04 March 2008

Anyone wanting a pictorial explanation of the English phrase ‘sank like a stone' should look at a graph of stock market value over the course of January. Investor confidence seemed to evaporate over the first few weeks of the year, as fears about a recession in the US worsened, triggering weeks of heavy selling.

Add to this the staggering scandal at French bank Société Générale, where junior trader Jérôme Kerviel managed to work around apparently stringent controls to put as much as € 50 billion (US$ 73 billion) at risk. His fraud looks like it will cost France's second biggest bank a € 5 billion (US$ 7.3 billion) loss.

The SocGen scandal did nothing to repair confidence in the banking sector, which some would argue has been the author of its own destruction by gambling in the US sub-prime mortgage market. It is also thought that SocGen may have caused a temporary dip in world markets as it sought to close-out Kerviel's positions before going public with the embarrassing details.

Whatever the causes, however, January was an ugly month on the stock markets. In the first three weeks of the year alone the Dow lost 6.87% of its value to end week 3 at 12159 points. The Nikkei was not far behind with a -5.65% loss, while in London the FTSE 100 took a 9.55% hammering.

Crane shares

Coming in with even heavier losses over the three-week period though was the crane industry. IC's share index of major crane manufacturers dropped 11.7% in the first three weeks of the year to finish at 493.38 points. It was the lowest the index has been in more than a year.

Despite a slight rise for Kobe Steel's share price, there were steep losses in the sector. The two US manufacturers were particularly heavily hit, with Terex dropping -20.52% and Manitowoc down -26.01%. However, double-digit losses were very much the order of the day in the sector.

This goes back to crane manufacturing being a classic cyclical industry – or so the received wisdom says. Demand for expensive capital goods like these usually takes off sharply when economic growth picks up, but drops equally sharply at the first signs of a slowdown. There are certainly signs of a slowdown in the US, so shares in the sector have dived.

But it is a curious phenomenon given that the global market is so buoyant and that crane manufacturers have such huge backlogs. Many of the manufacturers that make up the IC share index will already be sold-out for 2008, so it is difficult to see what immediate threat a downturn in the US poses to the industry.

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