Rudi's View | Dec 22 2011
By Rudi Filapek-Vandyck, Editor FNArena
There is an obvious analogy between what is happening in equities markets this month and what happened in late 2008 and I am certainly not the only one who has made that observation.
Just like in 2008, equities bounced in October after yet another mark down, only to be pressured lower again as the deterioration in the global macro-environment is simply too big, too obvious and too dominant to ignore.
It's difficult to anticipate anything other than that we will see more pain first, before we can start zooming in on gains again.
Maybe that's the smart thing to do right now?
Back in late 2008 I wrote a story wherein I stipulated the bottom in this downturn is somewhere in front of us. We just don't know as yet where and when exactly it is to be located. As it turned out, after two dreadful opening months in the following year, a short covering rally started in the US on March 6th and ensured markets had seen the bottom.
A rally followed.
I think we will see a similar scenario unfold in 2012. I don't know as yet when, where and why exactly it will happen, but somewhere in front of us lies the over-saturation point in negative news flow and from investors fleeing the stock market for the safety of cash, property and government bonds.
How will we know whether that point of reversal is approaching?
There are two indicators that have in the past proved their value as reference points. One is the OECD Leading Indicator, which at present is negative and falling, and the second one consists of global forecasts for corporate profits and -whatdayaknow– global earnings estimates are still falling too.
A few weeks ago I indicated when this is the case, it's usually the worst time to be in the share market as historical returns are the worst out of all available scenarios. The good news is, however, the next phase in the cycle for both these market indicators tends to be the most profitable one for equity owners.
This is why I thought a flash-back to three years ago is apt as the experience of 2008-2009 proved just that: first more pain, and during the process the foundations are being laid for the following gain.
Don't just take my word for it, analysts at both UBS and Macquarie have been doing some backward looking data analysis earlier in the year and in both cases their analysis confirmed that what happened three years ago will likely happen again this time around as well.
Admittedly, things look a bit different because of the seemingly permanent macro-overhang of Europe and its problems, and it may well be that the trigger for the next rally this time will come from the European banks, but it remains my view that any rally will prove unsustainable until the two indicators I mentioned before will have turned for the better as well.
Which brings us to the obvious question: when is that going to happen?
Analysts at Macquarie updated their views this week and they believe the turning point could be sooner than many of us are inclined to expect, because the news continues to be so negative, as is the accompanying price action.
Macquarie thinks we are staring towards a bottom in Q1 next year when the trough for both the OECD Leading Indicator and the downtrend in global earnings forecasts will likely manifest themselves.
I am a little less optimistic than Macquarie and suspect it will take a little longer, potentially into Q2 this time, but the difference is in timing, not in underlying principle. Macquarie analysts left some room for alternative scenarios just in case their base case view will be proven incorrect in timing.
On their modelling things will fall into place for a reversal of fortune for equities between late Q1 and August next year.
In practical terms, this translates into we are either going to see a repeat of 2009 next year, or a slower process, but 2012 should see both the depth and the turnaround in this downtrend. I think that's something to look forward to.
In the meantime, be like an experienced hunter, be patient (or adjust your principal focus if you're a trader).
(This story was originally written on Tuesday, 20th December and sent out in the form of an email to paying subscribers on the day.)
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This is my final Weekly Insights market commentary for calendar 2011. I hope you all enjoyed it as much as I enjoyed writing down my ever evolving insights and personal analyses (I think I did a good job in avoiding writing about Europe the whole year). Weekly Insights will return in the third week of January.
Best Wishes to you all. May 2012 bring wisdom, fortune and happiness, and still leave enough to aspire for in subsequent years.
It was a pleasure, as always,
Your Editor,
Rudi Filapek-Vandyck
P.S. A paid subscription now comes with two e-booklets written by myself. One is last year's "Five Observations (That Matter)", the second one is the recent "The Big De-Rating".
The first one will help with using FNArena's tools and applications, the second one explains how not to become a dinosaur in a changing investment climate. If you are a paying subscriber and you haven't downloaded your copies as yet, send an email to info@fnarena.com