Bears are having a long picnic

THE bear market on Wall Street is now the most protracted since President Nixon was in the White House – when gold was hitting $US875 an ounce and the Middle East embargo sent oil to $41 a barrel.

US stock prices almost halved between 1973 and 1974, and it took eight long years before the market index was able to regain its previous highs. By contrast, the crash of October 1987 was a short, bloody affair. Although 25 per cent was wiped off stocks in a single day, the Dow Jones index then stood at a modest 2,700, so only a piffling one trillion dollars was slashed off investors’ wealth.

The numbers this time are seriously sobering. US stocks have lost about $7 trillion since their peak in March 2000. The broad-based S&P 500 index has tumbled 20 per cent so far this year, extending its decline to 40 per cent. The technology-heavy Nasdaq has imploded by 75 per cent as the Internet bubble burst. That is the worst performance by a major market index since the Great Depression. It is a long time since the international financial pages and TV screens were filled with cheerleaders for the great game, whereby US stocks trebled between 1995 and 1999.

Now only pessimists get a hearing. British money man Hugh Hendry is reported in The Financial Times as saying that, typically, the past five years of gains from a bull market are wiped out in the following bear market. That would imply shares could dive a further 50 per cent before bottoming. Unfortunately Mr Hendry is not some crackpot gold nut trying to sell a book. He was Europe’s best performing fund manager last year – but it is worth noting he now stands to reap big profits from short positions if global markets go further carrot shaped.

American investors, although psychologically scarred, are not yet in full-scale panic mode as in 1987, when much of the disaster was caused by big institutional traders trying to get out of the exit at the same time. These days the New York Stock Exchange has electronic curbs in place to limit, or slow down, huge daily movements. As soon as the Dow Jones index is up or down 200 points in one session, these collars are triggered to block computer generated program trading. Even so, the market barometer fell 7 per cent in the week to July 12. Further torrid sessions are feared.

Some observers believe the appalling corporate accounting scandals in the US have their roots in the savings and loan company debacle of the 1980s, when the US government stepped in to guarantee deposits, and accountancy rules were relaxed. That enabled many S & Ls to trade their way out of trouble by taking on high-risk investments. More simply, corporate cracks, which can be papered over with the compliance of auditors while the good times roll, begin to gape open in a chilly down draught.

The Australian authorities have acted swiftly to try to ensure that abuses by bent bookkeepers do not crop up here and cripple confidence. The ASIC has set up a surveillance task force to root out accountancy fiddles. Warning letters have already gone out to the chairmen (not CEOs) of all public company boards. The critical profit-reporting season is almost upon us. Any top executives indulging in earnings massaging should come out with their hands up.

The Australian stock market has stood up manfully to the global onslaught. The All Ordinaries index is down 10 per cent from the all-time peak touched on March 7, and trading at a nine-month low. Technical indicators show that stocks are oversold.

Highly rated strategists, including Sathki Siva of UBS Warburg, are cautiously bullish on our ‘old economy’ cyclical shares. Macquarie Research has stuck its neck out with a bold call that the ASX200 will rise by 12 per cent over the year to June 30 on the back of “good valuations and a stronger than usual earnings outlook”.

But nobody is firing the starting gun for a buying rush just yet. Apart from the US agony, downside risks include a fall in consumer spending, some wilting in business investment, the effect of the drought on farmers, and a renewed surge in the $A putting pressure on exporters.

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