----- Original Message -----
From: "Ronald McEwan" <rmac@xxxxxxxx>
Sent: Wednesday,
December 10, 2008 10:42 AM
Subject: Q Ratio Signals Horrific Market
Bottom
>
> Q Ratio Signals Horrific Market Bottom, CLSA Says
(Update2)
>
>
> By Patrick Rial
>
> Dec. 10
(Bloomberg) -- A global stock slump may have further to go,
> according
to Tobins Q ratio, which compares the market value of
> companies to the
cost of their constituent parts, CLSA Ltd. strategist
> Russell Napier
said.
>
> The ratio, developed in 1969 by Nobel Prize-winning
economist James
> Tobin, shows the Standard & Poors 500 Index is
still too expensive
> relative to the cost of replacing assets, said
Napier. While the 39
> percent drop in the index this year pushed equity
prices below
> replacement cost, history suggests the ratio must sink
further as
> deflation sets in, he said. The S&P may plunge another
55 percent to 400
> by 2014, Napier said.
>
> The Q has come
down to its average, however its not always stopped at
> the average,
said Napier, Institutional Investors top-ranked Asia
> strategist from
1997-1999. It has tended to go significantly below that
> in long bear
markets.
>
> Shares have fallen this year as the worst financial
crisis since the
> Great Depression caused almost $1 trillion of bank
losses and dragged
> the worlds largest economies into recessions. The
MSCI World Index has
> tumbled 44 percent in 2008, set for the biggest
annual decline in its
> four-decade history.
>
> The S&P
500 increased 0.8 percent to 895.31 as of 9:54 a.m. in New York
> as
investors speculated lawmakers will approve a $15 billion bailout to
>
keep automakers afloat.
>
> Bear-Market Scholar
>
>
Napier, who teaches at Edinburgh Business School and advised clients
to
> buy oil in 2002 before it tripled, based his S&P 500 forecast
on the Q
> ratio for U.S. equities as well as the 10-year cyclically
adjusted
> price-to-earnings ratio, another measure of long-term
value.
>
> Before the trough in 2014, investors are likely to see
a so- called bear
> market rally for the next two years as central bank
actions delay the
> onset of deflation, Napier said.
>
> In
the long run, stocks will become even cheaper, said Brian
> Shepardson,
who helps manage $1.9 billion at Xenia, Ohio- based James
> Investment
Research. The firms James Balanced Golden Rainbow Fund beat
> 98 percent
of similar funds this year. There?s a likelihood of some
> type of rally
and further pullback surpassing the lows weve already
>
set.
>
> The Q ratio on U.S. equities has dropped to 0.7 from a
peak of 2.9 in
> 1999, and reaching 0.3 has always signaled the end of a
bear market,
> said Napier, 44, the author of Anatomy of the Bear, a
study of how
> business cycles change course. The Q ratio for U.S.
equities has
> fluctuated between 0.3 and 3 in the past 130
years.
>
> When the gauge is more than one, it indicates the
market is overvaluing
> company assets, while a Q ratio of less than one
signifies shares are
> undervalued because it is cheaper to buy
companies than to build them
> from the ground up.
>
>
Previous Bottoms
>
> At the end of the four largest U.S. bear
markets in 1921, 1932, 1949 and
> 1982, the Q ratio fell to 0.3 or
lower, and history is likely to repeat,
> said Napier. From the 1982
trough, the S&P 500 grew more than 14-fold to
> the middle of 2000,
when Napier says the last bull market ended.
>
> Napier started
his career in 1989 as a fund manager for the Scottish
> firm Baillie
Gifford & Co. As CLSAs Asian strategist he called the
> bottom of
Asian equity markets in mid-1998. This year, he predicted
> gains in
Japanese stocks prior to a 38 percent decline
>
> Measures such as
Tobins Q ratio and a 10-year price-to- earnings ratio
> are valuable
tools, said Andrew Milligan, the Edinburgh-based head of
> global
strategy at Standard Life Investments, which oversees about $190
>
billion. Milligan said he is bullish on U.S. equities for now as
central
> bank efforts to fight deflation will push the market
higher.
>
> Awaiting Signals
>
> For those who are
worried about losing much of their investment almost
> overnight, very
clearly youd want to wait for those signals to give a
> much stronger
case, he said. The bear market will have a painful
> resolution, its
just a question of how painful, over what period of
> time and for what
parties.
>
> Federal Reserve Chairman Ben S. Bernankes indication
that he will use
> quantitative easing to prevent deflation points to a
stock market
> rally that may last for the next two years, Napier said.
With
> quantitative easing, a tool pioneered by the Bank of Japan,
central
> banks can stimulate inflation by printing money and flooding
the market
> with cash in order to encourage consumers to
spend.
>
> The governments efforts will eventually fail as
ballooning government
> debt devalues the dollar, causes investors to
flee U.S. assets and takes
> the S&P 500 to its eventual bottom in
2014, Napier said.
>
> Bear markets always end for exactly the
same reason, and that is the
> market begins to price in deflation, he
said. Equities will be
> incredibly cheap.
>
__________________________________________________________
>
Click here for free information on consolidating your debt.
> http://thirdpartyoffers.juno.com/TGL2141/fc/PnY6rw2PBHP7WU4K1KsEeqAaPTWhNDjp9eAbdXnqyj2rDpQ16tAAv/
----------------------------------------------------------
No
virus found in this incoming message.
Checked by AVG - http://www.avg.com
Version: 8.0.176 /
Virus Database: 270.9.16/1841 - Release Date: 12/10/2008
9:30
AM