Thursday, October 16, 2008


Over the past two years, the S&P 500 index came down 33% and the bank index came down 50%. In the past 3 months the S&P came down 27% and the bank index went up 2%. The turn is being hidden by the talk.

The basic materials sector is down 36.6% in one month! A mother in a crystal shop has given her two year old a hammer. The broad financial sector, which includes mortgage brokers and lenders such as Fannie Mae and Freddie Mac, came down 17.3% in the past month. The KRE bank index came down 15.7%. Down sharply in a month but making the turn represents a buying opportunity.

History remains the best guide. Numbers from the last real estate recession, as made available by Bespoke Investment Group show the following:

In 1990, Financial stocks were 7.5% of the total market value. By 1992 this number had jumped to 10.6% and by 1996 to 15%. The relative bank over performance was 41% in two years and 100% over 6 years; great numbers because the average stock went up during these years.

In 1990, Technology was 6.3% of the total market value. By 1992 this number had fallen to 5.1%. By 1996, it had soared to 12.4%. Right at the turn, financial stocks beat the pants off technology. While financial stocks over performed average by 41%, tech stocks under performed average by 19%. However, after the turn was made, tech stocks over performed average from 1992 to 1996 by 143%!

Energy and basic materials both suffered at the turn and in the years that followed. In 6 years, energy under performed average by 31% and materials under performed average by 19%.

The absolute peaks were as follows: Tech went all the way from 5.1% in 1990 to 29.2% in 1999. In a very strong market, Tech beat the rest of the market by 472%! Of course, the energy bottom and top were opposite of the tech bottom and top. Energy went from 13.4 in 1990 to 5.6% in 1999 and back to 15.3 in July of 2008. The relative performance of the energy sector is partially hidden by the fact that these stocks tend to pay dividends that are many times the average tech dividend.

Consumer staples stocks follow closely behind energy stocks. They peaked one year after energy, in 1991, at 14.5%. Staples bottomed in 1999 at 7.2%. They currently are valued at 12.4% of the total market. Can you see how it is time to be out of the Proctor and Gamble's?

Big gains will soon show up in consumer discretionary stocks, which follow banks. Consumer discretionary stocks hit 13.4% in 2002. In other words, they exploded up just as the manufacturing recession ended. Today, they are down to 8% of the market.


The average household will spend $4,871 less per year as a result of declines in the price of oil! It ain't over yet! People who "cannot afford a new car" will be able to pay for one with their "energy income tax cut".

$4,871 supports loans of $58,000. Incredibly, some folks believe that it will be many years before the public borrows money again. The history of America has been that we get over tough times quickly (all the social programs passed during the great depression delayed that turn). 93% of Americans who want to work are working. Another 2% are drawing pay for not working (not counting retirees). Throw an extra $4,871 into the average family budget and a lot of buying will occur.

Despite the low price of stocks, consumers are not hunkering down in order to buy more stocks. The rational for saving and investing seems to have been lost. Consumers will pay off some credit card debt for a month or two but pockets filled with gasoline savings will be hot pockets by Christmas. The turn continues.