Street Over-Optimism?

Everybody and his dog is still looking for a bottom in the market.

Reading John Authers ("Short View") this morning in The FT in which he points out that with a recession clearly upon us, earnings growth forecasts for the US still show all sectors positive for the full year.

FT: "In spite of the widespread belief that the US is entering recession, no sector is forecast to suffer falling profits... Excluding financials, brokers now expect S&P profits growth of 7 per cent for the first quarter. Starting in this year’s third quarter, growth of at least 14 per cent is expected until the final quarter of 2009 – numbers that do not square either with a recession or with a tightening in the terms of credit... The last two recessions both saw several quarters where forecasts were written down by more than twice as much. So this implies downgrades have further to go."

Looks pretty bad.

SO I went off and did a bit of homework this morning myself, looking for what earnings growth was being forecast by the Street for Asian markets (according to Bloomberg data.) Looks like Asian markets are generally less bullish than the US in terms of current year forecast growth but, eyeballing it, more or less in step for next year. So positive for Asia, on a relative basis, it would seem.

THEN on the assumption that forecasts are generally still too positive, I got creative to see which markets were still expecting an acceleration in earnings growth into next year and were currently trading at a premium to growth (the nice-and-simple PEG or P/E-to-Growth ratio) - which if there are downgrades, should be bearish. (Flip side is an already forecast deceleration in earnings combined with a "discount" to PEG ratio, which should be more defensive.)

Possible (relative) Bear markets (not ranked):

• SHANGHAI SE B SH (Shanghai Bs)
• KARACHI 100
• NIKKEI 225
• NIKKEI 300
• TOPIX
• NZX ALL INDEX
• STRAITS TIMES

Possible (relative) Bull markets (not ranked):

• S&P 500
• NASDAQ COMPOSITE
• CSI 300 (Shanghai/Shenzhen As)
• SHENZHEN SE A SH (Shenzhen As)
• HSCEI HANG SENG CHINA (H-shares)
• JAKARTA LQ-45
• KOSPI INDEX (Korea)

These were NOT the results I was expecting to see - particularly surprising was that the US and China H- and A-shares appear in the bull table and that Singapore and Japan appear right up there with the bears.

We shall see! (And in the meantime, high volatility will continue...)