JUNE 25, 2002
INSIDE WALL STREET ONLINE
By Gene Marcial
What's Turning Barton Biggs into a Bull
Morgan Stanley investment strategist sees "classic" signs of a "double bottom" in equities. He says that means it's time to buy
It's not often that the usually bearish Barton Biggs, Morgan Stanley's top honcho on global investment strategy, gets bullish on the stock market. This is one of those rare times.
Biggs figures that equity markets around the world are in the process of making a significant "double bottom." He says based on scientific and technical studies of the current markets, "important buying opportunities are developing." While he doesn't think that all the excesses have been purged and that valuations are still somewhat inflated, "My guess is that the bearishness and selling have been overdone," say Biggs.
That's quite an optimistic outlook coming from Biggs. The last time he was hugely bullish on equities was right after September 11, when the major market indexes crashed. Biggs was on the money then: Stocks soared after Sept. 21 from the depths that the Dow Jones industrial average, Standard & Poor's 500-stock index, and Nasdaq composite had plummeted to. Biggs laments that he had advised selling too early -- in February. The market kept going up for some time thereafter.
"DOWNSIDE WHIMPER." But the second bottom that he sees will be quite an opportunity to buy again, according to Biggs. He notes that the first bottom is usually climactic, with panic selling on high volume. It's then followed by several extended rallies -- before a test of the first low unfolds.
"The second, or double, bottom occurs months later and is characterized by lower volume, despondency, and capitulation in the groups that were leaders of the earlier bull market." Like a downside whimper.
That's where he says the market is right now: Since its 2000 peak, the Nasdaq has fallen as much as the Dow did from 1929 to 1932, notes Biggs. And it has dropped more than Japan's Nikkei index has since its high in 1989, he adds. "The pattern of the equity markets since last summer has been classic," says Biggs, in foretelling that a double bottom is about to happen -- or has already begun.
A VIGOROUS RALLY. Given all these, "we have increased our exposure to equities," says Biggs. Assuming the September lows hold, as he expects, rallies of 15% to 20% are conceivable in the broad indexes in the U.S. and Europe, predicts Biggs.
In the U.S., he forecasts that over the short term, the Dow will climb to between 10,800 and 11,000, from 9,380 currently. The S&P 500, now around 1,000, should go up to the 1,100-1,200 level. And the Nasdaq could go up sharply, to around 2,000, from 1,460 currently. He thinks that technology, media, telecom, and the other "destroyed groups" could have much larger bounces than the rest of the market. Biggs says he doesn't predict a new bull market -- just a vigorous rally.
Another savvy market watcher, Edward Yardeni, chief investment strategist at Prudential Securities, also thinks that the market will make a double bottom -- "and then rally back to at least the year's highs by yearend." The previous two double bottoms occurred in 1962 and 1974, recalls Yardeni. Some 12 months later, he says, the S&P was up 33% after the '62 double bottom, and it went up 38% after '74's.
TOO CAUTIOUS? Morgan Stanley's Biggs notes that some investors, including many in Europe, argue that valuations still aren't low enough and that it's possible that a double-dip recession in the economy could be coming. So they believe that expressing such bullish views is "early -- maybe by years."
Biggs's response: "As far as I know, the God of Markets never ordained as one of the Ten Commandments that all of the classic technical and sociological extremes had to occur before a good bottom could be put in place." The fact that so many investors are waiting for the "right stuff" to occur before they'll be convinced of a bottom "diminishes the probability of their occurring," he says.
"Our valuation measures, including both the dividend-discount model and the forward yield-gap analysis, indicate that the U.S. and European markets are now undervalued," Biggs argues. The sentiment indicators, for one, say stocks are very oversold.
RISING EARNINGS. He says the fundamentals also support his argument that, for the time being, stocks have fallen far enough. Biggs notes that the world economy is not booming, but it is recovering. And that could be a blessing because it suggests a slower but more extended cycle. He thinks corporate earnings in the U.S. and Europe have seen their troughs and will post at least three or four quarters of favorable comparisons.
What about the issues of corporate mistrust and fears of terrorism? "The peccadilloes of Wall Street and Main Street have been all over the press and on TV," says Biggs. So they must be pretty well digested by now, he adds. The news need not be good, he argues, for stocks to go up. It just needs to be less bad than what's already out there. As to fears of terrorism, he believes the market has pretty much discounted most of what could happen -- except for a nuclear attack.
The last word from Biggs: "My case is that if you wait for every indicator to flash green and all the stars to align, and Jupiter to merge with Mars, you may miss the buying opportunity, the main chance."
Marcial is BusinessWeek's Inside Wall Street columnist |
