12 months to March 2009

12 months to March 2009

Towards the end of 2008 it looked like share prices had bottomed out, and were bumping along waiting for a recovery. Unfortunately they have sunk to new lows and show little sign of stopping.

As a result, losses on a rolling 12 month basis are just looking worse and worse. For example, in the 2008, the ACT Heavy Equipment Index had a net loss of just over half its value, and mainstream indicators like the Dow, S&P 500 and NASDAQ were down anywhere from 30% to 40%.

Compare those figures to this month's graph. On a rolling year basis to the start of March the ACT HEI is now down more than 70% and two out of the three mainstream markers have broken through the sub-40% floor.

New low

The ACT HEI ended the month of February at a new closing low of 53.03 points, down more than 10 points from the new record low I reported in last month's column. Even more striking is how the current trough compares to the high of 207.25 points, seen only last April. Back then the industry had a stock market valuation just a whisker under US$ 141 billion. At the end of March that figure stood at US$ 33 billion.

The reason for the continued slide in share prices resides with the banking sector's continued losses. Despite mergers, bail-outs and partial nationalization on both sides of the Atalntic, losses and write-downs in the sector continue to stun the markets.

In February in the UK for example, the RBS Group announced the biggest losses ever made by a British company - UK£ 24 billion (US$ 33.8 billion) - for 2008. About the same time Citi Group announced a new deal with the US Government to convert Federally-held preferred shares to common stock to raise up to another US$ 25 billion of fresh capital.

Stunts like these are really the nub of the problem at the moment. Each fresh write-down and capital injection underlines the fact that the banking sector is still saddled with bad debts, and is unable to function.

Until the banks can shake off their bad debts, and get back to operating profitably and lending normally, the markets will stay depressed. Despite their current image problem with the public at large, the fact remains that without banks to lend money the economy is totally dysfunctional.

But while the banking sector (hopefully) gets its house in order with the help of legislators and tax Dollars, what will the markets do? The evidence of 2009 so far suggests they will continue to fall. The question is, how low can they go?

Cheap shares?

By any normal measure, shares are hugely undervalued today. Manitowoc for example is now down in the US$ 3 per share territory, closing-out February at US$ 3.82. With earnings estimates for this year put at US$ 1.18 per share, that's a price/earnings (P/E) ratio of 3.2. In normal times, fair value is reflected by a P/E from 10 to 17. That would imply a share price of about US$ 12 to US$ 20 in Manitowoc's case.

If you subscribe to that view, now would be a good time to buy. Even if shares fall further, when the market snaps out of its current lull you might expect to triple or quadruple your money.

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