VIEW-Equities headed for "cataclysmic crash"

By James Molony

LONDON (Reuters) - Equities are set for a four- to five-month rally before a "cataclysmic crash" next year, Alex Allen, chief investment officer at fund of hedge funds boutique Eddington Capital Management, said.

"At the edges where markets are liquid we've been willing to call the bottom. We're bullish on equities for the next four to five months and then we expect to see the final cataclysmic downleg," Allen said.

"Equities will go to at least 50 percent below where they are now. It's going to be as bad as 1929," he said. "Equity markets are extremely expensive."

Analysts are currently forecasting average operating earnings for 2008 of $72 for the S&P 500.

"At its current level that would put the index on a PE ratio of 14 which is around the long-term average of the market," Allen said.

In a best case scenario operating earnings will hold up at $72, so for the market to bottom-out on a PE of 10 it would have to go to 720, Allen said. The index closed at 1005.75 on Tuesday.

But this seems to rosy a scenario, Allen said, with earnings forecasts likely to be downgraded further next year.

"Markets have, with few exceptions, rarely bottomed-out on a double digit price to earnings ratio," Allen said.