Bear market? How will it affect your company?

[Wes Bucey]

This may seem an esoteric topic for a Quality Forum, but consider what happens to publicly held corporations when their stocks get hammered in a bear market. Now consider what happens downstream to the mom and pop small businesses in the supply chains of those big public companies.

We have seen the ramifications for the supply chain when the domestic automotive market goes through a rough patch. What will happen when many more companies undergo similar stress?

My suspicion is credit rates will climb and become MUCH tighter, crippling the ability of companies to store inventory or make large bulk purchases of raw materials.

With equity markets down and interest rates up, companies will curtail capital investments of new and more efficient equipment simply because they can't swing the deal, regardless of how much improvement they project.

Companies in bear markets do as the automotive sector has been doing for the past few years - pare payrolls and put more stress on surviving employees. The airline industry pared payrolls and mothballed airplanes, parking them in deserts throughout the world.

The worst part of this is nobody knows how low a bear market will go, so speculators are afraid to buy "bargains" only to find the price keeps dropping and they are saddled with losers.

The ensuing panic only works to the benefit of religions, psychiatrists, and other necromancers who hold out hope of helping people make sense of the chaos.

If we, as individuals, tighten OUR belts by deferring big ticket purchases, then we contribute to the shrinking markets and companies are forced to slash prices to obtain cash, even to the point of taking a real loss just to have cash for ongoing operations.

I wish I had meaningful advice on how to protect yourself, but I don't, YET! Do you have any strategies to ride out the coming storm?

Global equity meltdown costs investors $2 trillion
Tuesday June 13, 5:27 PM EDT
By Chris Sanders

NEW YORK (Reuters) - The month-long slide in global stocks has wiped out at least $2 trillion in wealth, leaving investors few alternatives to preserve their holdings aside from bonds and money markets.

Investors have been dumping stocks, commodities and emerging market assets on growing concerns that economic growth will suffer from higher inflation and interest rates.

"It is essentially one consistent story worldwide, starting here in the U.S. There is a fear that the Fed's repeated commitment to limiting inflation demonstrates a willingness to risk economic activity," said Christopher Low, chief economist at FTN Financial in New York.

Stock markets have been punished since the U.S. Federal Reserve raised interest rates for 16th time in a row on May 10 and issued a hawkish statement saying it may need to do so again to fight inflation. Investors had expected some sign of an end to the tightening cycle.

Global markets have suffered since, and strategists show little agreement about how deep and how long the sell-off will go. Bonds have been the most direct beneficiary of the equities route, with benchmark U.S. 10-year Treasuries staging their longest rally of the year since mid-May.

MARKETS FALL INTO THE RED ON THE YEAR
The Dow Jones industrial average <.DJI> is off 8.2 percent since mid-May and as of Tuesday's close had erased its gain for the year. The Nasdaq Composite Index <.IXIC> is off 12.75 percent from its high for the year on April 19 and the Standard & Poor's 500 Index <.SPX> has fallen by nearly 8 percent from its May peaks.

On Tuesday, Tokyo's Nikkei average booked its biggest one-day percentage fall in two years, tumbling 4.14 percent, wiping out more than 16.56 trillion yen ($145 billion) in market value from the Tokyo Stock Exchange's first section. It was the biggest one-day point drop since immediately after the September 11, 2001, attacks on New York and Washington.

In Europe, the FTSEurofirst 300 <.FTEU3> index of top European shares has fallen about 11 percent since May 11. The index finished at 1,238.5 points on Tuesday, its lowest closing level since November 30.

Since its year high hit in early May, the MSCI World Index <.MSCIWO> of global stocks has lost $1.9 trillion in market capitalization, nearly 12 percent of its value and more than the economic output of the United Kingdom.

The index compiled by MSCI Barra does not account for all global stocks, meaning the total amount of lost wealth is greater still.

As global central banks in Europe and United States have raised interest rates to cool inflation, investors are aggressively slashing their exposure to emerging markets as well.

OUTFLOWS FROM EQUITIES
Investors pulled out about $8.5 billion from emerging equities in the three weeks ending June 8, according to data from EmergingPortfolio.com Funds research. The benchmark MSCI emerging market stock index <.MSCIEF> has lost about 24 percent since May 10.

"We've seen a lot of panic selling by people who have gotten into emerging markets and commodities later in the game -- pessimism is high," said Scott Wren, a senior equity strategist with A.G. Edwards & Sons. "People are sitting on a lot of cash and are afraid to get back in the market."

Given the drop-off markets, analysts said investors should now seek quality.

Tom McManus, chief investment strategist with Banc of America Securities said investors should look at "the bonds of the stock market. Steady companies with strong earnings and geographic diversification."
These shares have been out of favor since about 1998, he added, and are the kind of companies Warren Buffett has been known to own -- companies with top-quality balance sheets and diversified earnings streams.

Shares held by Buffett include Coca Cola Co. (KO), American Express Co. (AXP), Wal-Mart Stores Inc. (WMT), Wells Fargo & Co. (WFC) and Anheuser-Busch (BUD). Each of these has retained their gains even as the S&P 500 has erased its advance and now stands 2 percent lower on the year.

