For our Canadien friends:
Bottoms up for markets? Not so fast
Published Saturday November 22nd, 2008
Markets Storm clouds are gathering everywhere
Keith Woolhouse
Jeff Rubin, CIBC World Markets chief economist and chief strategist, must be squirming now for his rash forecast that equity markets were nearing a bottom. That was the commentator's curse in slow motion. The kiss of death, if one were needed.
Enlarge Photo Daniel Roland/the associated pressWhere does the bottom lie in this most dismal of times? Canada’s benchmark index is off about 48 per cent from its June high. The S&P 500 index too has collapsed about 48 per cent so far this year while the Dow Jones industrial average is down about 43 per cent. European bourses are down by around the same amount so we’re all in the same (sinking) boat on this one. Since Rubin penned his thoughts on Nov. 11, the S&P/TSX composite has crumbled nearly 1,700 points, or almost 18 per cent. But with the S&P/TSX already 35.7 per cent off its June high when he made the call, Rubin might well argue that a further crash of double-digit proportions is neither here nor there.
He has a point. Stocks haven't been this cheap since the mid-'80s. Bargains abound but investors are displaying considerable hesitancy while markets persist in ratcheting back to multi-year lows.
Under these conditions it takes deep conviction and fortitude to chase the bargains. It does beg the question, however, of where the bottom lies in this most dismal of times. Canada's benchmark index is off about 48 per cent from its June high, so it's no wonder that analysts are trying to figure out at what point the slide will stop and the market head upward.
The broad-based S&P 500 index has collapsed about 48 per cent so far this year while the Dow Jones industrial average is down about 43 per cent. European bourses are down by around the same amount so we're all in the same (sinking) boat on this one.
Rebounding from such severe declines in the current economic climate will not be trouble-free.
Storm clouds, as Michael Gregory at BMO Capital Markets points out, are gathering everywhere. Weakened demand has pounded commodity prices across the board. The housing sector has cooled at a much faster pace than most observers conceived possible. The dire state of the North American auto sector is particularly problematic for Canada as the Canadian economy is about 60 per cent more exposed to direct vehicle and parts production than is the United States.
Consumer confidence is in tatters and retail sales are woeful. One bright spot. The dollar at about 77.6 cents U.S. helps our exports, but who's buying? That advantage is wiped out by the brutal U.S. economy and the weakest retail sales report in more than 21 years. The U.S. appears to be slipping into an even deeper recession than was initially feared and that it will last 14 months, not 10.
"It's uncertain how much havoc these storm clouds will cast over the Canadian economy, but at least the authorities appear to be acting proactively to provide a bit of umbrella," says Gregory, commending a series of measures the Bank of Canada and the federal government have introduced to ease the credit crunch.
Among the most noteworthy of the bank's moves was the introduction of a new collaterized lending package that will add a minimum of $8 billion into money markets. Meanwhile, the Department of Finance tripled the size of its Insured Mortgage Purchase Program to increase the purchases of commercial banks' insured mortgage pools to $75 billion from $25 billion.
As necessary and commendable as these measures are to mitigate the pressure on credit and money markets, it's debatable how they will benefit Canada's equity market and investors. Not much, I'm afraid, and this is borne out by an exhaustive study from Merrill Lynch that looked at 16 components grouped under four indicators: quantitative strategy, economics, investment strategy and technical analysis for a clue to when equities might turn around.
Only two of the components signal that the bear market is over. Eleven show a down trend while three are flat. The positive trends are the ratio of up-to-down revisions on earning estimates that declined for the first time in seven years (this suggests that now we know it's bad, the only way is up) and long-term growth rates, which remain depressing but show a smidgen of improvement.
Not much to cheer about there.
For the remainder, it's thumbs down for share repurchases, analysts' uncertainty, housing market, savings rate, household debt, the U.S. Conference Board's lagging index (a summary of economic activity), jobless claims, the S&P 500's downtrend line, share volume, new highs versus new lows and new lows being tested.
A Merrill Lynch in-house composite of six indicators, a sell-side indicator (a contrarian opinion) and share value all came in flat.
What emerged for the U.S. in the survey can be applied to Canada.
The verdict of Merrill Lynch's QuEST (from quantitative, economics, strategy, technical) research produced a reading of 22 out of 100. "We'd like the to see this approach 50 before we become more constructive on equities," Merrill Lynch said. "The risks remain to the downside."
Merrill Lynch sees the backdrop for equities improving but at the same time it is advising clients to remain on the sidelines because the risks embedded in the economy still outweigh the expected returns from equities. For now, it may pay to exercise extreme caution and not try to anticipate the market's bottom. "History shows that being early can carry substantial performance penalties. We believe it has historically been better to actually be somewhat late." |
