FYI | Aug 29 2007
We are experiencing the advent of another strong leg of the global bull market for equities. It is either that or the start of a bear market.
Wow, that’s quite extreme, I hear you thinking. Why cannot we have something in between, like a more moderate growth phase as an extension to the bull market we’ve experienced so far?
Because this is a time of extremes. And I’d be inclined to think that signals of extremity are to be followed up by something that is equally extreme by its inner nature.
This week, for the first time in the five years that we have been closely monitoring Buy, Sell and Hold recommendations on individual stocks by major stockbrokers and equity researchers in Australia, the total amount of Buy recommendations has surpassed the total amount of Holds.
I learned recently this was traditionally always the case in the US and that’s why authorities have put some new regulations in place over the past few years. The trend in the US appears to be now that the amount of Buy recommendations is shrinking in favour of more Holds and Sells. In Australia, however, Hold/Neutral/Marketweight ratings have always ruled the day. Until this week.
Those readers who log on to our website every day and look at how our Bear/Bull Indicator progresses would have already guessed it as, yes, this week saw another compartment added to the framework as the Indicator fell to new lows (signaling the market continues to grow in bullishness). Our Bear/Bull Indicator measures underlying market sentiment by measuring the relative amount of Buy, Hold and Sell recommendations in the market.
We’ve now had to add an extra compartment on the bullish side of our Indicator for three weeks in a row. I looked at the Indicator this morning and it looks really ugly these days, completely out of balance.
However, if the pace of recommendation upgrades from the past weeks continues over the next few days we’ll have to add another compartment soon. It’ll make the Indicator look even uglier.
This is almost beyond extreme.
This week saw 66 recommendation upgrades against 30 downgrades. That is a lot, but it is reporting season. The week to August 11 saw 50 upgrades against 11 downgrades. The week before that generated 36 upgrades and 13 downgrades. The week before that had 22 upgrades versus 11 downgrades.
That makes 174 recommendation upgrades against 65 downgrades for August (two more days to go) in a result season that is said to have generated a lack of positive surprises, but overall relatively strong performances.
If you look at the bottom graph in this week’s Weekly Analysis (available on the website for those who missed the email) you’ll see that out of the ten experts we monitor six of them have now more Buy recommendations in their research universe than Holds or Sells. And UBS is very close to becoming the seventh (the broker currently has an equal amount of Buys and Holds).
Three out of those six experts currently have more Buy recommendations than Holds plus Sells combined. These three are ABN Amro, Credit Suisse and Merrill Lynch.
Two weeks ago I wrote that 2.25 out of every three stocks covered by these ten experts carried at least one Buy recommendation. I haven’t done the calculations this week, but I have little doubt the present number is even higher.
There are only about 200 Sell recommendations out of a total of more than 2000 ratings for individual stocks by these ten experts. The amount of Buy ratings is approaching the 1000, and fast.
The gap between the amount of Buys and the rest simply continues growing. It’s almost like every time the share market pulls back a few more stocks are being upgraded to Buy, and every time the share market recovers most of those Buys remain in place and some more Buys are added.
Click on the Low Sentiment Button on our Sentiment Indicator page and you’ll find one single stock: West Australian Newspapers (WAN) – widely considered too expensive on fundamental grounds. Not even Spotless Group (SPT) is there anymore! Nor is Bendigo Bank (BEN), or Hutchison Telecom Australia (HTA).
And it gets crowded at the top too. Usually we have one or two, maybe three stocks that carry the maximum score on our Sentiment Indicator. As things stand now the upcoming Australian Super Stock Report (to be published next week) could well contain a top ten list of stocks with a maximum score of 1.0. This means that every broker/expert we monitor that covers this particular stock rates it a Buy.
We currently have seven stocks with only Buy recommendations: Boart Longyear (BLY) with six out of six, Macquarie Leisure Trust (MLE) with five out of five, followed by five stocks that each have four Buys out of four; Perilya (PEM), Tassal Group (TGR), Aditya Birla (ABY), Domino’s Pizza (DMP) and Galileo Japan Trust (GJT).
Six other stocks only require one recommendation upgrade to join this list.
Guess what the average share price potential is for the first seven stocks as implied by the difference between average price targets and Wednesday’s closing share prices?
26.26%. (Dividends not included).
One would be inclined to think these figures cannot be stretched much further. That’s what I thought two weeks ago, but they have.
Let’s see what one of our favourite market commentators, Dennis Gartman, unaware of the above mentioned figures, had to say in his daily newsletter today:
“We hear the chorus of those who argue that share prices are now “cheap” relative to history in terms of P/E multiples, or book values, or dividends et al. We hear them, and yet we chose not to listen, for the same chorus of voices preceded, and then ran contiguous with, the bear market of ’73-’74, and the bear market of ’81-’82.
“All the way down, in both of those markets, the bulls argued that the market was “cheap,” that earnings were high and rising, that valuations had reached untenable levels… and yet prices continued to wend their way lower, and economic conditions continued to deteriorate until such point as there were no earnings with which to make an P/E valuation, and book values became nothing more than a chimera.
“It was then that prices reached their bottoms… amidst overwhelming despair, and the wailing and gnashing of teeth.”
Gartman is convinced the world has entered a bear market and thus global equity markets will sink lower than the lows of two weeks ago – sooner rather than later.
This week also saw Morgan Stanley strategist Gerard Minack acclaiming the next leg of the bull market will take the S&P/ASX200 index above 6700 by the end of December, some 14% higher than where the index is on Wednesday. No doubt, investors will have been heartened by this firm statement.
But… Gerard Minack firmly bullish on Australian equities?
Before Minack left ABN Amro to join Morgan Stanley three years ago, I used to read his weekly comments almost religiously, because his views were always opposite the crowd. Minack earned his reputation as the local market’s Super-Bear because he always saw problems; consumer spending, bond yields, interest rates, housing prices – there was always a worry around that needed to be highlighted.
Now Minack says investors should not worry about global problems in the credit and debt markets because Australian shares will surge a net 14% by Christmas.
There’s an old saying in financial markets that when the last bear in the market changes his view, the end is near. Last year, Morgan Stanley’s global strategist Stephen Roach cast his global worries aside following a visit to China. That was in early May. A week later global equity markets sold off in a correction that lasted for almost two months.
If Minack is not the last bear, who else is left standing?
Till next week!
Your less than extreme editor,
Rudi Filapek-Vandyck
(As always supported by the Fabulous team of Greg, Terry, Chris, Pat, Joyce, Grahame and George)
