Global Stock Markets Rally But Have We Hit A Bottom? Not Quite

Have We Hit A Bottom? Not Quite

Date 29/10/2008

The Right Side

Garry White

So, as global stock markets rally at the prospect of sharp interest rate cuts, have we found a bottom?

I don’t think so.

Capitulation. That’s what we are looking for...and I don’t think we are there yet.

Capitulation happens when investors completely give up on the stock market. They sell stocks because they want to exit the market as quickly as they can. They completely throw in the towel.

So, for true capitulation to have occurred you need extremely high volume and sharp share declines. In short, you need to look for total panic.

So far we haven’t had the sort of volume that would imply capitulation. The biggest volumes have been seen when the market has been going up. People are waiting to pounce on stock they perceive as bargains.

The fact that there are numerous investors waiting to buy a bottom means we haven’t quite made it yet. This means investors are more concerned about missing the chance to buy a bargain than they are about potential losses.

Fundamentally, however, the buyers are right. The market really is cheap.

The FTSE 100 is trading on a p/e of 7.27 — one of the lowest of all the major global indices. The long-term average for the index is a p/e of 14.

This means that the market is expecting earnings in the FTSE will slump around 50%. This is extreme. Most analysts are expecting earnings to slump 30%-40%. So, on this fundamental basis, the FTSE 100 is undervalued.

There’s even more positive news for FTSE investors. It’s all to do with the sliding pound.

This move will boost earnings of companies with substantial operations abroad, of which there are many. Miner and oil companies receive their revenues in dollars. Currency movements should provide an earnings cushion as profits are hit by the slowdown

The falling pound also boosts dividend payment that are declared in dollars. I’m thinking of companies such as BP, Shell and AstraZeneca.

For example, BP hiked its December dividend payment yesterday by 29%. However, because of the sliding pound, the actually increase in the dividend when currencies are taken into account was a staggering 68%.

The FTSE 100 is currently yielding 6.21%. This is almost very attractive. However, it is likely that dividend will be cut next year, so this will fall.

However, I don’t think it will fall as much as the gloomsters think as long as the pound stays weak...and I expect the pound will stay weak for some time.

So, by any logical metric, the FTSE 100 is in buy territory: It is definitely cheap. This is especially true for companies that make profit in dollars.

My gut feeling is, however, that they may get cheaper still.

Warren Buffett said recently that if you wait for the robin, spring will be over. He means that you should buy into this market and expect losses in the short term because if you tried to time the market you will have missed the boat.

There is some truth in that and it’s probably a sensible thing to be drip feeding money into this market.

But, once the rate-cut euphoria eases, (and remember this rally is on the EXPECTATION rates will get cut) the market is likely to fall again.

Garry White
For Fleet Street Daily

The Daily Reckoning — Is the Bottom in?

Hope springs eternal... and then gets whacked.

Big jump in the Dow yesterday — up 889 points. Does this mark the end of the downturn... the bottom of the bear market... the worst it’s gonna get?

Everyone hopes so. But don’t count on it. There is almost always a large rally before the final bottom is in. Hope... followed by disappointment. Often several times. Over a long period of time. And by the time the final bottom comes, investors are so broke, so depressed, so fed up that they no longer care.

The Japanese market hit a high over 30,000 on the Nikkei Dow in January of 1990. Stocks plunged. Investors have been waiting for a recovery ever since. This year, for example, Japanese stocks have lost 50% of their value... bringing the index down to the 8,000 range, the lowest it’s been since 1982!

Compared to long-term investors in General Motors, the Japanese are lucky. GM is now trading in the $5 range — a price it last saw when your editor was born 60 years ago. But even that could get worse.

"End of the road for US automakers?" asks a headline in the Los Angeles Times.

Meanwhile, Detroit seems to be becoming a ghost town... or a hell-hole like Port-au-Prince, Haiti — with ice. Mansions once owned by auto industry tycoons now selling for $100,000 or less. But just wait until the auto industry shuts down completely!

You can read the Daily Reckoning in full here.

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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