Crazy is as crazy forecasts

By Tony Jackson
December 29th, 2008
Financial Times


Absolute Strategy Research (ASR) calculates that for Europe, the ratio of buys to hold/sell recommendations hit about 63 per cent at the start of 2008, just after the market's all-time peak. The trough of 38 per cent came back in 2003, just as the market was poised for an explosive four-year rally. The ratio is now a little over 50 per cent, suggesting the market has further to fall. (One need not be sociopathic to be a stock 'analyst' but obviously neither is it detrimental to the cause - AM)

Back in the real world, my guess is that equities will not be the real story next year, any more than they were in this. That is not to say equity markets will be calm. Rather, they will be an expression of what is happening elsewhere, mainly in credit.

Begin with the fact that corporate defaults are still eerily low. According to Standard & Poor's, the latest 12-month trailing figure for global defaults was 2.7 per cent. This compares with the average for 1981-2007 - that is, excluding the period of almost zero defaults at the peak of the bubble - of 4.4 per cent.

Even leveraged loans - mainly a legacy of the private equity bubble - were on a default rate of only 3.8 per cent, compared with a peak in 2002 of almost 6 per cent.

But the distress rate - the proportion of loans trading below 80 cents on the dollar - is off the scale at 76 per cent, compared with a 2002 peak of just 10 per cent. If that figure is half-way right, watch out.

Ditto with the behaviour of banks' loan officers. According to the US Federal Reserve, 84 per cent of US banks are now restricting lending to large corporates. That compares with about 60 per cent in the past two recessions.