The bottom line is keep your powder dry
Stocks haven't hit bottom yet, Ross Healy says
Diane Francis
Financial Post
Ross Healy, president of Strategic Analysis Corp., jokingly informed me two weeks ago that the high-tech party was over because his postman had just given him a stock tip.
Such an anecdote is telling to those who participate in, or follow, stocks and commodities. That's because it is an axiom of investing that when great numbers of people, who are unsophisticated about investing, start to speculate, they will pay too much, eventually forcing a fall in prices.
For instance, just before gold bullion prices peaked at $800 (US) an ounce a generation ago, newspapers carried pictures of lineups of people buying gold bricks. In the early 1980s, the talk at the office water cooler was about hot oil stocks, including Dome Petroleum, which spectacularly collapsed. Then there was the real estate bubble which burst in the late 1980s in southern Ontario, caused by scads of speculators and stories about everyone from school teachers to physicians who were buying and flipping houses.
So now the market is getting real again and while no one has all the answers, Mr. Healy has a track record. He was the first guy to spot the Dome Petroleum problem and the Canadian Airlines problem in 1990, and was one of a few lone voices last year forecasting that oil prices had truly bottomed.
Mr. Healy's outfit sells research to both brokers and their large sophisticated clients and uses a complicated formula based on the consensus about a company's earnings, plus a forecast of interest rates. Uninterested in comments about past carnage, I wanted forecasts.
"Our call is that we are heading into a bear market, but we're not there yet," he said. More specifically:
- The Nasdaq is already in a bear market, but there is no belief or expectation that the "broad market" is also in a bear market, or downturn.
"We're not in a bear market. The Nasdaq has broken already. That's already in a bear market. But the Nasdaq was grossly over-valued," he said. "I hear people saying, 'OK, the high-techs got way over-valued and are getting their comeuppance, but there's lots of opportunity out there.' "
But he said a true "bear market" involves the indiscriminate selling of blue chip companies even at fair prices. "Before a down market is finished you've got to be able to smell the fear and I don't smell the fear," he said.
- He believes that the S&P 500 will go down roughly 8% more to about 1,250 (it's at 1,401 now) before a sustainable rally occurs.
- The Nasdaq will go down to 2,600 (it's now at 3,539) before a rally occurs, he said.
"An old rule of thumb says when the Fed [Federal Reserve Bank] initiates a series of rate hikes at the end of bull markets, usually the economy is so strong that the market keeps rising. But in speculative markets [like Nasdaq] the first correction is usually back to the level at which the Fed began to raise rates. For the Nasdaq, that means 2,600. (The Nasdaq peaked at 5,000 last month.)
- The TSE 300 has a less serious decline ahead.
"It topped at nearly 10,100 and now it's around 8,500. We believe that 8,000 is fair market value when a decent rally should occur," he said.
Rates of decline depend on a number of factors, notably interest rates imposed by central bankers as well as the general economic performance.
All of which means that markets are doing what markets always do: Fluctuate by getting ahead of themselves, then getting behind. And people are also equally predictable, flocking to fashionable and much-vaunted vehicles to make lots of money, based on media reports and eventually word of mouth.
So what's worth buying now because it's been left behind by the faddish fancy for high-tech?
"Gold stocks are as cheap as they were at the bottom of the bear market in 1982. If you talk about gold stocks to anyone, they will yawn in your face. But those stocks are really washed out and there's some evidence evidence of higher bullion prices if inflation is strong. Barrick and Franco Nevada are two quality stocks in this area," he said.
They have been overlooked in the rush for e-gold. So has Canadian Tire Corp., another market "orphan," probably due to publicity about its controlling shareholder's love-life troubles.
"This company is trading at book value and is as cheap as it's been in 30 years, and yet it is growing at 13% a year," he said.
Mr. Healy's bottom line is, keep your powder dry. The fun is not about to begin yet. |
