Bull & Bear Markets of Metals,
Financials, Energy & Tech, Stocks
1938 to 2008
15 September 2008
There is no denying it. Since March of 2008, gold, silver and the mining shares have seen losses, but are comfortably within their 70 year bull & bear market trading range. Considering the hi-jinx that occurs in the metals futures markets, it is remarkable how well the major gold and base metal mining companies have withstood the drop in metal prices. But note in the below charts how government bailouts have not prevented the financial companies from suffering their greatest losses since 1938. As my charts below show, mining, oil and tech stocks have outperformed the financial stocks in the current market downtrend by a significant margin.
The difficulties these financial companies find themselves in are self-inflicted and intractable. There are just no good solutions for them or their clients' problems. When financial assets in the amount of hundreds of billions of dollars become non-performing liabilities, government liquidity injections or other schemes will not make good what is bad in finance.
Interest-bearing financial assets are the largest segment in the US money supply. These assets consist of mortgages created by Fannie, Freddie and the debts created by commercial and investment banking system via loans. Managers of other people's money: central banks, insurance companies, pension funds, etc. depend upon these assets (interest bearing debt) for their reserves.
The Federal Reserve and US Treasury are resolved to postpone deflationary mass debt defaults which would result in a dollar for dollar deflation in the world's balance sheets. They do this because each default reduces the US money supply on a dollar for dollar basis. But this scheme will not rescue the shareholder of the companies that created these problematic assets. As it looks now, the actions from Washington are not saving the investors of insurance companies either. As shown below, insurance companies, once one of the safest investments, are sinking to seventy year lows in their share prices. Considering the current problems with financial paper (which is the life's blood of insurance companies) will insurance companies soon have problems making good their obligations to policy holders? I expect that investments in financial companies, even from these current depressed levels, will prove to be hazardous.
Metal and the companies that mine for new supplies of metal are in a completely different situation. In an era where an unexpected news bulletin can devastate foreign exchange rates or an entire paper asset class in an instant, metal and the companies that mine metal will eventually be seen in a new light. Copper, gold and silver have an intrinsic value independent of the currencies they have traded in. It has been this way for thousands of years. Historically gold, silver and copper have functioned as money in of themselves. The same can now be said of crude oil. But my charts and table that follow tell the tale better than I can with text.
For new readers I am including an explanation of my data and charting. If you have read my previous articles using “Bear's Eye View” or BEV charting, you may want to jump directly down to the BEV charts and table.
All of my data are from the pages of Barron's except for gold and silver prices from 1969 to 1975 which came courtesy of ShareLynx. The Barron's Gold Mining Index has been continuously published since 1938 and is unaltered. Data for the other stock price series is from the now discontinued “Barron's Stock Averages” which were published from 1938 to 1988. From 1988 to Barron's 15 September 2008 issue I used the Dow Jones Total Market Indexes. The two data series were coupled with an adjustment factor from 1988 to present.
The resulting data sets would be as if I were to take the 30 company average Dow Jones Industrials from 1938 to 1988 and couple it to the 500 stock Index Standard & Poor's 500 from 1988 to 2008. See the chart below for how well my data matches an old “Average” with a new “Index.”
The match is not perfect but these metrics themselves change with time. The companies that make up the Dow Jones Industrials and S&P 500 in 1988 are not the same as those of 2008.
As office equipment from the 1930s included mainframe computer manufactures like IBM and Burroughs, I used the Technology Index from the Dow Jones Total Market Indexes as filler from 1988 to 2008. The financial, integrated oil producers and non-ferrous mining stocks had exact matches with the current Dow Jones Indexes. Metals prices have a long history of government price controls during the 20th Century. So my starting date for the metals charts is from the 02 June 1969 issue of Barron's as from that date, price variations in gold and silver became a weekly event. Copper had a few more years to wait until it too traded freely as can be seen in the copper chart.
The charts weekly data points are derived from the following formula:
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(Highest Weekly Closing Price of the Past Six Years) -1
This formula reduces each new 6-year high price to a zero value in the chart. Any weekly closing price that is not a new 6-year high is represented as a negative percentage from its last 6-year high. So bull markets are seen as a series of zeros clumped together on the top of the chart while bear markets are seen in negative percentage terms from their last 6-year high price. I call this method “The Bear's Eye View” or BEV charting. BEV charts examine bear markets and corrections within bull markets in percentage terms.
BEV is a different way of looking at historical data and at first is confusing. But for charts that span decades, the effect of monetary inflation has made decades of published data useless when charted as is. To show the difficulty of charting a historical series that spans decades, I have two charts below of the integrated oil producers. The first using data as published in Barron's and a second chart using the same data with my BEV technique.
The above chart offers little usable information until after the crash of 1987 which is almost invisible in the above as published chart. My BEV chart below provides specific information on both bull and bear markets in the oil stocks since 1938 that allows for direct performance comparison of the oil majors from decade to decade.
With the BEV chart we see that oil stocks were down by 43% in World War Two and 50% forty years later in 1982 when oil sold for $10 a bbl. The crash of 1987 drove down the oil shares down 31%. These precise details, separated by decades, are not apparent in a chart plotting the data as published. Crude oil may be down, but my BEV chart clearly shows that these companies' shares are priced well within their 70-year bull and bear market trading range.
Historically, non-ferrous, gold mining and steel production are industries of extreme share price changes. But the current distress in the metals markets is not driving share prices anywhere near to historic low prices. But these shares have always provided a wild ride for their owners. All and all, I see these charts indicating resilience in the mining and steel production during out present difficult economic environment. After a bounce they could be a buy.
Gold and copper are down but not out. Silver is having problems but the current price of silver at ten dollars and change is suspicious. Searching the internet for silver eagle bullion coins prices, it is apparent that many silver dealers are not selling silver at these low prices. My chart's data is from Handy & Harman. One has to wonder how much silver is entering and leaving the H&H refinery at their published price.
Besides Fannie and Freddie, banks and insurance companies are the largest sectors in the financial stock sector. Both bank and insurance stocks have recently visited lows not seen since 1938 but banks have recovered some. The table below gives the specifics. Normally, such low levels would offer tremendous values for investors, assuming the companies survive. Will these companies survive? That is the question. There're just too many issues that have yet to be resolved concerning the debt market and the US dollar. When a stock sector whose business is vital to the economy crashes down over 70% it's usually safe to assume that the risk of losing money has been minimized. But not always! The wise course of action would be to wait until the white flag of surrender is waved over the Federal Reserve and we see if any gold is left inside of Fort Knox. Until then there is just too much bad news yet to come to take a chance on these companies.
The tech stocks have had a great run since 2002. But from 2000 to 2002 they fell 77.25%. To be sure there are those thinking the financial shares will do something similar. Will the techs continue to outperform the market in the future? They might, but personally I prefer the metals and energy sectors.
The following table gives a summary of pertinent factors in the above BEV charts.
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