Re: Birchtree's account talk
You know you've hit bottom when the talk stops
We're not there yet, says economist
Published: Monday, March 09, 2009
Jonathan Ratner, Financial Post
With the widespread view that the S&P 500's closing low of 752 on Nov. 20 represented a market bottom now shattered, experts and investors are setting their sights on new trough levels.
Based on extended downturns of the past, David Rosenberg, Bank of America Merrill Lynch chief North American economist, thinks the index could fall another 20% or more from that level to 600 - and Canadian stocks could follow suit.
He had been calling for
an evil-sounding bottom of 666 for the S&P, but didn't think it would happen this quickly. The index hit that level during afternoon trading on Friday.
"Each one of these bear markets had this common characteristic of sitting on the shelf for a period of months, lulling investors into the belief that we have seen the final low, only to then break below that threshold," Mr. Rosenberg said. "This is a book and we're taking it a chapter at a time."
His target of 666 for October was derived by applying a classic recession multiple trough of 12x to Merrill's 2010 forward operating earnings.
However, since we are only in March, the economist thought it would be prudent to apply that multiple to an average of 2009 and 2010 earnings. He has been ahead of his peers in forecasting the global economic downturn and financial crisis and the fact that U.S. consumer spending would crumble.
Mr. Rosenberg also said there is no reason why the same analysis cannot be applied to Canada or any other market. Based on the average bear markets in the past, he said the move from that second-to-last intermediate low - "the one that at the time everyone mistakenly believes is the ultimate low" - to the final bear market low is 20%.
Applying that "last leg" decline to the TSX's closing low of 7,724 on Nov. 20 would bring Canada's benchmark index to around 6,180. However, Mr. Rosenberg said it is important to recognize that the TSX is a much more cyclical beast.
"There is a tug-of-war in Canada between the implication for those sectors hooked to the global economy, which are going to be increasingly vulnerable to the decline in world economic activity, and the fact that the banks - while not necessarily pristine - they are certainly in much better shape than they are south of the border."
Meanwhile, the proportion of NYSE-listed stocks trading at or below their 200-day moving averages is a staggering 99%, according to Tobias Levkovich, chief U. S. equity strategist at Citigroup.
The proportion of the market being attributed to any future earnings growth, meanwhile, is calculated to be less than 5%.
He said this implies that "hope has been lost with some wholesale dumping of shares."
Last week, the American Association of Individual Investors (AAII) survey showed that investors are more bearish than they've been since data started to be collected in July, 1987. Of respondents surveyed, 70.3% are in the bearish camp, which some consider a sign that a meaningful rally is on the way since the AAII confidence index is often viewed as contrarian.
"Indeed, previous market bottoms have coincided with spikes in bearish sentiment," said Pierre Lapointe, market strategist at National Bank Financial.
He told clients that the index is sharply above its historical average, while the last time bearish sentiment was this high was in 1990-1991.
"At the time, there was a consumer-led recession, credit was hard to get and investors chose to park their money in money market mutual funds (more than 40% of total mutual funds assets)," Mr. Lapointe said. "Today's situation is pretty similar to what we saw back then."
Mr. Rosenberg admits that trying to pick a bottom is futile and thinks we are probably not there yet, but he does have an idea of how we'll know when we get there.
"When we actually hit a low and nobody talks about it, that's when you know you're at the low," he said. "It's when people are just totally ignoring the market. It's when ambivalence has overwhelmed long-term resolve."
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