher for a while, gaining 10.9% in 2 months and 4.3% in 30 days for this year. Next year’s expectations are also on the rise and have increased 2.6% and 7% for this year and next, respectively.
NCTY has now beaten Wall Street’s quarterly earnings estimates for 3 consecutive quarters. In early August, the company announced that it surprised by more than 27% in the second quarter as EPS reached 61 cents. Meanwhile, net revenues soared 69% year over year to US$66.3 million. Its revenues and net income were both records. NCTY attributed its results to the continuing growth of Blizzard Entertainment®’s World of Warcraft® and Soul of The Ultimate Nation.
Big Lots, Inc. (BIG) reported solid fiscal second-quarter numbers in late August. The closeout retailer also raised its EPS guidance for the full year. Earnings per share from continuing operations reached 32 cents, exceeding the consensus by a little more than 18.5%. BIG has now amassed an average surprise of 17.5%. Net sales advanced 1.9% to approximately $1.1 billion.
Thanks to its solid fiscal second-quarter numbers, BIG raised its 2008 earnings guidance to between $1.90 and $2. Over the past month, earnings estimates are up 5.3% for this fiscal year and 6.5% for next fiscal year. Analysts also expect an EPS improvement of about 8.1% next year over this year. Shares improved by 4.5% last week, which was enough to make the Zacks #1 Rank Top Performers List.
Earnings estimates for Knoll, Inc. (KNL) remain above levels from 2 months ago by 10.5% for this year and 5.6% for next year. The furniture maker made the Zacks #1 Rank Top Performers List last week as shares improved 3.7%. The company has a good record of meeting or beating analysts’ earnings expectations, and has marked a surprise of 11.2% over the past 4 quarters.
The company’s second-quarter report from July included adjusted earnings per share of 49 cents on net sales of $292.5 million. The earnings result topped the consensus by 22.5% while easily improving upon the year-earlier result of 37 cents. Net sales moved higher by 7.5%. KNL attributed results to its diversification strategy that focused on high design content businesses and away from dependence on North American systems sales.
Urban Outfitters, Inc. (URBN) is a Zacks #1 Rank Top Performer as shares gained 2.6% last week. Over the past month, earnings estimates for the fiscal years ending January 2009 and January 2010 are up 8% and 5.9%, respectively. In addition, analysts currently expect next fiscal year’s profit to advance by more than 20% over this fiscal year.
URBN is performing better than most retailers, and enjoyed a boost last week after an analyst offered a favorable view of the fiscal third quarter. The company has put together a solid streak of better-than-expected earnings, and enjoys an average surprise of 12.6% over the past 4 quarters. In its second quarter, URBN reported earnings of 33 cents per share, which topped the consensus by almost 14%. It also marked a solid year-over-year advance from 19 cents.
Sales advanced approximately 30% to $454.3 million. Same-store sales were up 13%.
In spite of the recent selloff in the energy sector, most of these stocks are still trading with big gains on the year.
This stands in sharp contrast to stocks from the financial sector, which have suffered steep losses as big banks have been forced to liquidate assets and raise capital to support their balance sheets.
Because these two groups of stocks have functioned as polar opposites during this stretch, it has provoked many conversations about which is currently the more attractive investment destination; high-flying energy stocks or beaten down financial stocks.
Its All About Earnings
When you take a look at the earnings picture, this argument becomes very one-sided.
Crude prices have recently dipped lower, but they are still very high when compared to historical norms, and this will translate into big earnings for energy companies. We can see this dynamic expressed through analyst estimates.
Encore acquisition Co. (EAC) shares are still trading up sharply on the year in spite of the stocks recent sell off, but estimates have risen in tandem with the stock price, with the current-year estimate advancing to $5.07 per share per share from $3.63 per share 90 days ago. This kind of earnings power provides plenty of fundamental strength for more share appreciation.
The earnings picture on the financial side looks very different. Wachovia Bank Corp.’s (WB) share price is trading at half of its 2008 high, causing many investors to proclaim the stock is “cheap.” But the company just posted a steep loss in its most recent quarter, and analysts are projecting sustained earnings weakness. The current-year estimate is now projecting a loss of $2.15 per share, down from a gain of $1.60 per share, 60 days ago.
Two More Stocks
On that note, lets take a look at two more stocks, one from the energy sector and one from the financial sector.
