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Bears tipped to snore through a decade

A LEADING sharemarket analyst said to me last week he expected to downgrade earnings of Australian stocks every year for the next 10 years. At first I thought he was just out to shock me, but I quickly established his comments were genuinely his view.

A LEADING sharemarket analyst said to me last week he expected to downgrade earnings of Australian stocks every year for the next 10 years. At first I thought he was just out to shock me, but I quickly established his comments were genuinely his view.

That is a stark picture to paint about the future of local equities. It is not uncommon for analysts to dial down earnings forecasts but to do so for a decade would be crippling. We all live in hope that sometime in the next few years the economy will snap out of its funk and battle-weary analysts will begin to upgrade earnings. Current sentiment mocks anyone who attempts to articulate this scenario.

There is no sentiment indicator for the sharemarket in Australia. That is remarkable given sentiment is regularly pointed to as a powerful contrarian indicator. Baron Rothschild said, "buy when there's blood running in the streets" in 1871. We have to ask: is there enough blood in the streets today for the Baron to get out the cheque book?

In Australia have we totally capitulated? Unfortunately we have to rely heavily on flimsy indicators such as trading volumes and anecdotal straw poles to measure sentiment. Trading volumes are down about 30 per cent since peaking in 2007.

The straw pole, though, reveals a far darker story. Heads have been rolling in the stock broking industry for two years. Macquarie Bank, RBS, Bank of America and Goldman Sachs have all done some culling. Those remaining feel like dead men walking, with hundreds more jobs predicted to be shed before the year is out. Dealing rooms are deathly silent because the phones have stopped ringing. In the bear market of the early 1990s sedentary brokers sharpened their crossword skills this time they are downloading the latest gaming app to their smartphones.

Strategists in the Australian market, after years of predicting a major rebound in equities, are starting to come back to reality. Still many are forecasting the S&P/ASX 200 Index to finish the year higher than today, most of them predicting a climb of 10 per cent. Only one thinks it can sink 10 per cent from here. Analysts are still forecasting high single-digit earnings growth, while professional investors think it will be closer to zero.

Expert commentators have in recent times suggested that bond yields will stay low for many years to come. In other words, there is no bubble in bonds but simply the "New Normal", according to the world's largest bond manager, Pimco.

It is an easy task to construct a bear case at the moment. Europe is a basket case, China continues to slow down, the US has a fiscal cliff to contend with and company earnings at home are being wound back at a rapid clip. Investors have either ploughed their funds into term deposits despite declining yields or hidden in highly defensive equities such as healthcare and utilities.

So, is the "blood running in the streets" and do we buy? We know the blood is starting to flow but we don't know if it is going to turn into a torrent. And there lies the angst of the situation.

The Australian market is trading on about 11 times forecast earnings, which is historically cheap but still above the normal cycle low for a bear market. If earnings have to be downgraded further, then prices could easily fall another 20 per cent to hit the nadir.

One of the most accurate market forecasters, Craig Scheef of Technical Investing, believes the bottom will be hit later this year. Scheef has been deadly accurate predicting the market direction using a combination of technical and fundamental analysis. He picked the bottom in March 2009 and warned clients of an imminent decline only days before the recent selloff in May. His fund has posted an 83 per cent return since January 2006, compared with just 14 per cent by the All Ordinaries Accumulation Index.

Scheef believes the US market has again started a downward trend that will be punctuated by short rallies such as the one that has taken place during June. The most likely trigger for these short upward bursts will be policy announcements about global stimulus, a drug many investors have become addicted to.

Just where the bottom is he is not sure, but it will be a precursor to a rally that kicks off in earnest in early 2013. Obviously he believes there is not enough blood flowing yet. A conclusion with which many investors and stock brokers would disagree. This, though, could be more hope than reality.

In last week's column I wrote that in late 2008 NAB failed to raise funding in global wholesale debt markets with the government sovereign debt. NAB denies this, saying it was able to raise funds along with Australia's other major banks.

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