Someone who thinks capitulation has capitulated..
"All the signals scream "buy"
But cool heads will wait for fog of war to lift
By Peter Bale, FTMarketWatch 2:32:00 PM BST Sep 27, 2001
LONDON (FTMW) - All the technical signals in the stock market are screaming "buy", suggesting we're seeing bargains that come along only once or twice in a stock market investor's lifetime.
But hang on a minute. Before you invest that cash you've been saving for a gas mask in the stock market, consider two words: "war" and "recession". Both look imminent.
There has to be a right time to take advantage of both those nasty factors and move into the market at the perfect time and then ride the recovery to new riches, Daddy Warbucks-style. The question is whether that time is now.
Morgan Stanley analyst Richard Davidson, who's been living with the bears for months, reckons the time isn't yet right but might be soon.
"There is still the significant danger of random events in the political sphere affecting the market...," he said with a measure of understatement as the United States masses aircraft carriers, bombers, troops and fighter aircraft around Afghanistan.
But, he insists: "We feel that the uncertainty has already peaked."
Uncertainty is the only certainty
Personally, I remain convinced that the first cruise missile or report of "collateral damage" in the coming conflict will recreate vast piles of uncertainty as will any fresh outbreak of terror. See Vince Heaney on likelihood of a short, sharp shock and on retaliation.
But Davidson believes the long-expected cathartic capitulation in stocks has happened. That big sell-off we've all been predicting started the day before the September 11 attacks on New York and Washington, gathered pace afterwards and has probably gone deeper and faster than it would otherwise have done in calmer times.
"The big correction is over," Davidson says in a recent research note. "We think markets will move sideways in the next months, just as they did post the 1974, 1987 and 1990 collapses." See Vince Heaney on capitulation.
At the same time Davidson isn't ready to dive in and fill his boots, even though he says all the charts, indices, historic analysis and presumably the seaweed hanging outside his front door suggest "unequivocally that now is the time to buy".
"We have changed our view from being outright bearish to now being neutral on market direction, but we still think the time to get really bullish is not now, even though it may come in the fourth quarter," Davidson said in his report, titled "Beginning of the End of the Bear Market.
European markets, Davidson says, need to go through a confidence-building period when investors wait to see what develops - a pattern he says marked the three months after the last three big shocks.
During this period, he says, investors will be less inclined to go with the flow of the market and more inclined to pick stocks on fundamental performance and value criteria.
Buy, buy, baby, buy, buy
The key indicators Morgan Stanley thinks are screaming "buy" include:
* Morgan Stanley's composite value indicator (based on trading earnings per share and cash flow) is in "buy" territory at minus 1.2.
* 84 percent of all stocks in Europe are at least 20 percent off their highs, a greater percentage than any time in the past 20 years (except October 1987 when it was 92 percent of stocks)
* Liquidity in the money supply is expanding and more rate cuts are expected in the United States and Europe.
* Fund managers have a historically high 3 percent average weighting to cash, the second highest since 1999.
* The quarter-on-quarter change in U.S. unemployment numbers went above 10 percent, an "end-of-bear-market" signal, according to the Morgan Stanley analysts.
Set against all those positive "buy" signals, Davidson argues, is the likely damage to corporate earnings over the next two or three quarters as the economy moves into a recession it may not emerge from until the second quarter next year. Profit growth will lag.
He also thinks any U.S. recession is going to be sharp.
So, while you're waiting for those buy signals to consolidate and your confidence to come back (or be erased by the first cruise missile) Morgan Stanley suggests you run a ruler over selected media, information technology, telecoms and services stocks like: Cap Gemini [FR:012533, News, Chart, Research] , Hays [UK:HAS, News, Chart, Research] , Amey [UK:AMY, News, Chart, Research] , Sweden's TietoEnator [SE:5727014, News, Chart, Research] and Telewest [UK:TWT, News, Chart, Research] .
10 weeks to change your life
Fresh research from Credit Suisse First Boston shows just how much investors can gain from taking advantage of such low points over time. It also shows how much you can lose selling at the low point.
In one of those extraordinary bits of number crunching analysts love, the team at CSFB has looked at 30 years of stock history and worked out what would have happened if you'd been out of the market during the 10 best weeks and the 10 worst weeks. By the way as you might have expected, one of the worst weeks in 30 years was the week just gone. In September Eurozone equities have had three of their worst 10 weeks in 30 years, the CSFB analysts found.
__ "The long term is a series of short-term periods, the volatility of which can seriously damage your wealth" - CSFB
The key to remember now while licking your wounds is that the best weeks often come just after the worst and that keeping your courage is perhaps the best advice and the hardest thing to do in practice.
"Equity investors are typically tutored on the notion of investing for the long term," the CSFB team headed by Richard Kersley says in its report Volatility: Challenge and opportunity. "However, the long term is a series of short-term periods, the volatility of which can seriously damage your wealth."
A notional $100 invested in European equities in 1973 would, with income reinvested, have been worth $2,378 by last Friday, CSFB says. However, had the investor missed out on the 10 best weeks in those 30 years the fund would have been worth just $1,177.
By the same token, had the investor been able to escape the worst 10 weeks of the same period the pot would be a mouth-watering $5,409.
So the moral there has to be to try to avoid selling into the troughs. Hard to do given the natural herd mentality in the way down as well as up. See FTMarketWatch Top of the Stocks on Marconi.
"The best weeks frequently follow the worst," CSFB analyst Steve Wright told FTMarketWatch. "You find when people do tend to throw in the towel it tends to be the worst possible time." |
