Why Magazine Covers Are Historically Great Contrarian Indicators

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Wade Slome submits:

Back to the future?

I'm not referring to the movie, Back to the Future, about a plutonium-powered DeLorean time machine that finds Marty McFly (played by Michael J. Fox) traveling back in time. Rather, I am shining the light on the uncanny ability of media outlets (specifically magazines) to mark key turning points in financial markets - both market bottoms and market tops. This will be the first in a three part series, providing a few examples of how magazines have captured critical periods of maximum fear (buying opportunities) and greed (selling signals).

People tend to have short memories, especially when it comes to the emotional rollercoaster ride we call the stock market. Thanks to globalization, the internet, and the 24/7 news cycle, we are bombarded with some fear factor to worry about every day. Although I might forget what I had for breakfast, I have been a student of financial market history and have experienced enough cycles to realize as Mark Twain famously stated, "History never repeats itself, but it often rhymes" ( read previous market history article ). In that vein, let us take a look at a few covers from the 1970s: (Click to enlarge)

Newsweek's "The Big Bad Bear" issue came out on September 9, 1974 when the collapse of the so-called "Nifty Fifty" (the concentrated set of glamor stocks or "Blue Chips") was in full swing. This group of stocks, like Avon ( AVP ), McDonalds ( MCD ), Polaroid, Xerox ( XRX ), IBM ( IBM ) and Disney ( DIS ), were considered "one-decision" stocks investors could buy and hold forever. Unfortunately, numerous of these hefty priced stocks (many above a 50 P/E) came crashing down about 90% during the1973-74 period.

Why the glum sentiment? Here are a few reasons:

  • Exiting Vietnam War
  • Undergoing a Recession
  • 9% Unemployment
  • Arab Oil Embargo
  • Watergate: Presidential Resignation
  • Franklin National Failure

A cartoon from the same bearish 1974 cover article.

Not a rosy backdrop, but was this scary and horrific phase the ideal time to sell, as the magazine cover may imply? No, actually this was a shockingly excellent time to purchase equities. The Dow Jones Industrial Average, priced at 627 when the magazine was released, is now trading around 10,247…not too shabby a return considering the situation looked pretty darn bleak at the time.

Reports of the Market's Death Greatly Exaggerated (Click to enlarge)

Sticking with the Mark Twain theme, the reports of the market's demise were greatly exaggerated too - much the same way we experienced the overstated reaction to the financial crisis early in 2009. BusinessWeek's August 13, 1979 magazine captured the essence of the bearish mood in the article titled, " The Death of Equities." This article came out, of course, about 18 months before a multi-decade upward explosion in prices that ended in the "Dot-com" crash of 2000.

In the late 1970s, inflation reached double digit levels; gold and oil had more than doubled in price; Paul Volcker became the Federal Reserve Chairman and put on the economic brakes via a tough, anti-inflationary interest rate program; and President Jimmy Carter was dealing with a full-swing Iranian Revolution that led to the capture of 63 U.S. hostages. Like other bear market crashes in our history, this period also served as a tremendous time to buy stocks. As you can see from the chart above, the Dow was at 833 at the time of the magazine printing - in the year 2000, the Dow peaked at over 14,000.

The walk down memory lane is not over yet. Conveniently, the Back to the Future story was designed as a trilogy (just like my three-part magazine review), so stay tuned for "Part II" - coming soon to your future.

Disclosure: Sidoxia Capital Management (( SCM )) has a short position in MCD at the time this article was originally posted. SCM owns certain exchange traded funds, but currently has no direct position in Avon, Polaroid, Xerox, IBM or Disney. No information accessed through the Investing Caffeine (( IC )) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision.

See also As Gross Says, The Fed Provides 'Return-Free' Risk on seekingalpha.com



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: AVP , DIS , IBM , IC , MCD , SCM , XRX

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