Getting to the bottom of market mayhem

Andrew Alexander says equities have further to fall despite brokers trying to convince us otherwise

EVEYONE is feeling for a bottom. It sounds slightly salacious but investors will understand.

"You can't go on being a bear forever," a jaded friend snaps at me. No, of course not.

There is a point at which markets always turn. But why should it be soon?

No end of brokers and strategists have been telling us this year that the bad times are over. But the only principle that was based on - scientific enough in its way - is that they want your money.

Otherwise, they resort to all manner of black magic about the number of years when the market has been down on the year before, the length of the last bear market, the ratio of buy notes to sell notes. The phases of the moon, the traditional rally come Michaelmass and much other nonsense will no doubt be prayed in aid soon.

In the past, a friend of mine used a very sensible way to detect bottoms - when a major piece of bad news failed to shift markets.

He applied that in 1975 when Burmah Oil went bust - and the London market hardly moved. No more sellers, he concluded, and his fund piled into equities and made a fortune.

The most obvious sign of a bottom is the fall in priceearnings ratios to below historically normal levels obvious indeed, but suprisingly neglected.

There is little guidance in the fact that share prices have fallen if earnings have fallen even faster.

THE graph for Wall Street illustrates the point brutally - and we are certainly not going to get a real rally in London unless Wall Street recovers.

The PE ratio on the S&P 500 is a demanding 37. The response of the bulls is that this is trailing earnings (as always). We should, they say, be looking at future profits and thus a future S&P priceearnings ratio. But they have been saying this for months.

Whether profits in the US have been rising or falling is one of those happy hunting grounds for accountants.

But on two of the three of the measures used by the Bureau of Economic Affairs, they fell in the first and second quarters of this year, which helps explain a rise in the market's PE despite a decline in share prices.

Reports that American businesses are trimming their workforces and making all-round economies sound impressive and ought, some may say, to lead to a profits recovery.

But when redundancies reach a certain scale, the impact on consumption at large counteracts that effect.

That is the position we seem to have reached now.

The double dip in the economy is in prospect, if it has not actually arrived.

Yes, the bottom will be felt at some point. But not yet.

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