Sunday, 26 October 2008

Another awful week and a History Lesson

(by Richard Holway)

Last week in the markets

You probably don’t need reminding that it’s been another awful week for shares – tech in particular. But here are the Week, Month to Date and Year to Date falls in the main indexes:

NASDAQ – Week change -9.3%, MTD -24%, YTD -41%
FTSE100 – Week change -4.4%, MTD -21%, YTD -40%
FSES SCS(UK) – Week change - 6.6%, MTD -24%, YTD -34%

Until September, tech had fared much better than the general market. That was mainly because investors seemed to believe that “Tech is a safe haven in the gathering storm” and would be somewhat immune to any economic slowdown.

Well, such ‘Living in Denial’ is clearly well and truly over. I suggest you read Fortune 24th Oct 08 Tech teeters on the brink of recession. "Morgan Keegan analyst Tavis McCourt, who covers Apple and Research in Motion, two of the biggest growth engines in the sector, says he's convinced that the downward momentum is just starting."

So this was the week when markets stopped worrying about the survival of the financial system and turned their attentions to the general economy and 2009 earnings outlook in particular.
"What we are seeing is part of a bigger slide," says McCourt. "You won't find many companies growing earnings next year. It will be a full-blown recession. If you asked me a month ago, I wouldn't have said this."

Well, I could suggest that Tavis McCourt signs up as a HotViews reader because we have been saying just that not for a month but for most of the last year.

We are working on our 2009 revised forecasts. Our current ones, produced a few months back, were for no real growth in 2009. However that still equated to a minor 1% or 2% headline growth. (BTW – that is still the most pessimistic forecast of any forecaster!) But, clearly that is too optimistic now and any new forecast would be for a real decline and probably a decline at the headline level too.

Lesson from History

Just one ‘Lesson from History’. The papers for months have been full of advice to small shareholders not to sell at the current lows. The problem is that in every other recession I have lived through stock prices fell…and then continued to fall week after week, month after month, year after year.

We all know that the bubble burst on 6th March 00. Between its high of 4951 in March 00 and Oct 00, the FTSE SCS Index fell 45% - not a million miles from the current % fall from FTSE SCS high in Q3 2007.

BUT, between Oct 00 and Oct 01, the FTSE SCS fell another 72%. Between Oct 01 and Oct 02, the FTSE SCS Index fell another 56%. Indeed, that 2002 low of 340 is pretty much the same as the current index of 360.

It would a very brave or foolish person who called the bottom of the tech market right now. If history repeats itself, we are in for a long, persistent, depressing fall. Let’s hope by Oct 09, we really can call the nadir and look forward to better times.

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