Unexpectedly Intriguing!
August 3, 2011

On Tuesday, 2 August 2011, the S&P 500 dropped by 2.56% to 1254.05, bringing the index to its lowest point in 2011.

As best as we can tell, what we're seeing is a noise event - rather than responding to a significant change in the fundamentals underlying the market, investors are instead reacting to news that indicates the global economy is not performing as well as investors had previously believed.

We know that's the case because there has been no deterioration in the projected future dividends per share for the S&P 500. At least, through the available dividend futures reported for 2 August 2011.

S&P 500 Trailing Year Dividends per Share, 2009Q1 Through 2011Q1 and Futures to 2012Q2

For such a rapid decline in stock price to be driven by the fundamental driver of stock prices, their underlying dividends per share, we would be deluged with news of companies in the S&P 500 that had acted to cut their dividends going forward, which was very much the case back in 2008 and 2009.

Instead, in scanning the news, we found just one company that had acted to cut its dividend, and it is not even a component of the S&P 500. However, the circumstances behind why the company acted to slash its dividend might very well be what is spooking investors.

The company in question is the U.S.-based Overseas Shipholding Group (NYSE: OSG). Bloomberg reports on the company's dividend cut:

Overseas Shipholding Group, the largest U.S.-based oil-tanker owner, fell to the lowest level in almost 29 months after the company cut its dividend. Other tanker companies including Frontline Ltd. also declined.

New York-based Overseas Shipholding tumbled $1.72, or 7.4 percent, to $21.60 in New York Stock Exchange composite trading, the lowest price since March 13, 2009.

The adjusted second-quarter loss widened to $36.1 million, or $1.20 a share, from a loss of $10.1 million, or 34 cents, a year earlier, as crude tanker rates dropped, the tanker owner said today in a statement. The company cut its annual dividend to 87.5 cents a share from $1.75.

This is a nice illustration of how a cut in a company's dividend can drive its stock price suddenly lower. But for our purposes, it's the news describing the company's current business environment that is spooking investors:

"Everyone is getting crushed and OSG happened to cut their dividend," said Urs Dur, an analyst at Lazard Capital Markets Ltd. "Shipping rates stink and nobody is betting on any sort of recovery." [...]

Overseas Shipholding was paid an average spot rate of $20,400 a day in the quarter for its very-large crude carriers, or VLCCs, down from $44,399 a year earlier.

The ships, which can carry about 2 million barrels of oil, operate mainly between the Persian Gulf and ports in Asia and the U.S.

The world's economy operates on oil - oil is consumed in greater quantities when the world's economies are growing, and it is consumed in falling quantities when those economies are contracting.

A dramatic decline in the spot rate of oil shipping, such as the 46% decline described above, indicates a significant drop in the demand for oil has taken place since last year. And that has caused a company exposed to the leading edge of world oil consumption to slash its dividend by 50%.

Stock Market Chaos

Right now, investors are behaving as if they anticipate additional dividend cuts will spread into the economic downstream of the world economy.

Our thinking is that the sharp rise in oil prices earlier this year likely tripped the world's figurative economic circuit breakers, triggering the economic slowdowns, which may be measured by the reduced volumes of oil being transported to the world's markets. Until now, the world's economies had been driven somewhat by inertia, which has both hidden and delayed the inevitable reaction to the decline in economic fortunes.

And that's very much what we've observed in the U.S. economy, which we recently declared to be in the grips of a microrecession.

As noise events go, the current scenario is about as scary as it gets. Our fear is that instead of presenting a buying opportunity, as many noise events do thanks to investor overreaction, investors may instead be correctly anticipating a declining situation, which would perhaps make this the rare case when falling stock prices may actually precede a decline in expected future dividends. Normally, it's the other way around....

Only time will tell if that's the case. We'll know soon enough as the expected futures change.

Labels: ,

About Political Calculations



blog advertising
is good for you

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations.com

Thanks in advance!

Recent Posts

Applications

This year, we'll be experimenting with a number of apps to bring more of a current events focus to Political Calculations - we're test driving the app(s) below!

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

Visitors since December 6, 2004:

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button

JavaScript

The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links
Charities We Support
Recommended Reading
Recommended Viewing
Recently Shopped

Seeking Alpha Certified

Archives
Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.