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Remember Oct 4, 2011 – Dow intraday 10362.26?

May 06, 2012 – Comments (1) | RELATED TICKERS: AEO , ARO

 Remember Oct 4, 2011 – Dow intraday 10362.26?

On October 4, 2011, the Dow Industrials fell to an intraday low of 10,362.26 from what was then a post recession intraday high of 12,928.45 hit on May 2, 2011. The fall represented a 13.85% decline.   It is important to remember these declines and the events that led to the decline and the emotions that surrounded the events. I don’t spend too much time on this; I just like to make a few quick notes.

My first blog remembered the May 2, 2011 post recession high.

http://caps.fool.com/Blogs/turning-point/601485

 

From the blog:

I have enjoyed the bull market that we have experienced since the stock market lows of March of 2009 when the Dow and S&P500 hit intraday lows of 6,440.08 and 666.79 respectively. The Dow reached a post recession peak of 12,928.45 for about a 100.7% gain on May 2, 2011. The S&P500 new peak was also hit on May 2, 2011 and the 1370.58 post recession peak represented a gain of 105.5%.

 

So what caused the October 4, 2011 decline which started on May 2, 2011?

The decline was 13.85%. It wasn’t a major decline, but it did create some fear. I feel it was mostly just a natural correction, the market don’t go up in a straight line forever even in the best of times. But the world did have some scary problems occurring.

The main fear centered on Greece debt. They had been spending more than they brought in from taxes for a very long time, kinda like another country I know about hehehe. Many European countries are holding Greek debt, particularly France and Germany. If Greece defaulted it would hurt other European countries. The fear was that Greece may be one domino ready to take out all the other dominoes causing a European recession which could then lead to another global recession. To add to the fear surrounding Greece, Moody’s downgraded Italy’s sovereign debt too.

After October 4, 2011, the stock market started to rise again. Greece made a resolution, blah blah blah, “austerity” blah blah blah “riots in the streets of Greece” blah blah blah, and the stock market began another journey to the next post recession high. But it isn’t over yet, Greece still has debt, and it will probably be another supporting reason for the next decline. But even during the rosiest of times, stocks markets never just go up, so I don’t worry about these things.  Corrections give us chances to add to our positions at better value points. We should embrace volatility and learn to exploit it.

With all the talk about Greece, it wasn’t the catalyst that sent the markets down in my opinion. The decline began on May 3, 2011 on Tuesday, a little over a year ago. Just about 4 days earlier, on April 29, 2011, a Friday, oil prices hit $113.93 a barrel.  The last time oil was that high was in April of 2008 and we all know what was about to happen then. Greek debt, high oil prices and the European economy is all very much related. As oil prices go up, it would surely further hurt the Greek economy which would mean loss of jobs and make it harder for them to pay their financial obligations, speeding Greece, then Europe, and then the entire world back into a recession.

By October 4, 2011, as the Dow hit post May 2nd lows, the Greek debt issues hadn’t been resolved. I don’t think they improved one iota, but oil prices were down to about $80 a barrel. And the price of the stock market went right back up to a new post intraday high of 13,359.62 by May 2, 2012 exactly one year since the last post recession high.  Are you seeing a pattern?

I also want to note that a severe flood in Thailand caused the prices of many electronic components to go up and created a hard drive shortage. With Apple's Mac Drives being affected and with Apple one of the bright stars of our market, this didn't help support the U.S indices either. It just added to the fear.

On a side note, cotton prices presently are trading at about $0.80 per pound.  Back in May of 2011, cotton prices were trading around $1.62 per pound. Oil prices are presently $98.50 per barrel, also lower than last year.  Certain elements of the macro environment have improved since the last major correction, so I am thinking any post-holiday downturn will be less than 13.85% from the new high, barring any additional bad news. Higher oil prices around $110 a barrel would in my opinion trigger another downturn. If oil prices remain under $106 per share, I think we may see a stronger fiscal 2012 and can buy dips with more confidence and enthusiasm.

With Cotton prices hovering around $0.80 per pound, I think the recent moves in clothing retailers, like AEO and ARO, should remain strong. Margins should improve helping this industry. AEO just raised guidance for their first quarter. Their big product is denim which is made from cotton. Cotton driven margin improvements should carry on for as many quarters as cotton remains cheap.

I placed AEO on my caps on 9/8/2011: I also purchased it for my portfolio. I realized that changes in fashion tastes have more to do with apparel retail problems than cotton prices. But I think the 17% increase in first quarters sales may indicate, they have that part of the problem under control. But the real attractive part of their business was the 4% dividend and the $611 million in cash and zero debt on their balance sheet. I figured the large dividend and large cash cushion would limit their downside until they could tweak their styles and for cotton prices to fall.

I will be keeping them on my caps page. I also believe the larger apparel businesses, with an abundance of net cash, can more easily adapt to changing fashion tastes.

 I will also be updating my page posts for both AEO and ARO. I own both of them and both are on my Caps page.