Morgan Stanley says stocks could fall 10%

[Newt_Buggs]

How much weight, if any, do you give to articles like these?

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Morgan Stanley says stocks could fall 10 percent

OSLO (Reuters) - European stocks are overvalued and could fall by at least 10 percent within three to six months, a Morgan Stanley equity strategist said on Thursday.

"Tactically, we are neutral equities and overweight cash, seeing a correction of at least 10 percent," Vice President for European Equity Strategy Ronan Carr told an investor conference in Oslo.

"We are not calling for the end of the bull market, which typically runs from one recession to the next," Carr said. "We are cautious short term."

Morgan Stanley have preferred cash over equities and have been underweight in bonds since January 22 this year, he added.

"Our biggest concern is valuation," Carr said, adding that the investment bank preferred stocks with large capitalisations because of their relatively cheaper valuation and stronger balance sheets compared with small-caps.

Morgan Stanley was overweight in banks, pharmaceuticals, oil, materials and technology sectors, and underweight in autos, investment banks, real estate and consumer staples, he said.

Market timing models were also giving Morgan Stanley short-term "sell" signals.

"It's a bit mixed at the moment, but the sentiment is increasingly too bullish," Carr said. "The most worrying is the ratio between 'put' and 'call' options. People have given up buying protection on their portfolios."

Carr also pointed to an element of froth in credit markets, as shown by the emergence of "covenant light" bonds with less investor protection.

A market pullback could be triggered by wobbles in the credit markets or an inflation scare, Carr said.

"Bond yields have risen in the U.S. up to a level where you often see market pullbacks. You could also have an inflation scare, although were not worried on a structural basis."

A spill-over from troubled parts of the U.S. housing market and an overheating Chinese economy, were other possible triggers, he said.

"The property markets are looking stretched globally. Nobody talks about the U.S. subprimes anymore, but the full repercussions have not played out yet," Carr said. "If the U.S. has a hard landing, the rest of the world is unlikely to survive unscathed."

[DcifrThs]

not to take credit away from morgan stanley, but others (including myself) basically said this exact same thing a while ago.

i said i was neutral on equities since fundamentals were about neutral but flow and intermarket action were positive. add in risk factors and you'd get neutral to slightly negative.

global real yields are definitely still too low and i mentioned rates should be rising before they fall. so neutral equities & short bonds. the tougher call to make is the diff bets among developed world government bonds.

diff bets are extremely valuable since they are almost uncorrelated with each other (maaaayybe very lowly positively correlated in some instances) and almost certainly uncorrelated with all directional trades. thus they provide a good area to generate uncorrelated alpha streams.

europe, britain, japan, canada & the US are all likely headed higher with rates in the near term, however it seems europe & canada will move faster than the US, possibly along w/ britain while japan awaits stronger economic signals before pushing up rates again. so i guess that would put me in the long EURvUSA, long CANvUSA, very slightly long UKvUSA, long USAvJPN, long CANvJPN, long UKvJPN, long EURvJPN and neutral most other spread pairs (long as im using it here indicates that the spread between the two will widen as the first in the pair raises rates faster than the 2nd. in trading terms though it would mean being more short the first than the second. i didn't include australia b/c i forgot but i'd put AUS long v JPN, and US and slightly long to neutral vs. the others. one factor to watch here is the size of the carry trade to AUD assets)

back to the risky asset argument...given where we are, there are many factors that can lead to a sell off and very few that would lead to an extension of the rally. the post i made about global risk premia being squeezed suggested that now may be a time to move from risky assets to cash in active portfolios as a correction in asset pricing may be around the corner...especially with respect to credit spreads as an increase in risk aversion would affect those disproportionally more.

glad to see MS has jumped on the bandwagon [img]/images/graemlins/tongue.gif[/img]

[/brag]

please feel free to comment/correct anything i've stated above.

thanks
Barron

[hawk59]

sign of the times when a 10% pullback seems like a lot. who knows, but what the market has done over the past year is far from typical

[mtgordon]

Barron,

How long ago did you say this?

[Scorpion Man]

Question for the statistically minded:

If you have an asset with a 17% standard deviation, how often can you say it will fall at least 10% in the next six months and end up being right on purely the basis of statistical fluctuation (incorrectly assuming a Gaussian dsd).

[crazy canuck]

[ QUOTE ]
Question for the statistically minded:

If you have an asset with a 17% standard deviation, how often can you say it will fall at least 10% in the next six months and end up being right on purely the basis of statistical fluctuation (incorrectly assuming a Gaussian dsd).

[/ QUOTE ]


N(d2) in the BS formula gives you the probability that the stock will be bigger than a certain strike under geometric brownian motion assumptions. N() is cumulative normal distribution.

So assume S (stock price) = 100.
Strike K = 90
Time = T = 0.5 years
std = sigma = 0.17

So probability that stock bigger than strike = N(d2)

d2 = (log(S/K)+(r-sigma^2/2)T)/(sigma*sqrt(T))


So I get 85% with 5% interest rate.

Therefore, based on these assumptions there is a chance of 15% that Morgan-Stanley is right and the market will drop more than 10%.

[captZEEbo]

does this mean I should sell some of my europe stock?

[SlowHabit]

[ QUOTE ]
does this mean I should sell some of my europe stock?

[/ QUOTE ]
It means you should load up your moneys and wait until the 10% drop actually happen and buy more European stocks.

[Jeff W]

[ QUOTE ]
How much weight, if any, do you give to articles like these?

[/ QUOTE ]

0

[DcifrThs]

[ QUOTE ]
Barron,

How long ago did you say this?

[/ QUOTE ]

maybe 3weeks-1mo ago. i think i even said it further back as well but not quite sure...that opinion has been held since last november though...post is part tounge in cheek (MS agreeing doesn't make it so).

Barron