The global sell-off, however, is not over and may only be just starting, according to JPMorgan Chase & Co.'s global equity strategist Abhijit Chakrabortti.

"This is nothing compared with what we may see late in the summer and early October -- once slower growth finally sinks in and expectations for higher benchmark rates, at 6 percent or even more, come out," Chakrabortti told the Reuters Investment Outlook Summit in New York.
"Sectors most dependent on growth and the companies most dependent on volume and price declines, which also includes tech companies, should be avoided," he said.

"We like the big telecom providers such as Verizon (VZ) and AT&T (T), as well as Colgate (CL)," he added. All three have soundly outperformed the market this year, gaining 4.75 percent, 10.3 percent and 12 percent, respectively.

Among U.S. mutual funds, investors pulled only $1.9 billion out of equity funds in the week that ended June 7, not a huge amount compared with outflows of $7.1 billion during the previous week, research firm TrimTabs reported late last week.

At Boston-based Fidelity Investments, the world's biggest mutual fund company, "we have not noticed unusual activity during the past several days but we had strong money market inflows in May," said Vincent Loporchio, a spokesman.

(Additional reporting by Ros Krasny, Vivianne Rodrigues, Chris Reese and Svea Herbst-Bayliss in Boston)

©2005 Reuters Limited.

 

[Marc]

So - How will the housing market in the US play into this?

And - How do you see gold or silver?

 

[Wes Bucey]

So - How will the housing market in the US play into this?

Prices will drop as mortgage rates climb. Some housing markets where industry has failed in small town areas (like Danville, Illinois) are already dropping through the floor. I saw one house in such a town (6 bedrooms, 3 car garage, in-ground pool, all brick, new commercial-style kitchen, etc., etc.) for less than what a 60 year old 900 sq ft 2 bedroom, 1 bath, no garage frame house sells in my town.

And - How do you see gold or silver?

If you can afford to tie up cash, buy only bullion, not mining stocks or other indirect investment routes. Most gold bugs keep a stash of gold coins in a safety deposit box and maintain bullion deposits in specialist banks that certify the bullion is legit so you don't need a chemical analysis to sell it.

Plainly and simply, cash will always be king. Don't chase risky bonds or "depository receipts" for the high interest - use money market accounts.

Next question that I do NOT know answer to is "Dollars or Euros?" Dollars have certainly taken a beating against the Euro. Heck, even some South American currencies are gaining value on the dollar!

 

[apestate]

Very interesting posts, Wes.

It seems to my young mind that market is constantly in flux. I mean, day-trading?

What is the benefit of all this activity? Isn't the market flux just a symptom of greed...

 

[Wes Bucey]

Very interesting posts, Wes.

It seems to my young mind that market is constantly in flux. I mean, day-trading?

What is the benefit of all this activity? Isn't the market flux just a symptom of greed...

Here's the deal: Day traders and speculators perform the MOST VALUABLE SERVICE for stock markets - their activity is what provides liquidity of stock investments. Market specialists and speculators and even greedy little day traders operating in their underwear in their mom's bedroom are the ones who will BUY your stock any time you need or want to sell it. Similarly, they will SELL when you want to buy. They make their main profits on the spread between bid and asked prices, only occasionally making a windfall profit when a stock makes a major swing in their favor, but just as often taking a loss if the market swings the wrong way for them.

If you are an INVESTOR, rather than a speculator, you should be buying the stock because you think future events will be beneficial for the company issuing that stock. Similarly, you need the courage and intestinal fortitude to sell when you think a combination of events will be adverse for that company.

It's not my intent to take anyone to school on investing and certainly not to tout or pan any particular stock by name. As quality professionals, it is important to keep in mind that stock market TRENDS rather than day-to-day fluctuation are what affect the actual operation of a company. Think of the analogy of the normal variation when plotting SPC, only raising concern when the TREND changes.

It's my contention we ARE in a bear trend, combined with mild inflation. If the guys running the federal reserve make a slip, the trend could accelerate, similar to what can happen when an operator is unaware his machine is trending toward an out of control status. Think of a loose nut, which, unattended, vibrates off completely, resulting not only in nonconforming product, but possibly catastrophic damage to the machine.

 

[Atul Khandekar]

I'm not an expert or anything in these matters, but In India too, we are seeing the stock markets fall every day- after rising sharply to record heights in a very short period of time. (And for a change there are no signs of any scam.) Some say this is just an adjustment/correction in stock valuation. Same is the case with gold prices. Property prices have risen dramatically too.

Do you think all this points to a slump /slowdown (or even recession) in the economy?

 

[Wes Bucey]

I'm not an expert or anything in these matters, but In India too, we are seeing the stock markets fall every day- after rising sharply to record heights in a very short period of time. (And for a change there are no signs of any scam.) Some say this is just an adjustment/correction in stock valuation. Same is the case with gold prices. Property prices have risen dramatically too.

Do you think all this points to a slump /slowdown (or even recession) in the economy?

For the scifi buffs (Asimov's Foundation series), I am not Harry Seldon. (Harry Seldon, a mathematician who has discovered a way to predict the future. It is a new science that he calls "psychohistory.")

