There have been many, many market panics over history. Last week's plunge in global markets has all the earmarks of a classic Panic, which will be quickly reversed and provides a buying opportunity.
It is likely market history books will be dubbing it the "Greek Panic" but since Greece is only the catalyst for a broader eurozone confidence problem, I would like to call it the "Club Med Panic" or the "Euro Credit Panic". I prefer the latter, because it would appear fewer Europeans will be at Club Med this summer.
I wrote the guts of the following comments on Friday night, and see at this time (late Sunday evening EST) the Euro Cavalry is coming to the rescue and the S&P500 June futures are up over 20 points.In his excellent book "Panic Profits" written in 1994, John Dennis Brown itemizes and describes 94 US market panics that occurred between 1890 and 1990.
How do I know this is a panic?
I believe the US stock market in particular has been behind the curve on the Greek problem, which has been brewing all year. The media is now running full blown specials on the subject, whereas in March and even lately, all they fixated on was Goldman Sachs (NYSE:GS).
The April jobs numbers with 290,000 in non-farm payrolls in the US today were something to cheer about. Normally that would have meant a rally. These newly employed will be buying houses and furniture, or for the pessimists, able to perhaps avoid foreclosure.
Interest rates have actually gone way down again since the crisis has been brewing and 3.50% 10 year government bond yields in the US and Canada make quality dividend-paying stocks, such as Plum Creek Timber REIT (NYSE:PCL
) and BCE (NYSE:BCE
), very attractive. We continue to trade these issues as we wait for signs the absolute depths of the panic have occurred.
Panics are more frequent than Bear markets, occurring on average one per year but they do tend to group together. In 1907 and 1994 there were several panic drops in one year associated with unexpected events.
Panics hit in both Bull and Bear periods although they have a different quality in each sequence.
In the current case, the Euro Credit Panic hit during a Bull market so its character is one of shock. In February of 2009, the downturn, final as it was in hindsight, had people numb due to the prior setbacks, and so the character of the panic was chronic pessimism, not shock.
Panics are always unexpected and are thus frightening.
And they disappear just as quickly. Meaning they are an opportunity to make money for those who have cash on the sidelines or are prescient enough to cut their positions at the beginning of the panic, remain stalwart, and buy back at the worst points.
Panics last an average 20 trading days (e.g. a month), some as little as 10 days (for example, during the assassination of a public figure), some 25, but never more than 30 days. Because the fears and uncertainties are so overblown during a panic, reality is never as bad as thought and no allowance for improving efforts is made. People in Europe will continue to buy things, use tissue and paper, lumber, etc.
I mention these products as we are overweight Canadian forest product stocks (Canfor Pulp (OTC:CFPUF
), Canexus Income Fund (OTCPK:CXUSF
), Interfor, SFK Pulp (SFKUF.PK), Tembec (OTCPK:TMBCF
Ditto for the British who in spite of the hung parliament, will continue to require the products our companies make.
The deterioration into panic is always very fast. We saw that last week. However, the one day plunge last Thursday does not in itself constitute an entire panic, but was rather one part of the typical panic anatomy.
In our Euro Credit Panic, the anatomy included an extra twist because some "fat-fingered" trader apparently hit the adjacent "B" key rather than the "M" key for a million, and therefore placed an excessive sale order for Procter & Gamble (NYSE:PG
) stock. The computers exacerbated the selling rather than checks and balances. “Rise of the Machines” indeed.
As Panic Profits calculates, the average Panic drop from beginning to nadir is between 10-20% of the prior high. If it is more than 20% that means there are underlying fundamental problems which could begin a Bear Market.
The DJIA has so far dropped 878 points since the high on April 26. That’s a drop of 8% and it took 9 trading days.
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Notice the high volume in the past 2 days. Bob Pisani on CNBC said the Thursday plunge recorded 11 billion shares traded on the consolidated NYSE. I know from plotting volumes during the October 2008 plunge, that 11 billion is a pretty high number, symptomatic of panics, which always occur on high volumes at nadirs (capitulation selling).
The Thursday plunge was somewhat constructive because it wiped out some of the over-leveraged and cleaned out some day traders. However, the recovery was so fast, it really did not accomplish what the 1987 Panic did.
(Post Script - The Thursday Plunge did seem to focus world leader attention on the immediate market danger and has rallied the euro finance ministers and IMF into providing this 600 million euro funding package Sunday evening).
Judging from past history recorded by Panic Profits, we can expect at least another 2% decline on the DJIA, and possibly as much as 12%, over the next 1 to 11 trading days.
The good news is, and as the Panic Profits book very clearly details, if you buy a panic you will make money, and quickly. My personal experience is that you should not overbuy, because the recovery from a panic can be bumpy, and you can easily get knocked out of your position if you get overextended. So buy cheap, but also buy modestly. The gains will be outsized.
We bought Canadian REITs such as Calloway, and Telecoms such as BCE on Thursday during the plunge. But we sold these at the close on Friday in case another leg of the panic were to come down at the opening Monday.
Although more illiquid issues were absolutely hammered and looked tempting, we bought high quality, liquid issues so we would not be knocked out of positions if another "bad day" were to occur before the panic recovery.
Brown shows the average reflex DJIA gain from absolute lows for all the panics in the 100 years he studied them was 11.5% in a month, 16.2% within two months, and 22% after three months.
However, bull market panics, such as the one we have right now, provide a three month average gain of 29.3%.
You don't have to catch the low Brown shows, and it is hard to do, as the intraday Dow only ranges within 1.5% of the absolute low for as little as 1 day, and at the most, a dozen days.
My guess is the DJIA will rally (in a sustained way) by the end of next week, perhaps after it hits the low set around 9,900 last Thursday.
So Greece defaults, and takes down a bank or two in Europe, that is unquestionably nasty stuff and a lot of euros are going to be printed to mend their balance sheets; how does that affect us? Not that much.
It means the euro will decline and European profits will face a headwind. It means US companies will have more competition selling into China. But overall, it is hardly a reason to dump all your US stocks, permanently.
I really thought the market should have reacted in panic mode a month ago when Greek debt maturities were due April 22. So I became a little complacent as I felt the market had discounted the worst, and we held stocks into the panic Thursday. Little did I know, the market had just been asleep and had not properly discounted the risks to the system Greece represented.
We will hold stocks and buy back names we sold when the panic gained momentum last week.
Disclosure: Long Canadian stocks, and US REIT trading positions