Rates will fail to reignite stocks: Sprott
No grounds for rally: Danger signs being explained away, strategist cautions
Steve Maich
Financial Post
Lyle Stafford, National Post
It's time for investors to wake up and throw off their rose-coloured glasses, because stock prices must get a whole lot worse before they get better, says money manager and strategist Eric Sprott.
In strong words, the head of Sprott Securities Inc. has assailed investment advisors and the media for soft peddling the serious situation facing North America's economy and stock markets.
The bottom line, he said, is that stock markets have been rallying for no good reason over the past month, and interest rate cuts from central banks will fail to re-ignite the economy until price-to-earnings multiples decline.
"We are collectively in a state of denial, where bad economic and corporate news gets brushed aside or, even worse, explained away in the most optimistic light," Mr. Sprott wrote in a report many clients received last week. Contacted yesterday, he said renewed bullishness in light of this week's large interest rate cut by the Bank of Canada has done nothing to change his view.
Investment advisors throughout the industry bear much of the blame, he said. It's illogical for stocks to be rising when corporate bond yields continue to drive higher, on concern that businesses will be unable to meet their debt obligations, he said.
"The facts just aren't there to support all the optimism," Mr. Sprott said.
"We would be doing our clients a disservice (and there is a lot of that out there) if we were to paint a picture rosier than it really is."
Mr. Sprott's reality check stands in stark contrast to the advice of legions of investment advisors on Wall Street and Bay Street, insisting that the lows hit on Sept. 21 will prove to be the bottom of a grinding bear market.
International Business Machines Corp.'s recent performance is a prime example of the market's overheated expectations, Mr. Sprott said.
Despite the fact the economy has entered a tailspin over the past year, driven mainly by faltering demand for high-tech products, IBM's stock has risen 18% in the past year and has resulted in a price to earnings multiple above 22 times. Given the enormous uncertainty in the economy, a sharp decline in profits and a return to the average bear market multiple of 10 times earnings, is very possible, Mr. Sprott said. That would translate into a stock price as low as US$20, he said. IBM shares closed yesterday at US$108.57.
"Only when you can buy IBM for US$20, and still worry that you might lose money on it, will we be able to confidently say that the market is close to bottoming and a bull market is just around the corner."
The only way to protect yourself in a down market like this one is to hedge risk, mixing both long and short positions within your portfolio, Mr. Sprott said. His key hedge fund has been among the best performing Canadian funds this year.
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