Stock markets may seem like fair value at the moment. But they're only fair value if you think all of the bad news has been priced in. And that's unlikely.
In November last year, virtually every stock market in the world had fallen to a level of long-term support and since then has remained range-bound. Whilst markets remain in a range we've got a puzzle to solve - so where should we look?
The first clue is that not one of the world's markets has, as yet, broken through the upside of its range not in Asia, South America, Europe or America and without exception, all of them are positioned below the 30-week moving average. The presumption has to be that, whilst the price remains below the 30-week moving average, the primary bear market continues to live.
There are a few other clues; a number of European markets, lead by France, have recently violated the downside of their trading ranges.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Another key piece of evidence is that the UK Advance Decline Index, which nets off the number of UK shares that rise against the number that fall, has broken down, indicative that the breadth of the market is very poor. More UK stocks are weakening than strengthening, unless that changes, how can FTSE recover?
The early clues therefore suggest that the bear market might be on the edge of its next big move down.
This last few days, Andrew Smithers has issued his latest report, number 327, about the UK stock market, its value and outlook. In the summary he says about the UK stock market:
"It is therefore likely that the UK market was selling at around fair value at the end of 2008 and was neither markedly cheap nor expensive. The UK and US markets thus seem to have been very similarly priced at the end of last year."
"The UK market is much more dependent on foreign buying than the US and this makes it likely that the UK follows the US's lead, as is generally assumed to be the case."
"We expect US shares to fall in 2009, largely because we expect companies to cease buying shares and to become net issuers. We expect a similar development in the UK where companies have become extremely highly leveraged and have restricted access to banks and debt markets."
Importantly, primary bear markets in the past have not ended until, in value terms, they have been far too cheap. As we have said in previous issues, it is totally unlikely that this bear market, borne of a banking crisis worse than in anyone's lifetime, could deliver a bear market for equities that ends at fair value. If it does end here, it means that all of the bad news is already priced into the market we just don't believe that.
If you look below at the one-year daily price chart for the FTSE, you will see the trading-range top is at 4,676. You will also see that the declining 30-week moving average has virtually reached that same level. If FTSE rallies to above 4,676, rising above the 30-week moving average, then that would be very surprising we would say, if that happened then, for the time being, the bear market has ended and we would not benefit from being short of the market. In fact, it would be a persuasive argument to switch to be long of FTSE.
If the bear market is to continue, we would expect the recent rally to end below 4,444 and the 30- week moving average. If that should happen and is followed by a close below 3,900, that would be a convincing signal that the bear market has resumed and has a lot further to fall.
Analysts are in unchartered territory. Never in the modern capitalist world has there been a recession/depression as a result of such an apocalyptic bank crisis, borne of banks of the highest quality knowingly promoting loans to borrowers of inadequate status, relying for security on assets that were in a bubble formation as a direct consequence of their crazy lending. Though banks have to be saved because of the systemic risk they pose, they have nonetheless, for obscene selfish motives, ruined our world. Woody Brock said so succinctly at our annual investment conference last November that they are no better than thugs who have poisoned the water our children drink.
Regular readers will know that each two weeks we review activity in the four key sectors, we continue to do that:
Housing Market
Rightmove reported that in the UK there is twice as much interest in property compared to a year ago, however, they go on to say that there were only 43,000 new listings compared to 89,000 last year and the supply of property-to-let was up one third mostly property that has failed to sell. Repossessions in the third quarter 2008 were 13,161, up 92% year-on-year.
The Hometrack House Price Index was down 1% in January versus December, the sixteenth consecutive monthly fall; buyers registering interest were down 6.1%; new listings were down 3.6% and sales agreed down 5%.
In spite of one item of slightly upbeat news from Rightmove, the overall situation is not good. The US is no better. The optimistic news was that US home resales were up 6.5% in December although still down 35% year-on-year, that was from the National Association of Realtors. The median price for existing homes was down 15.3% year-on-year to $175,400, the sharpest fall since records began in 1968.
Unemployment
No improvement, the storm clouds just get darker. To crystallise the position, a quote from Raymond Torres, head of Employment Analysis and Policy Division, OECD, "We have a vicious circle of depression, where job losses lead to falling consumption, which lowers industrial confidence, which leads to less investment, which results in more job losses and so on."
Consumer Spending
The rules of the game have changed - we now live in an age of frugality where possessions are made to last and the preference is for saving and paying down debt rather than borrowing and spending. The retail spending boom came about as a result of consumers' willingness to pledge their homes to raise money to spend on trivia. All levels of the economic spectrum were guilty of this, from the rich to the poor. The banking industry lent to anyone, for any reason. What kind of insanity is abroad for people to put the cost of a dinner in an expensive restaurant on their unaffordable interest-only mortgage? Borrowing money to buy an asset that appreciates, such as a house, makes sense most of the time, but borrowing to party, dress extravagantly and holiday excessively is a sickness. Those who did that, put their economic future on the line and are now paying the price.
Corporate Earnings
The outlook for corporate earnings will deteriorate as companies, as well as axing staff, axe capital expenditure a process well under way and likely to get worse. PwC recently conducted a survey of 1,100 executives across 50 countries; only 27% of them were confident that their revenue would rise, this compares to 50% a year ago; seven out of ten complained that they have been adversely affected by the banking crisis and 85% of them admitted they were facing higher financing costs. Corporate revenue and profit margins will come under growing pressure, leading to bankruptcies galore.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.
8 of the best riverside properties for sale
Will “Liberation Day” strike again?
