Morgan Stanley warns the 'mid-cycle rally is over'
Posted on 06/06/2007 1:42:29 AM PDT by bruinbirdman
Morgan Stanley has advised clients to slash exposure to the stock market after its three key warning indicators began flashing a "Full House" sell signal for the first time since the dotcom bust.
Morgan Stanley warns the 'mid-cycle rally is over'
Teun Draaisma, chief of European equities strategist for the US investment bank, said the triple warning was a "very powerful" signal that had been triggered just five times since 1980.
"Interest rates are rising and reaching critical levels. This matters more than growth for equities, so we think the mid-cycle rally is over. Our model is forecasting a 14pc correction over the next six months, but it could be more serious," he said. Mr Draaisma said the MSCI index of 600 European and British equities had dropped by an average of 15.2pc over six months after each "Full House" signal, with falls of 25.2pc after September 1987 and 26.2pc after April 2002. "We prefer to be on the right side of these odds," he said.
The first of the three signals Morgan Stanley monitors is a "composite valuation indicator" that divides the price/earnings ratio on stocks by bond yields. It measures "median" share prices that capture the froth of the merger boom, rather than relying on a handful of big companies on the major indexes.
"If you look at all shares, the p/e ratio is at an all-time high of 20," he said.
The other two gauges measure fundamentals such as growth and inflation, as well as risk appetite. "Investors are taking far too much comfort from global liquidity. Markets always return to fundamental value, so people could be in for a rude awakening. This is the greater fool theory," he said. "The trigger may be rate rises by the Bank of Japan, or a widening of credit spreads. There are lots of little triggers."
Morgan Stanley is not predicting a recession, believing bond yields will fall during a correction and act as an "automatic stabiliser" for the world economy. Once the market shakes off the latest excesses, it's back to the races.
A triple sell warning is a buy signal.
Give me a nice healthy 10% pullback, then I will invest more. This relentless climb is getting on my nerves.
Yes, it’s about time we had a good, strong correction. More than 10%.
ssshh! Don’t tell the Chinese!
Anyone know if MS issued a warning on the Nazdog crash before March, 2000?
Triple Sell Signal=”we need churn”
“Interest rates are rising and reaching critical levels.”
Really, “critical levels?” Since when?
>>A triple sell warning is a buy signal.
<<
How has that worked out historically?
If earnings are too low for their price, growth is slow and inflation is high that does not, on the surface sound like a buy signal.
>>Anyone know if MS issued a warning on the Nazdog crash before March, 2000?<<
They jumped the gun and issued it in late 1999.
It looks like English but all I hear is, "Blah, blah, blah."
This climb is being fueled by private equity acquisitions, which I believe is being fueled by the desire of companies to avoid Sarbanes-Oxley. In other words, the climb is not being fueled by fundamentals.
Yeah, I've heard Brinker talk about this recently. He expects this to continue during the current administration and to help fuel the market. S&P sitting around 17 reported P/E is pretty benign compared to 46 in 2001.
I wonder what will happen in the long run, though. Will this get us into the monopoly/collusion territory? I remember the Big Bell/Baby Bell breakup. We are going in the opposite direction now. I'm certainly not an expert on the subject.
No. These acquisitions are being done by private investors, not other companies.
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