Morgan Stanley says: not yet a market trough (... Therefore we should...)

Morgan Stanley (which reports tonight) is climbing on the "signposts for a trough" bandwagon with a thoughtful piece with 6 indicators. (Full note linked if you have MS research access.) Their conclusion: Not Yet.

Conclusions: Our six signposts for a market trough are yet to give a strong signal. Whilst the aggressive Fed and depressed sentiment are positive, valuation is still 9-19% above prior trough lows, our economic lead indicators are not yet at recession lows, and credit spreads, while high, are yet to form a peak.


Six Signposts: To determine if we have reached a market trough, we analyse six signposts, including: a) monetary policy, b) credit spreads, c) valuation, d) duration, e) market sentiment, and f) economic lead indicators.

• Ultra-Easy Monetary Policy: The Fed’s ultra-easy monetary policy is very positive for equities. When the real Fed funds rate has turned negative in the past, APxJ equities have on average delivered a 30% return in the following year.

• The Ongoing Blowout in Spreads Is Negative: Credit spreads are at high levels, but do not always peak before equities. Nonetheless, as the credit markets are at the centre of this downturn, signs of stabilisation may be necessary before equity markets trough.

• Valuation Still Above Historical Troughs: Valuations for both APxJ and the US are still 9-19% above average trough levels, a negative.

• Duration: Equity market troughs occur anywhere from one to 12 months into a Fed easing cycle, so we find this an unreliable indicator. That said, we could be 3-6 months away from a trough based on this indicator.

• Sentiment Enters Capitulation: Two of our sentiment indicators have entered the capitulation zone, suggesting a market trough and rebound near-term.

• Economic Lead Indicators Should Deteriorate: Our G6 and the OECD Lead Indicators are well above historical troughs, suggesting further downside if this is an average downturn. However, we expect a shorter and milder downturn than the average.

Everybody, myself included, has been saying beware of the bear rallies... which means it could rally longer than everybody (me included) is expecting. But first, I need to get a handle on apparently conflicting reports that the borrow, in HK at least, is the highest ever relative to free float, versus hedge funds apparently at record low net and gross levels. If both are true, the market is retail dominated and extra squeezable.

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March 11, 2008 - "Bear Stearns is not in trouble" - "Don't be silly"


Ho ho ho... Cramer, eh? Though to be fair, it's really really hard when you're on the spot and in the public spotlight every single trading day!