Morgan Stanley Says Sell Best S&P 500 Rally Since ’38 (Update3)
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By Nick Baker
March 30 (Bloomberg) -- Investors should sell U.S. stocks following the steepest rally since the 1930s because earnings are likely to keep weakening, according to Morgan Stanley.
The Standard & Poor’s 500 Index advanced 21 percent in the past 14 trading days, the most since 1938, according to data compiled by New York-based S&P analyst Howard Silverblatt. It closed at 815.94 last week, rebounding from the 12-year low of 676.53 reached on March 9.
“We cannot see large upside for the S&P 500 above the 825- 850 level,” Morgan Stanley U.S. equity strategist Jason Todd wrote in a report yesterday. “In the rush to buy a cyclical recovery, it seems earnings or valuation no longer matters. We would be comfortable with this view if the earnings trough was closer, but it is not.”
The S&P 500 lost 3.2 percent to 789.86 at 12:26 p.m. in New York as the Obama administration warned that some banks will need more government aid and bankruptcy may be the best option for General Motors Corp. and Chrysler LLC.
U.S. companies will start reporting results for the first quarter in the next two weeks. Analysts, who have overestimated profits for every period since the third quarter of 2007, expect S&P 500 earnings to drop 36 percent on average, paced by retailers, automakers and semiconductor suppliers, according to data compiled by Bloomberg. They’re forecasting S&P 500 companies won’t halt the longest streak of declining earnings since at least 1947 until the fourth quarter.
Financial ‘Backstop’
New York-based Citigroup Inc. and JPMorgan Chase & Co. and Charlotte, North Carolina-based Bank of America Corp. were among banks that said they were profitable in January and February. The Federal Reserve pledged on March 18 to buy more than $1 trillion of Treasuries and bonds backed by mortgages to drive down interest rates.
Treasury Secretary Timothy Geithner last week unveiled a plan to remove so-called toxic assets from bank balance sheets by providing as much as $1 trillion in non-recourse financing to private investors to purchase the securities.
“We see a lack of fundamental support outside the financial sector, where there is now a fast-growing belief that policy action and bank guarantees may have finally backstopped the downside,” said Todd, the interim replacement for Abhijit Chakrabortti, who left in January.
Todd said investors should consider “collaring” their positions by selling call options and buying puts on the S&P 500, thereby protecting against declines and profiting from the forecast that the gauge won’t advance much further.
Companies in industries including technology, industrials, commodities and consumer goods are most likely to disappoint investors with their earnings reports, Todd wrote.
To contact the reporter on this story: Nick Baker in New York at [email protected].
Last Updated: March 30, 2009 09:51 EDT
Share | Email | Print | A A A
By Nick Baker
March 30 (Bloomberg) -- Investors should sell U.S. stocks following the steepest rally since the 1930s because earnings are likely to keep weakening, according to Morgan Stanley.
The Standard & Poor’s 500 Index advanced 21 percent in the past 14 trading days, the most since 1938, according to data compiled by New York-based S&P analyst Howard Silverblatt. It closed at 815.94 last week, rebounding from the 12-year low of 676.53 reached on March 9.
“We cannot see large upside for the S&P 500 above the 825- 850 level,” Morgan Stanley U.S. equity strategist Jason Todd wrote in a report yesterday. “In the rush to buy a cyclical recovery, it seems earnings or valuation no longer matters. We would be comfortable with this view if the earnings trough was closer, but it is not.”
The S&P 500 lost 3.2 percent to 789.86 at 12:26 p.m. in New York as the Obama administration warned that some banks will need more government aid and bankruptcy may be the best option for General Motors Corp. and Chrysler LLC.
U.S. companies will start reporting results for the first quarter in the next two weeks. Analysts, who have overestimated profits for every period since the third quarter of 2007, expect S&P 500 earnings to drop 36 percent on average, paced by retailers, automakers and semiconductor suppliers, according to data compiled by Bloomberg. They’re forecasting S&P 500 companies won’t halt the longest streak of declining earnings since at least 1947 until the fourth quarter.
Financial ‘Backstop’
New York-based Citigroup Inc. and JPMorgan Chase & Co. and Charlotte, North Carolina-based Bank of America Corp. were among banks that said they were profitable in January and February. The Federal Reserve pledged on March 18 to buy more than $1 trillion of Treasuries and bonds backed by mortgages to drive down interest rates.
Treasury Secretary Timothy Geithner last week unveiled a plan to remove so-called toxic assets from bank balance sheets by providing as much as $1 trillion in non-recourse financing to private investors to purchase the securities.
“We see a lack of fundamental support outside the financial sector, where there is now a fast-growing belief that policy action and bank guarantees may have finally backstopped the downside,” said Todd, the interim replacement for Abhijit Chakrabortti, who left in January.
Todd said investors should consider “collaring” their positions by selling call options and buying puts on the S&P 500, thereby protecting against declines and profiting from the forecast that the gauge won’t advance much further.
Companies in industries including technology, industrials, commodities and consumer goods are most likely to disappoint investors with their earnings reports, Todd wrote.
To contact the reporter on this story: Nick Baker in New York at [email protected].
Last Updated: March 30, 2009 09:51 EDT
