Morgan Stanley's soon-to-be-former chief investment strategist, Barton Biggs, is a legend in the U.S. investment industry, partly because of his euphonious name, and because he has been a fixture at Morgan Stanley for over 30 years. It certainly isn't a result of his star-studded record for forecasting, since he has been wrong - or at least too early, which is often as bad as being wrong - far more than he has been right. Now Mr. Biggs is predicting markets could soar by 50 per cent when the war ends.
"If things go well in Iraq, I believe an equity market rally of 40-50 per cent is plausible," Mr. Biggs wrote in a market note Tuesday. It wasn't clear what he meant by the war "going well," but presumably he meant a short and not too bloody conflict. Although the Morgan Stanley strategist cautioned that this move was not likely to be "the beginning of a new bull market," anyone who read his comments could be forgiven for ignoring that caveat and being mesmerized by the thought of a 50-per-cent jump.
Keep in mind that Mr. Biggs - who will soon be leaving Morgan Stanley to start a hedge fund with a couple of fellow Morgan Stanley alumni - doesn't mean a 40-50 per cent jump from the lows of October, when the Dow hit 7,197, the Nasdaq composite hit 1,108 and the Standard & Poor's 500 index hit 768. We're already almost 25 per cent higher than those levels now, even after the decline earlier this week when the war started looking a lot less rosy. He means a 40-50 per cent climb from the current levels.
That would take the Dow up by anywhere from 3,280 to 3,600 points to between 11,470 and 11,800 - higher than the peak in early 2000. Under Mr. Biggs' scenario, the Nasdaq would rise by up to 675 points to 2,079, and the S&P 500 would climb by over 400 points to the 1,300 level. That would take the markets well past last year's peak, when they got excited about the prospect for an economic rebound. The Dow climbed to 10,635 on those hopes - but Mr. Biggs sees it adding a further 1,000 points.
Is it possible that Mr. Biggs is right, and the major market indexes could be 40 to 50 per cent undervalued, even after climbing by more than 25 per cent from the lows of last fall? That's difficult - perhaps even impossible - to believe. That would mean the Dow and even the broader S&P index were trading at 75 per cent below some notion of fair value at their lows of October. It's hard to imagine anyone actually making that case, unless U.S. GDP is going to pop up to the double-digit level tomorrow.
It's possible that Mr. Biggs was simply trying to make a point, and was exaggerating in order to make the case that now could be the start of a major war rally. But senior market strategists for major Wall Street brokerage firms don't normally do that sort of thing in their official market notes to clients. So perhaps Mr. Biggs actually believes that the U.S. markets - and/or the economy - will be 40-50 per cent more attractive than they are right now, provided the war with Iraq goes well.
Mr. Biggs could turn out to be right about the market moving up 40 to 50 per cent - but it's also possible that that increase could take place over the next five years or even the next 10 years, rather than the next year. Would that make Mr. Biggs wrong? You be the judge. Was he wrong for being so bearish on the markets through most of the late 1990s, while the markets were climbing to their record highs? He was right in the long run, but anyone who followed his advice missed out on a big move.
In order to buy the idea that the markets are 40 to 50 per cent below fair value, you'd have to feel that virtually all the negative numbers the U.S. economy has been coming out with lately - not just the sentiment readings, which can be distorted, but the factory orders and housing starts, the job losses and the industrial activity figures - are solely the result of war, and that once it is over the U.S. economy will again become a double-digit growth machine within a matter of months.
If that's the kind of case Mr. Biggs wants to make, he should try making it to Federal Reserve Bank of New York president William McDonough, a voting member of the Fed's rate-setting committee. Mr. McDonough told a group of bankers on Monday that "recovery in the business sector continues to be restrained not just by geopolitical uncertainty and the need for further restructuring in some key sectors, but by caution on the part of investors and lenders." That likely won't change overnight, he suggested.
In general, the Fed governor added, "the effects of the bursting of the stock-market bubble have proven to be far more long-term and pervasive than expected." It's hard to reconcile that with the 50-per-cent market ride Mr. Biggs has pencilled in for this year.
E-mail Mathew Ingram at mingram@globeandmail.ca
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