Stocks roller-coaster signals conclusion of Irish bull run

COULD this be the end of the hull run in Irish and indeed worldwide equities? For some, the signs are all there. And many analysts are predicting the end of the "equity bubble".

Earlier this week the Dow plummeted 2.9 per cent in one day to its lowest closing level since January 29th. The Dow has now given up over 400 points or 7.5 per cent since the record set of 5,778 on May 22nd.

The New York market may have stabilised in the latter half of the week after a phenomenal day's trading on Tuesday when the Dow oscillated in a range of over 290 points, but many feel that the instability in New York may be a precursor to a period of weakness in share prices.

In the same period when the Dow fell by 7.5 per cent, the Irish market has fallen back by the same amount and earlier this week went within a fraction of going below the 2,400 ISEQ level.

The Irish market has regained some ground since then, but there is a strong view among Irish investors that the fortunes of the Irish market are inextricably linked to New York.

Whether the events of the past week represent the beginning of a bear market or merely a correction is the subject of heated debate among Wall Street's analysts. No matter which, it seems that bears are dominating at least for the moment.

Despite all the recent talk, European markets have not disengaged from the US. When the Dow falls, European traders take note and begin to sell. There has been talk of an imminent dive on Wall Street since last autumn but in recent weeks nearly all major indicators have been pointing to the market heading south.

Last week Vickers Weekly Insider Report, which tracks the personal share dealings of investors showed that they planned to unload shares at a record pace. The ratio of sellers to buyers is now where it was just before the 1987 crash.

In addition, the record inflows from mutual funds have slowed dramatically. Last month the inflow dropped 38 per cent from the previous month to $15.5 billion. American private investors have woken up to the fact that the Dow could be in for a sharp correction.

The Dow's price to earnings ratio is also near record highs at 18.3. Some analysts are warning that that is nearly as high as before the crash in 1929. In addition the market's dividend yield is at a record low of 2.1 per cent.

The market is also beginning to look at the "Q" ratio with more attention. The ratio the total market value of American companies divided by the replacement cost of their factories, equipment, stock is now 1.88. The post war average has been 0.7, which is taken as yet another sign that shares are too high.

Officials at the British Treasury also point out that the pattern of stock market movement over the last year is potentially even more ominous than in the run up to the 1987 crash.

However, US analysts are still divided over how large the fall is likely to be. Byron Wein, a Morgan Stanley equity strategist, has been predicting an 18 per cent fall for the Dow. But Michael Metz of Oppenheimer believes the market will only fall to 5,000, around the levels of last November. However, he warns that it may not rise much above that for a year or two.

Mr Jim Power, chief economist at Bank of Ireland Treasury also sees a 5,000 level for the Dow. Although he believes that it may recover to 5,600 by the end of the year. "Levels below 5,000 would not be sustainable," he said. That would feed through to an end of year level for the ISEQ of 2,700.

Mr John Conroy, head of equity research at NCB Stockbrokers, has not yet revised his prediction of 2,650 for the Irish market at the end of the year. However, he warns that the market may now find it difficult to meet this target.

"The sell off in overseas markets limits the upside of the Irish market," he said. "But many of the leaders are oversold so we expect the index to end the year higher."

He also warned that the Dow could fall another couple of per cent. That would lead to a similar fall in the short term on the Irish market, he said.

"I'm not convinced there is huge rebound potential on Wall Street. The market has been driven by falling interest rates and it now looks as though they may be rising. On top of that corporate earnings have not been very robust."

Mr Joe Burnett, equity strategist at Davys, said the brokerage has recently raised its year end target for the ISEQ to 2,700. "The sort of correction we are seeing is in the nature of markets," he said. "It's too soon to be revising our forecasts. After all the market has had a pretty frisky run recently."

Davy argues that Irish financial stocks are undervalued and have under performed the market as a whole over the last six months.

So far this year, the non financial index has outstripped the financials by 30 per cent.

The growing economy will also benefit the earnings of non financial stocks, according to Davy. Even though the price earnings multiples on this sector are similar to the British market, they expect strong earnings growth based on the vibrant economy.

However, CRH could be vulnerable to a downbeat building market in the US where the company has a lot of exposure. In addition Smurfit has not had a good run this year. Although box shipments in the US were up strongly in June, which would normally benefit paper stocks, analysts are reluctant to upgrade their expectations on one month's numbers.