Professor Elam

Weekend Sept  27, 2015

Bad News Bears

In bull markets, all news turns out positive.

In bear markets, bad news tends to be, well, really bad.

The classic example of news in a bull market is the Clinton Presidency.  Whether the Republicans took over the House and Senate or the revelations of Monica, Bill seemed Teflon coated, nothing stuck. The reason was no so much Bill as the fact that positive social mood makes politicians appear successful. And so the stock market and Bill enjoyed a bull run.

Bear markets however work the other way.  Bad news sticks, the Teflon coating is gone, and events going black turn, well, turn pitch black.  I have received some negative feedback over my claim that stocks are transiting to a bear market. A weekly close under the August 24 levels will confirm just that. The Dow Industrials are a mere 500 Dow points from that level now. 

Here are a few items in the news illustrating the ‘bearish’ effects of recent news events.

Volkswagen wanted to be the largest carmaker in the world. (The recent experience of GM and then Toyota wishing the same thing should have suggested otherwise but this was a decision made in the bull market.) VW chose diesel engines as the tonic for low emissions rather than hybrid or turbo-charged gasoline engines. And so VW gleefully claimed 44 mpg while meeting worldwide emissions requirements.

Now here is the bad news.  VW has admitted installing devices, which ‘sense’ when testing occurs. After that is concluded the device turns the emissions system off resulting more pollution and more power.  In the period of three days

-VW stock dropped 18% the first day of the announcement and is now half what it was in May

-CEO Winterkorn, like Captain Renault in Casablanca, announces shock that this could occur at
VW, he resigns two days later

-First the US and then France and South Korea announce investigations, read fines are coming

-No one knows the cost of a ‘fix’

Stakeholders like new dealers hoping for VW expansion and now diesel car owners (we’ve been had!) are the latest casualties

The US Government is somewhat complicit in this. Tuning for lower emissions results in higher nitrides of oxygen output, one cannot have it both ways.   It may be that VW will be the first to be singled out for trying to cheat its way to success.

Any short list of top US CEOs would surely include Steve Wynn. He created and sold the Mirage and Treasure Island and then opened Wynn’s in Vegas.  But Wynn Macau and Wynn Palace are now suffering amid the Chinese meltdown.   The Shanghai SSEC exchange is down a whopping 44% just since June!  Since 2012 WYNN soared from 80 to 240 and now back to 60, losing 75% of its early 2014 value.  The slowdown in the Chinese economy has left the casino tables begging for customers.   Once again, large moves to the upside occur at the end of market manias just as the 2013 round did for WYNN.

Weatherford WFT had announced plans to raise $1 billion in cash with a combo of shares and convertible bonds.  WFT shares fell 17% to $8.41 immediately following the announcement. That drop caused the company to cancel the offering 14 hours after it was announced.  Yahoo Finance puts book value of WFT at $7.91. 

Capitulation occurs as prices fall and fall resulting in incidents like this where companies can no longer raise capital. The only choice is to put the company up for sale or merge to stay in business. That is probably not the case for case for WFT but recall how quickly Halliburton pounced on Baker-Hughes.  The WFT   stock price is likely to dip below book value before this is all done. 

WFT waited to long. Earlier this year Whiting Petroleum, a North Dakota play, raised $1.05 billion selling stock at $30; today it trades for $18. 

Once stocks hit a new low for the year, yes expect a big bounce, which is typical of the post October seasonal lows. But unlike the last Octobers since 2009, this time it is different. The bear is coming out of hibernation.