Apache Corp. (APA) shares are also trading much higher on the year, in spite of the stock’s recent sell off. But once again, this stock has advanced with analyst estimates. The current-year estimate stands at $15.53 per share, up from $13.01 90 days ago. At these levels, this stock looks like a huge bargain, carrying a forward P/E multiple of just 6.8X, a steep discount to the overall market.
Fannie Mae (FNM) shares are trading at just a fraction of the stocks 52-week high after the company was rocked by liquidity issues. These lower prices have generated plenty of interest from investors, but the company’s earning capacities have been severely damaged. The current-year estimate is projecting a loss of $6.01 per share, a steep increase from a loss of $2.02 per share 90 days ago.
Conclusion
Earnings are the most important factor driving share price appreciation. Earnings enable an investor to frame a company’s stock price within the context of actual financial production. Stock prices will always swing wildly, but this in and of itself carries little value. By creating investment strategies that rely upon actual and projected earnings, investors are aligning themselves with companies that have the fundamental strength required to produce long-term gains.
The five best performing stocks on the Zacks #1 Rank List last week were: Terra Industries (TRA), CF Industries Holdings, Inc. (CF), Massey Energy Company (MEE), Innophos Holdings, Inc. (IPHS) and Bucyrus International, Inc. (BUCY).
Earnings estimates for Terra Industries (TRA) have gained 9.2% in two months and 1.4% in the past 7 trading days. In addition, analysts currently expect next year’s EPS to advance approximately 21.2% from this year. Shares of TRA increased 13.6% for the week ended Aug 22, making this fertilizer company one of the top performing Zacks #1 Rank companies.
Despite lower commodity prices, agribusiness remains a hot sector, as evidenced by TRA’s second-quarter report from late July. Fueled by higher selling prices for nitrogen products, the company announced that revenues jumped almost 22% year over year to $843.1 million from $692.5 million. Furthermore, earnings per share easily topped both the consensus and year-ago result. As for the future, TRA believes that strong demand will continue for the rest of this year.
CF Industries Holdings, Inc. (CF) is another fertilizer company that had a strong performance last week. Its stock price has been quite volatile of late, but was able to rise approximately 12% and make the Zacks #1 Rank Top Performers List. Over the past month, earnings estimates for this year moved higher by 24%. Also, analysts currently expect 2009 EPS to be about 26% better than that of 2008.
In its second quarter, CF announced that price increases for all products helped net sales surge to a record $1.16 billion, or 37% better than the previous year. Excluding items, earnings per share of $4.10 marked an EPS surprise of almost 15.2% over the consensus. It also accounted for a solid advance from the year-earlier performance. CF has an excellent record of beating Wall Street’s quarterly earnings expectations, and has amassed an average surprise of almost 29% over the past 4 quarters.
Massey Energy Company (MEE) had a good week ended Aug 22, as shares advanced approximately 10.9%. Investors snagged shares after the company’s price moved lower in reaction to a correction within the commodities markets. MEE also enjoyed a brokerage upgrade during the week. Earnings estimates for this year are up 7.3% in the past month.
Excluding a charge, the company announced second-quarter earnings per share of $1.15 late last month, compared to 43 cents a year earlier. The result bettered the consensus by as much as 42%. In addition, produced coal revenue gained 38% to $710.3 million and produced coal tons sold advanced 8% to 10.8 million.
Innophos Holdings, Inc. (IPHS) announced a strong second quarter in late July, which included an earnings per share surprise of almost 215%. The phosphate producer reported $2.74 per share, while analysts were only expecting 87 cents. The result also reversed a year-ago loss. Meanwhile, selling price increases led to revenue growth of almost 74% to $264 million.
Earnings estimates have been trending higher for IPHS. Expectations for this year are up approximately 146% in two months, which includes a jump of 34% in just the past 7 trading days. The company made the Zacks #1 Rank Top Performers List for last week with a gain of 10.1%. IPHS was also featured for the week ended Aug 1.
Bucyrus International, Inc. (BUCY) reported second-quarter earnings per share of 83 cents in late July, versus the year-earlier result of 40 cents. The result marked an almost 26% surprise over the consensus. Sales rose to $621 million from $374.8 million. The company is enjoying strong demand from its products and services, thanks to high international commodity prices and strong markets for commodities mined by its machines. BUCY also benefited from its acquisition of DBT GmbH last year.