Here's what I do know:
Emotion, more than fundamental economics, are driving the current bear market. Emotion rides on the uncertainty of political conditions throughout the world because ALL markets are global now. Uncertainty is thrown into the mix by wild cards of health of leaders, sex escapades of first tier advisors to governments, wild-eyed fanatics engaging in terrorist acts, criminal syndicates taking over spamming and computer virus generation for PROFIT, not fun. The end result is the very folks who are supposed to assure a smooth flow of safe commerce are "distracted." When a combination of separate and unconnected distractions occur, they gain a certain synergy and generate more uncertainty as folks wonder how they will react to their small crises.

When Deming talks about the Theory of Profound Knowledge, in part he is talking about pervasive knowledge throughout ALL organizations playing a large part in eliminating that uncertainty about how events will unfold. It isn't hard to imagine panic scenarios (we have ample precedents throughout history) simply because people make decisions based on skimpy information. With full information, folks can make informed decisions in running a FMEA (Failure Mode & Effects Analysis) on the operation of the business, not just a single process within the business.

It's slightly more difficult to imagine scenarios where current economic conditions are a very minor blip and market stability returns within six weeks. The difficulty comes because each new day brings news of another company which eschews WIN-WIN relations with its employees, customers, and suppliers in favor of WIN-LOSE to massage the ego of a greedy fool at the helm. The fallout from just one fool extends up and down the supply chain.

When most folks do a "what if . . ." analysis, blank spaces (uncertainty) are usually filled with disaster scenarios. Even Shakespeare understood this when he wrote, "aye, there's the rub" and continuing on to write
"And makes us rather bear those ills we have
Than fly to others that we know not of?"

 

[apestate]

Would you rather have one share of Google or one troy ounce of gold?

When I see business stock market news and economic trading, due to a lack of knowledge of economics, the perception is that the entire thing is an overly active, excitable game.

There can be no question of the trade's existence, it's simply an intrinsic matter of free market. I question the activity of the trade in the spirit of no confidence.

The entire world market of ownership is more or less tied together in its activity. It is almost universally fast or slow, priced high or low. There can be one simple, common fundamental that ties the world market together in this way, it is greed.

People make trades to get more money. There is a degree of separation in the ownership of corporations, and the ownership is accountable on a quarterly basis to the perception of a mob. I do not understand how a trader who is interested in serving his portfolio can help a business attain its goals for the better of the world.

So, it seems to me that when businesses are leaning on their market offering for strategic amounts of capital, they are stupidly too fast and too greedy. I should hope there is a sustainable way to raise the kind of strategic capital a business needs to move quickly, instead of offering up ownership to this public.

I don't know what all this means, I think it's an excellent topic and it's very interesting, Wes. I am very curious how a market slowing or selling would affect businesses around the world, and what is the strategy that is in motion now as far as the stock market is concerned.

Is there a way to figure how many businesses in the US could be bought by their employees?

 

[apestate]

Good post, Wes. I liked reading the Seldon reference in regard the psychology that is active in the world and the market.

I think we cannot keep moving so quickly or support a system that does not engender sustainability.

 

[Wes Bucey]

I'm NOT a gold bug. In fact, gold has taken a dive in value in the last month.

I don't give public comment on individual stocks as investment vehicles - hence no comment on Google.

There is a vehicle for purchase of companies by employees (an ESOP - Employee Stock Ownership Plan - Google the term.) Employees can certainly try to organize to take over a company, but current owners may not want to sell (psychology) and hostile takeovers can be ruinous for everyone concerned.

The entire world market of ownership is more or less tied together in its activity. It is almost universally fast or slow, priced high or low. There can be one simple, common fundamental that ties the world market together in this way, it is greed.

People make trades to get more money. There is a degree of separation in the ownership of corporations, and the ownership is accountable on a quarterly basis to the perception of a mob. I do not understand how a trader who is interested in serving his portfolio can help a business attain its goals for the better of the world.

So, it seems to me that when businesses are leaning on their market offering for strategic amounts of capital, they are stupidly too fast and too greedy. I should hope there is a sustainable way to raise the kind of strategic capital a business needs to move quickly, instead of offering up ownership to this public.

I don't know what all this means, I think it's an excellent topic and it's very interesting, Wes. I am very curious how a market slowing or selling would affect businesses around the world, and what is the strategy that is in motion now as far as the stock market is concerned.

I don't agree on greed as the driving force (call me Pollyanna!)

Greed certainly plays a part for some people, but there is a wide range of emotions which which enter into play, otherwise charities and churches wouldn't exist.

The primary problem is people do allow their emotions, rather than their intellects, to dictate decisions where the emotion may lead them into detrimental situations for themselves, their families and the network of people and companies which depend on them for survival.

Think of the analogy of a drunk. His addiction to alcohol affects not only him, but his family, his friends and former friends, his employer, the stores from which he purchases (or not purchases) products ranging from alcohol to food to autos to clothes, whether he maintains his real property or not, which affects the property value of his neighbors, and so on and so on.

So if a company leader makes a knee jerk reaction when his stock starts to tank, who can say whether it will be beneficial or ruinous (Enron?)