It looks like Monte Carlo or bust for Teun Draaisma, the Morgan Stanley strategist who has been telling people to Buy Buy Buy ahead of the coming equity mania.
In publishing his latest collection of bullish charts, Draaisma can foresee the cynics declaring them to be “Lies, lies and statistics.” No matter…
We present some relevant stats that harbour a bullish message for stocks. All these favourable odds will not work if we are heading for a recession, of course, and yes, risks of a recession are higher than normal. But you have to be very sure it is a recession, indeed, if you are bearishly positioned. The upside is significant, as some of the stats presented in this document show. We expect 15% upside to our 12-month target of 1750 for MSCI Europe.
Boiled down, the MS man’s case is that if and when we get through the current crisis, euphoria over the fact that the system is strong enough to cope with such a shock – in tandem with a generally benign economic environment – will put a fire under stocks, the likes of which we have never seen.
That call was first made in mid-August, with further evidence presented 10 days ago in a note entitled “Think Big.” After back-pedaling softly a week ago, Draaisma is now headed forward again – and at some pace. He’s got some supporting statistics:
1. The best year in the US presidential cycle. Year 3 (this year) of the US presidential cycle has never been down post WW2. In fact it is the best stock market year of the 4-year cycle, supposedly because presidents try to end on a high note.
2. 96% chance of up-markets based on current CBOE put-call ratio. After CBOE put-call ratio scores higher than 1, in the next 6 months MSCI Europe has been up in 96% of observations, up on average 14%, in the 1995-2006 period, based on a time-series of weekly averages.
3. In addition, the Fed is about to cut rates. We expect a 25bp rate cut on Tuesday, not a 50bp rate cut, now that there have been some signs of improvement in the short-term money market last week.
Best presidential year? Options ratios look good? And the Fed will cut rates tomorrow?
Yikes! Draaisma was the man who said Sell, Sell, Sell, back in June and we’ve applauded that timely call. But can he call bottoms as well as tops? All of a sudden we are not so sure…