BUCY shares moved higher by 9.7% during the week ended Aug 22, which was enough to put this mining equipment company on the Zacks #1 Rank Top Performers List. Earnings estimates for this year are up 12.5% in the past month. Also, analysts are expecting next year’s earnings per share to improve upon this year’s by as much as 32%.
Changes to the Focus List, particularly positions we close, are rarely the primary theme to this column, but I feel the decision to remove Encore Acquisition (EAC) and EOG Resources (EOG) deserves a detailed explanation.
Yesterday, we removed both stocks from the portfolio to reduce our exposure to the Energy sector. We locked in a six-month profit of about 100% on EAC and a three-month loss of 21% on EOG.
Both stocks continue to look attractive on a fundamental basis. EOG recently reported strong second-quarter results and our oil analyst, Sheraz Mian, continues to recommend the stock as a long-term buy. Estimates are being revised upwards on EAC and, despite its sharp run upwards this year, the stock trades at a discount forward-looking P/E. (Sheraz does not cover EAC).
Our concern was with the price of oil that brokerage analysts were using to forecast future profits for both companies.
As the crude bubble inflated during the first-half of the year, brokerage analysts were forced to constantly adjust their models to reflect the higher prices. This resulted in numerous positive revisions on oil exploration and production (E&P) companies, including EAC and EOG. As long as oil remained above the prices used in the profit models, we had reason to believe that more positive revisions would occur.
We believe brokerage analysts are currently using prices of $110 to $120 per barrel in their profit forecasts for E&P companies. When oil dropped into the $130s, it made sense to use some patience and wait for second-quarter earnings to be released. However, the extended decline into the low $120s gave us reason to rethink the extent of our exposure to the energy sector.
As if on cue, oil rebounded as soon as we made the decision to sell EAC and EOG, closing at $126.77 per barrel yesterday. Nonetheless, we believe that there is more downside risk to oil. Should crude fall to $100 or below, forecasts for several E&P companies could potentially be trimmed.
This said, it is hurricane season. More importantly, many speculators are likely continuing to watch crude prices closely and would add momentum to any upward move. Oil remains in a bubble and bubbles, by their very nature, do not tend to reflect rational valuation decisions.
We still have exposure to the energy sector, particularly with ConocoPhillips (COP) and Petrobras (PBR). Both of these companies have refining operations and are far more diversified than EAC or EOG. They will still be affected by sentiment towards crude prices, but we believe the fluctuations in their earnings forecasts and stock prices will be less than either EAC or EOG.
As I’ve already said, we continue to like EAC and EOG on a fundamental basis. Therefore, we will continue to monitor both stocks and will consider adding them back to Focus List at a later date.
Tuesday’s Fed Meeting
The Fed will hold a one-day meeting on Tuesday, Aug 5. I do not expect any change in interest rates.
The drop in energy prices should allow the Federal Open Market Committee to use wording in its statement that will suggest rates will stay unchanged at the Sep 16 meeting as well.
The Equity Markets
The S&P 500 is trying to rebound from a bottom, but appears to be in a new lower trading range more than anything else. The Stock Trader’s Almanac says that August has been the worst month for the index since 1987. Additionally, the new regulations against naked short-selling will expire in a couple of weeks, so it should be interesting to see how things play out.
Focus List Changes
In addition to removing EAC and EOG, we also sold Western Digital (WDC) from the portfolio. Given falling earnings estimates, we felt the prudent move was to lock in our profit on the stock. The demand for storage is not going away, but the pricing environment seems to be less favorable right now for hard drive manufacturers.
The stock market is acting as if a bottom has been set.
There are reasons to be optimistic. Oil has fallen by more than 20% since early July. The Fed is clearly on hold for a while. Pending home sales unexpectedly rose in June. Even the greenback is doing better.
Unfortunately, bear market rallies can feel a lot like recoveries. Stocks were oversold on a technical basis, so some type of an upward move was expected. Furthermore, the markets did try to make a recovery in response to first-quarter earnings, only to reach new lows instead.
