"The market has fallen to depressed levels, and many commentators are saying it is time to come back into the market. What will tell you that the time is right to come back and buy stocks?"
Over the last 12 months, only 12 of the top 350 companies in the UK stock market have risen in value at all.
This is awful.
The relentless downturn in stocks is one reason why we have slowed the stream of new recommendations that you may be accustomed to. It underlines why we favour diversified large cap groups over riskier small cap plays and it also highlights why we have introduced non-stock assets into the portfolio.
Of course, sooner or later, we will have another bull market. But that will not happen overnight.
As we have been saying for some time, recession in the UK is a certainty. Consultancy Ernst & Young have recently joined us in that view, arguing for a relatively light 1% decline in British growth next year.
Ernst & Young: Recession forecast for 2009
In my view a 1% drop is too optimistic. We are facing a much deeper recession. One that will continue to hit listed companies and weaken stock values.
This is one reason why we have not produced any new stock recommendations.
So what will prompt new stock tips?
Wait for the tide to turn in analyst forecasts
It seems like everyone from policy makers to the media has turned ultra-bearish in their outlook. However, there has been one group lagging reality, as they tend to, and that’s the analysts.
Yes, I am waiting for that old chestnut, the analyst forecasts to get even more bearish before I make my next stock recommendation.
Analysts are notoriously bad at their jobs. It would be comforting to believe their semi bullish views at this stage but unfortunately things are going to get worse. Just because things are bad already does not mean they can’t get much more painful.
That’s why you need to take what professional number crunchers tell you with a pinch of salt. Analysts, like regular investors, tend to herd around one point of view and are slow to react to the often sudden changes in the market.
We will use the current earnings season as an opportunity to grade the analysts’ pessimism.
Q3 earnings are in, and despite the bearish posturing, 111 listed companies reported profit warnings. That is, 111 companies produced worse figures than the City had expected them to.
According to our indicator (first published to Fleet Street Letter readers on 2 October), this would represent the "Denial" stage of analyst folly. This is where analysts downsize their optimism but do not go far enough. What follows is "Fear". This is when the downturn shocks analysts into action. They turn their forecasts around and issue massive earnings downgrades for the foreseeable future.
So when do we buy?
...when analysts say sell. We are currently in between that delicate position where analysts go from being not bearish enough to being too bearish. That is our opportunity.
Now that these companies are underperforming over-bullish estimates, analysts will use a hatchet to cut earnings forecasts in half. And by the time they finally wake up to reality and realise that the climate has changed completely, the worst may already be behind us.
This will be our opportunity to come back into the market.
When my shortlist of new recommendations is oversold and underestimated, that is when we are going to buy.
In the meantime, we are offering a stock market hedge that has outperformed the FTSE 100 by 25.19% since our recommendation on 9 August.
As the UK economy crashes into recession, this investment actually gains in value. Also, since tipping, it has paid a dividend to shareholders and represents a great potential safe haven in this volatile bear market. My colleague Ben Traynor has written a short report on this opportunity.
Best wishes,
Theo Casey
Investment Director
The Fleet Street Letter
P.S. Due to the popularity of our special Credit Crunch presentation, we will be doing another. On Wednesday I will conducting a video interview of our Editor-in-Chief Lord Rees-Mogg for his take on the bear market and on global recession. Send your questions to fsl@f-s-p.co.uk.
P.S. If you enjoyed this article then we encourage you to sign up for The Fleet Street Letter. Get contrarian, cutting-edge analysis for sensible, long-term investments that secure you high growth and healthy dividends.
