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Is the bear just playing dead?

TheStar.com - Business - Is the bear just playing dead?

Despite bargain hunting, sudden burst of optimism, the answer really does depend on whom you ask

November 29, 2008 James Daw

Global stock markets shot higher this week, producing the sort of quick gains that most investors would be delighted to see in an entire year.

Toronto S&P/TSX composite index rose nearly 14 per cent, while New York's S&P 500 and Dow Jones industrial average rose roughly 12 per cent and 10 per cent respectively.

These gains barely dented the losses of recent months, but the sudden burst of optimism and bargain hunting may have you asking: Is the bear market over? Has the next bull cycle begun?
The answer will depend on whom you ask, but it's safe to say nobody knows for sure. We've been hit by too many shocks in a matter of weeks to think they will be the last.

Bob Gorman, chief portfolio strategist at TD Waterhouse, thinks major markets are roughly in the range of what could turn out to be the true bottom, even if this week's gains are quickly wiped out over the next few weeks.

"We had lows in October, then we recently revisited those lows a little more than a week ago – and those sorts of levels represent pretty cheap prices," he said yesterday. "We will probably find a bottom around those levels."

But that's not what Robert Prechter Jr. and his acolytes at Elliott Wave International Inc. in Gainesville, Ga., are thinking. Their theory is that if you, dear reader, still care the slightest about stock prices, they still have a long way to fall.

The author of Conquer The Crash, published in 2002, plus a dozen other books and hundreds of newsletter commentaries has persuaded his true followers not to declare this bear market over until we see the "outright death of the equity culture."

Prechter has forecast all manner of sweeping social developments during this latest "supercycle" of extreme pessimism, including the rise of socialism in the U.S., the collapse of America's social security system, lower hem lines, violent race relations and a decline in the popularity of restaurants and Shakespeare.

Hey, I'm not making this stuff up; he is.

But so far in 2008, Prechter and his crew have declared themselves more right than wrong about sharply falling stock prices, the peaks and declines of oil and gold and the depressing economic downturn.

Back in the mainstream, Gorman frankly admits he was wrong to predict last year that 2008 would see North American stock markets rise for the sixth year in row. Even after this week's gains, markets have fallen by a third or more.

It is clearer now that economic hardship lies ahead. Yet he argues stock prices are tantalizingly inexpensive. Even if profits fall by a quarter more than stock analysts expect, current stock prices would be only about 12 times those lower earnings.

"That is not terribly expensive," he argues.

Meanwhile, Gorman points out, U.S. institutions and retail investors are sitting on about $3.7 trillion in money market funds, equal to about a quarter of the value of U.S. equities. Some of that cash could well move into stocks. Already company insiders are buying twice the volume of shares they are selling, he says.

Those and other positive signs considered, Gorm an says that he expects markets to be about 14 per cent higher by the end of next year. With dividends, total investment returns would be somewhat higher.

"When you go through a bear market, it tends to be much shorter than a bull market," Gorman says.

"Of course pessimism can get pretty thick, and my view is that it was somewhat overdone. We do have rough economic times ahead, but the market will always look ahead."

Now, if pessimism is all you are feeling, then Prechter is your man. He has predicted stocks will not hit bottom until share prices are only six times earnings per share, and dividend yields are in the range of 17 per cent.

A lot of people would have to turn their backs on stocks before that happened. Poll your friends to see whom they would rather believe.

Friday was the 6th Day From Bottom QEC ,TLM Running Up Fast

Will this help Oilexco?

U.K. takes majority control of Royal Bank of Scotland

EMILY FLYNN VENCAT

Associated Press

November 28, 2008 at 5:35 AM EST

LONDON — Royal Bank of Scotland Group PLC said Friday the British government will take majority control of the bank — buying close to a 60 per cent stake — after its shareholders shunned a stock offering.

RBS, which has indicated it could post its first ever annual loss this year, said investors bought just 0.2 per cent of shares offered to them in a 20 billion pound ($31-billion U.S.) government plan to recapitalize the bank. The offer, issued last month, expired on Friday.

Under the terms of the plan, the government agreed to buy any shares not purchased by investors.

As a result, the government is expected to buy nearly all 20 billion pounds worth of shares, with 15 billion pounds going for ordinary shares and 5 billion pounds for preference shares.

This will leave the British Treasury owning 57.9 per cent of the bank, and sitting on an immediate paper loss on its investment of around 5 billion pounds.

The British Treasury was not immediately available for comment.

The deal forms the largest part of the government's wider plan to recapitalize Britain's banks.

Last month, RBS, Lloyds TSB Group PLC and HBOS PLC agreed to sell a combined 37 billion pounds worth of stock to shore up their balance sheets. In all three cases, the government guaranteed to buy any shares not purchased by investors.

Shares in RBS were roughly flat at 55 pence in early trading on the London Stock Exchange, as the market had been widely expecting that the government would be taking a majority stake in the bank.

Last week, shareholders approved the capital raising plan though it was clear that ordinary investors would be unlikely to buy the new shares because they were selling for 65.5 pence — around 28 per cent more than the existing share price.

RBS shares were above 380 pence last December, and above 200 pence as recently as Sept. 26.

The bank is expected to buy the preference shares back from the government as soon as possible because it will be forbidden from paying any dividends to ordinary shareholders while the preference shares are outstanding.

The drastic fundraising plan comes on top of a 12 billion pounds rights issue by RBS earlier this year — at the time the biggest ever rights issue in Europe.

RBS has been one of the hardest hit European banks in the financial crisis because of its large exposure to sub-prime loans and its expensive purchase of ABN Amro bank just before the credit crunch.