The financial mess continues. An article in Sunday’s Chicago Tribune discussed how lenders are reluctant to rework mortgages unless borrowers fall behind in their payments. Other data suggests that a sizeable number of homeowners with reworked loans are still unable to meet their payment obligations.
Still, stocks have a long history of climbing the proverbial wall of worry.
Could this be another chapter in that story of bulls trampling bears? A case could be made for this scenario, but the reality is that we won’t know until after the fact. Nonetheless, when the market does make a successful recovery, there won’t be much foreshadowing, so it makes sense to maintain an allocation to stocks.
Market Overview
This week, I’m going to do something a little different and display multiple charts to give you an overview of what is happening in the broad financial markets.
In my last article, I discussed how the S&P 500 was trading in a new, lower trading range. The index is attempting to move out of this range, though it is has yet to truly rise above the line of resistance.
Part of the reason for the rebound in stock prices is the drop in crude prices. As I stated above, crude has dropped by more than 20% since early July.
Keep in mind, however, that Texas has already been hit by one hurricane and one tropical storm this summer. Hurricane season lasts through October.
Gold has also fallen notably within recent weeks. Combined with the pullback in crude, this suggests a rotation out of commodities. A reduction in fear and a stronger greenback is likely playing a role, as well.
The VIX has fallen notably over the past four weeks, a sign of reduced fear in the markets. At current levels, the index is within its historical norms.
Treasuries are below the price levels reached in the spring and have been holding a relatively tight trading range throughout the summer. The general consensus that the next move by the Fed will be to raise rates is likely creating a ceiling for bond prices.
Relatively speaking, American large-cap stocks are faring much better than their international counterparts. The MSCI EAFE Index, which includes stocks from Europe, Australia and the Far East, was hit hard in the spring and remains well below stiff resistance.
Last week, I discussed whether we are seeing the start of a recovery or just a bear market rally.
It’s still too early to say if a bottom has been firmly established. However, if we look out over 12 months, U.S. equities seem like they could be the best game in town.
There are several reasons why.
Relative valuation – The S&P 500 currently trades with an earnings yield of about 7%. Conversely, 10-year treasury bonds are yielding about 3.85%. This suggests stocks are more attractive on a valuation basis than long-term treasuries.
Diminished downside risk – During the period of Oct 2007 to July 2008, the Dow fell by about 23%. Such a decline is close to what typical bear markets look like. (Research by Jack Schannep, of TheDowTheory.com, finds that 80% of bear markets have declines of 24% or more.) Although the ongoing credit and economic conditions might cause some more weakness over the short-term, most of the damage has likely already occurred.
Lack of attractive alternatives – The next move by the Fed will be to raise rates, which is bearish for long-term treasuries. The Japanese and European Union economies contracted in the second quarter. Eastern Europe has to contend with a militarily aggressive Russia and Brazil is losing favor because of falling commodities prices. If the U.S. is closer to a recovery than other major economies, than domestic equities should outperform their international peers.
Keep in mind that I’m talking about relative returns. My expectation is that the U.S. markets will remain choppy over the next few months. This said, the outlook for the next 12-18 months does appear brighter, especially since stocks have a tendency to rebound before the economy does.
As I said last week, when the market finally does make a successful recovery, there won’t be much foreshadowing.
Market Overview
The upward move that started in mid-July remains in place.
Tech stocks have made a nice move lately, but do look a bit overbought.
Dow theorists look to the Dow transports as an indicator for where the market is headed. I don’t follow Dow Theory, but I do occasionally look at the chart of the ETF that tracks the Dow Transports to see what it’s doing.
The two-year chart shows the trends better than the one-year chart, but the transports are not providing a clear signal for market direction.
Focus List Updates
CF Industries (CF) is continuing its volatile ways. The odd thing is that the stock’s forward P/E multiple has actually declined throughout the year. All signs point to continued strong demand for fertilizer and earnings estimates continue to be revised upwards, so we’re keeping the stock in the portfolio. But, I do expect more price swings in the stock.
Columbus McKinnion (CMCO) was added to the Focus List. The company manufactures hoists, cranes, conveyors and related products. It was one of many industrial product companies to report good second-quarter results and raise guidance. Plus, it has a low valuation.
Petrobras (PBR) was sold from both the Focus List and the Timely Buys List this week. We expected some near-term weakness, but overall weakness in Brazilian stocks combined with falling oil prices caused a dramatic drop. I continue to like the company’s prospects, but our timing was clearly wrong on PBR.
