Why I Believe This Panic Is Over

by: Chris Damas
With DJIA up 225 and almost 500 points above its lowest point of 2010, combined with positive participant comments coming out of the Goldman Sachs Basic Materials conference, I declare this panic is over.

I had named it the "Euro Credit Panic". You could also call it the "Fear of Chinese Bubble Panic", "FinReg Panic" or even the "BP Oil Disaster Panic" which is still playing out.

It doesn't matter. I will bet the US stock market will be back above 11,000 within the next few weeks, in anticipation of decent Q2 earnings. I am not so sanguine on oil stocks.

Panics over the past 100 years have lasted 10-30 days and have have usually caused a maximum DJIA intraday high to low loss of 10-20%, followed by, in the case of a Bull Market Panic like this one, a recovery to the previous high within one to three months.

This panic has followed the classic pattern to a tee, had more than one worrying issue for investors and traders, but ultimately, will be shown to be short-term in nature.

Although average, nevertheless, this one has included, as most do, a unique event or aspect. In this case, it was the frightening and still unexplained, "Flash Crash".

The DJIA fell from an intraday 11,258 April 26 high, it experienced panic selling on May 6, May 21, May 25 (it hit an intraday low of 9,774) and again on June 1, with capitulation selling in BP and offshore oil drillers.

The total DJIA loss over the sequence was 13.2% not including dividends, making this an average panic compared to the 100 others over the last century or so. But a Bull Panic such as this one, is always shocking due to its unexpected reversal in investor psychology from optimism to fear.

If you measure this panic with the S&P 500 index, then the loss was 178 points, or 14.7%, not including dividends.

This anxiety creating, headline-grabbing, nerve-wracking, opportunity-creating episode lasted only 25 trading days.

Jim Kramer's bear call (DJIA 8,250) based on a "massive European systemic failure" seems rather nervous.

I suspect Greece will default later this year (I was sure before but the announced asset sales give me heart).

This has already been discounted in the equity market, as have been Spanish and Portuguese credit difficulties.

More importantly, I believe overall global industrial activity and end-consumer demand is better than most think, especially in the USA. The recent global GDP projections report by the OECD is supportive of my view.

I believe in reversion to the mean, and the stimulatory value of currency moves. In this case, the euro decline has had an ameliatory affect on European exports and industrial activity.

I also believe the Chinese property bubble is the garden variety type, and its bursting will have only a transitory effect on the huge multi-year buildout of Chinese infrastructure. For example, $60-100 billion will be required for the upgrade of their electrical power grid.
Over 5 million low income homes must be built for migrants and earthquake victims in the next few years.

The “Headline Risks” that many investment pros are using to explain their cautious posture on equities, are just that – mainly headlines, exaggerated and already discounted.

Self-described contrarians had-- and still have-- a chance to prove their mettle here, and buy stocks (see our picks in previous Seeking Alpha blogs).

These include Potlach Corp REIT (NASDAQ:PCH), Plum Creek Timber REIT (NYSE:PCL) , CF Industries (NYSE:CF) and The Mosaic Company (NYSE:MOS), and these were all up nicely today.

We have also bought MaCarthur Coal in Australia recently, which was subject to a 16.00 AUD takeover bid before the crisis, and is now on sale at 11.50 AUD.
This is not to say the BP Oil Disaster is not an ongoing problem for the energy sector. Here is what we said about the situation in our blog How the Market Functions as a Sifting Machine written on May 25th:
“The oil leak disaster in the Gulf of Mexico will soon be seen to be the proverbial "straw that broke the camel's back" for the oil industry.”

Although the media are ascribing the rally on Wednesday to the 6% increase in April Pending Home Sales, I would say this is unlikely, as they resulted from a tax credit which has already expired. Lumber futures failed to rally as evidence.

Positive comments on current and future orders by major US industrial companies at the Goldman Sachs Basic Materials conference yesterday morning are what I think caused the big rally, especially if it extends itself on Thursday with Day 2 populated by major fertilizer companies.

Here's a sample from three of Wednesday morning's presenters:
”Demand is good. China is robust. When I go to Wall Street, it is like the sky is falling.”
Andrew Liveris, Chairman and CEO of Dow Chemical
“I feel good about commodity chemicals – volumes are improving. Price increases for chlorine and chloralkali”
“China is the biggest coatings market in the world, 20% bigger than Europe and 50% bigger than the USA, and up 40% year over year, still growing”
Robert Dellinger, SVP and CFO, PPG Industries
“Dealing with (European credit) headlines for quite awhile now, and so far there has been no impact on paper or packaging. We are a short order cycle business and there is no sign of any problems”
“We have a converting and industrial packaging business in Spain and they are having a great year”
Tim Nicholls, CFO, International Paper
Is it so unusual the DJIA was up 69 points to 10,093 Wednesday morning, confounding technical analysts?
Having said that, we believe the energy sector is still a weak spot and there was more panic selling action in the market Tuesday, centred on Oil Leak Ground Zero i.e. British Petroleum (NYSE:BP), JV partner Anadarko (NYSE:APC), and Transocean (NYSE:RIG) the owner and operator of the Deepwater Horizon rig that blew up on April 20th.

Just about all US offshore oil service company stocks were thrown out with the bathwater - Noble Corp (NYSE:NE), Halliburton (NYSE:HAL), Schlumberger, etc.
The BP oil disaster has caused the market to get busy sifting out and seperating the offshore driller stocks versus the domestic OnLand producers that will stand to benefit from eventual higher crude oil prices.

Companies such as Pioneer Drilling (NYSE:PXD) which produces mainly domestic crude onland (they have some offshore South Africa) might see a boost in demand if energy gets tight in the SE USA, as well demand for their shares while competitors such as Anadarko are panned.
In Canada, Suncor (NYSE:SU), Husky Energy [HSE.TO] and Nexen Inc (NXY), are vulnerable to higher scrutiny and higher operating costs, in their offshore Eastern Canada and North Sea operations respectively.
Another interesting sidebar to the oil leak is that some big reinsurance companies may benefit from the higher cost of insuring drilling rigs and other oil-related equipment - Berkshire Hathaway (NYSE:BRK.B) comes to mind. Anyone but the company that insured that rig.

Typically, the leaders out of a panic were those most beat up in the panic. Include the oil producers and oil service drillers in that category, all up Wednesday. But they will not be the leaders from here.
Disclosure: Long US equities and REITs and Canadian equities and REITs.