Morgan Stanley: "Full house buy signal"

Morgan Stanleys aktiestrateg Teun Draaisma, 3 november 2008:

Från vår ”full house sell signal” i juni 2007, till en ”full house buy signal” nu 31 Oktober 2008.

”We have now come full circle: our market timing indicators are giving us a full house buy signal, i.e. each of the indicators (valution, Capitulation, Risk, Fundamentals) tells us to buy”.

”The latest elements that pushed us there have been a capitulation among retail investors, purchasing managers and sellside

analysts, as measured by record mutual fund outflows, ISM new orders below 40 and analysts revisions collapsing.

The idea is that when these three groups know about the bad news, equity prices are probably already reflecting it.”

Naturligtvis har vi inte alltid rätt…

”Obviously, our market timing indicators do not always work … Our disciplined quantitative approach to tactical asset allocation is obviously not a 100% guarantee to success. For instance, we did not get a sell signal after July of this year, ahead of the freefall in equities in the last two months. These models tend to work some 80-90% of the time, and in the

10-20% that they don’t work the move the other way can be spectacular. We are aware of the limitations of these models, but our approach is to play the odds and never contradict the signal, and use our judgment as to what extent we should follow the signal.”

… Men ”full house signals” har en nästintill perfekt träffsäkerhet.

”The full house sell signals have a perfect 6 month track record, as equities have always been down the next 6 months, with signals ahead of the 87, 90, 92, 02 and 07 corrections. Full house buy signals have been very good at indicating the vicinity of a major turning point, but have sometimes been early, with signals in July 84, August 98, and September 2002. The only wrong full house buy signal was November 2001, but this was flagged as soon as April 2002 by a full house sell signal.”

”The bad news is in the price”

”Implication: despite the bad fundamental outlook, prudent investors should not be short equities, and long-term investors should average in. We believe we are in the worst earnings recession of the last 40 years, expecting a 43% earnings recession ending at the end of 2009. Our end of 2009 earnings estimate is 43% below IBES consensus. But we do believe at 8 times trailing earnings, or 14 times our estimate of end of 2009 trough earnings, the bad news is in the price, and we do not wish to be short equities. We see 15% upside to our 12 month target for MSCI Europe, and we are 5% OW equities, neutral cash, 5% underweight bonds.”

”This is consistent with our idea that the severe part of the bear market is over, that there is value, but probably no hurry, as there are many short-term risks related to EM, FX and deleveraging. The more prudent investor may wish to stay in cash and not be overweight equities, but our advice is not to be short or underweight anymore. Our advice is also for long-term investors to keep on averaging in at these and lower levels. See also Time To Buy A Little Bit More, 13 October 2008 and Back to Basics: The Earnings Recession, 27 october 2008.”