Our policy is to remove a stock from the Timely Buys List during the middle of the week if the stock is also being sold from the Focus List. This is what happened with PBR this week.
History never repeats exactly. When we look to history for indicators of what the future might bring, we need to take a little of this model and a little of that in order to create a new composite model that is unlike anything that has happened before. This lesson has been forgotten after 20 years of an almost unbroken bull market.
The possibility that we could get a protracted multi-year global bear market and recession is outside the comprehension of most investors. Most floor traders and fund managers today began their careers after 1980, so have no personal experience of the massive inflationary bear market of the 1970s. And when it began in 1966, many of them were not yet born.
Technology Foster Lazy thinking
Since the introduction of stock market software, it has become increasingly fashionable to compare todays stock market patterns with past models, without taking into consideration that what created those particular patterns were not just market related but caused by cultural and political factors as well.
Technology has made our lives infinitely more comfortable. But it is a double-edged sword. The more we rely on technology, the less we think for ourselves. And making informed judgments on the future of securities markets, based on an inner sense that comes from working with market data over many years, has become a lost art. Yet, there are so many factors that affect market behavior that cannot be reduced to a software package or a computer-generated predictive system.
In Europe, where capital preservation is of a higher priority than a quick profit, they are in the habit of taking a view. While they may trade the intermediate and short-term swings of the market, they do it within the context of a multi-year concept of where the world in general economic terms is heading. This creates a difference between the two continents in how bear markets are defined. In America, all bear markets tend to be given equal ranking, with no consideration to the bigger picture. But that limited view is not particularly helpful for the longer term investor, particularly in todays investment climate.
In the last 70 years, there have been two major occasions when taking a view enabled you to see a different, more accurate picture of events, than simply treating every uptrend in the market as a bull market, and every down-leg as a bear. These periods are 1929 to 1942, and from 1966 to 1982. Both periods were times when there were major economic and monetary problems that took well over a decade to resolve. Both periods were mirror images of what we have experienced between 1982 and 2000.
1973 This one was scary! From a high of 1067 in January 1973, the market slid relentlessly down to its final low of 570 in December 1974. Its catalyst was the oil crisis. For the first time in American stock market history, a foreign power, or group of powers, were able to precipitate an economic slowdown. We had entered a new level of globalization after which the world would never be the same.
1977 DJIA fell fairly gradually, though gathering some momentum as it went from just over 1000 in January 1977 to a low of 736 in March 1978. Nothing dramatic caused it; rather more of the same of the past decade: increasing oil prices with dollar stability problems steadily worsening.
1981 This bear snuck up on people. DJIA made a rare quadruple top that convinced most investors it was building strength to break through. DJIA fell from 1025 in April 1981 to a low of 770 in August 1982, or 255 points. A mere 17-month-long bear, it led to a recession which was more severe than the stock market fall would indicate.
1984 Though this is not even considered a bear market by most, it scared a lot of investors because it broke below a giant support area and appeared to be heading back to the 1000 level, whence the bull market of late 1982 and all of 1983 had come. It fell 16%, from 1295 to 1080 in 7 months.
1987 This was a heart-stopper for the very reason that there was no apparent economic reason for it to occur. There were two catastrophic days of multi-hundred point drops, with one of those days being the largest one-day point drop in history. It came about because of computer programming (explained earlier), computer insurance schemes, and the globalization of markets. It was historys first simultaneous global bear market where all major world markets were hit badly at the same time. Australia was among the hardest hit, Japan among the least, but all had considerable damage. DJIA fell from 2747 to 1616 (i.e., 36.1%), in less than 2 months. It took nearly 2 years to surpass its prior high.
1990 This was the direct result of Iraq invading Kuwait, and was halted when the US launched Desert Storm. DJIA declined 17%. Duration: 4 months. This bear market, along with that of 1987 are the shortest bear markets in history.
2000 By October 2001, the Nasdaq was down a whopping 72% though the DJIA was only down around 25%. But most worrying, well before the September 11, 2001 terrorist attack, was that the underlying economic health of the US and most world economies showed increasing signs of weakness. It is already clear that this bear market has damaged the broader economic health of all major economies, more than any other bear market in the last 60 years.
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