Wednesday, November 19, 2008 Yola Edwards Technical View
TORONTO (GlobeinvestorGOLD) —Text: Technical charts suggest the vicious market decline may subside temporarily offering investors trading and exit opportunities before further declines take the markets to new multiyear lows. Note: The following chart legend: blue line - 10-Day/Week MA, green line - 20-Day/Week MA, red line - 41-Day/Week MA, pink line - 200-Day/Week MA, and Bollinger bands surround the stock and indexes’ price movements. .
TSX vastly undervalued, UBS says
Wednesday, November 19, 2008
Here's Allan Robinson's At The Bell which you'll find in Thursday's newspaper:
The Canadian economy is slowing, but investors are expecting the worst and, as a result, the S[amp]amp;P/TSX is more than 47 per cent undervalued, said George Vasic, a strategist with UBS Securities Canada Inc.
“It's hard to entertain such notions when the market is down 1,000 points in less than 10 days or so,” he said.
But UBS estimates the S[amp]amp;P/TSX within a year could reach 12,500 points, compared with yesterday's close of 8,490.56 and that target is not far-fetched, Mr. Vasic said. “In part, it is the current valuations that are depressed,” he said. “The target itself is not as lofty as it appears.”
Even with the S[amp]amp;P/TSX at 9,000, the price-to-book value is three standard deviations below the level suggested by the return on equity adjusted for 7-per-cent corporate bond yields, Mr. Vasic said. Put another way, stocks are only undervalued or overvalued that much one out of 100 times, which should be a “reasonably rare event,” he said.
UBS's 12-month index target is based on 2009 S[amp]amp;P/TSX share profit of $750 and that would still leave the index within one standard deviation, which indicates the valuation would be higher two-thirds of the time. If the S[amp]amp;P/TSX earnings slumped to $600 – which is one-half the earnings level projected just six months ago – the 9,000 level would still be relatively inexpensive.
Although the implied price-to-earnings multiple of 16.6 times looks high, P/Es tend to expand sharply when earnings slow sharply. That multiple is lower than at the end of any previous earnings decline since 1987, the UBS report said.
HOW WILL THE MARKET REACT?
“Investors tend to underestimate, if not ignore altogether, the tendency for multiples to rise when earnings decline,” UBS said. As a result of extremely challenging circumstances such as investors are facing today, that leads to very bearish forecasts when low multiples are applied to low earnings predictions.
“It will take time for investors to remove the discount,” Mr. Vasic said. It's a 12-month target and it would only take the S[amp]amp;P/TSX to where it was on Sept. 25.
“We have had three, four or five false starts already,” Mr. Vasic said. “Investors are waiting to see if things are getting better, but for now they are assuming the worst.”
Investors don't believe that the interest rate cuts are the answer, he said. Although fiscal measures often start after an economic recovery begins, governments are moving more swiftly this time, he said.
© Copyright The Globe and Mail
Wednesday, November 19, 2008
Here's Allan Robinson's At The Bell which you'll find in Thursday's newspaper:
The Canadian economy is slowing, but investors are expecting the worst and, as a result, the S[amp]amp;P/TSX is more than 47 per cent undervalued, said George Vasic, a strategist with UBS Securities Canada Inc.
“It's hard to entertain such notions when the market is down 1,000 points in less than 10 days or so,” he said.
But UBS estimates the S[amp]amp;P/TSX within a year could reach 12,500 points, compared with yesterday's close of 8,490.56 and that target is not far-fetched, Mr. Vasic said. “In part, it is the current valuations that are depressed,” he said. “The target itself is not as lofty as it appears.”
Even with the S[amp]amp;P/TSX at 9,000, the price-to-book value is three standard deviations below the level suggested by the return on equity adjusted for 7-per-cent corporate bond yields, Mr. Vasic said. Put another way, stocks are only undervalued or overvalued that much one out of 100 times, which should be a “reasonably rare event,” he said.
UBS's 12-month index target is based on 2009 S[amp]amp;P/TSX share profit of $750 and that would still leave the index within one standard deviation, which indicates the valuation would be higher two-thirds of the time. If the S[amp]amp;P/TSX earnings slumped to $600 – which is one-half the earnings level projected just six months ago – the 9,000 level would still be relatively inexpensive.
Although the implied price-to-earnings multiple of 16.6 times looks high, P/Es tend to expand sharply when earnings slow sharply. That multiple is lower than at the end of any previous earnings decline since 1987, the UBS report said.
HOW WILL THE MARKET REACT?
“Investors tend to underestimate, if not ignore altogether, the tendency for multiples to rise when earnings decline,” UBS said. As a result of extremely challenging circumstances such as investors are facing today, that leads to very bearish forecasts when low multiples are applied to low earnings predictions.
“It will take time for investors to remove the discount,” Mr. Vasic said. It's a 12-month target and it would only take the S[amp]amp;P/TSX to where it was on Sept. 25.
“We have had three, four or five false starts already,” Mr. Vasic said. “Investors are waiting to see if things are getting better, but for now they are assuming the worst.”
Investors don't believe that the interest rate cuts are the answer, he said. Although fiscal measures often start after an economic recovery begins, governments are moving more swiftly this time, he said.
© Copyright The Globe and Mail
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