22/10/2008 - 22:00

Bears have the run of world markets

22/10/2008 - 22:00


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LAST week, global stock markets experienced possibly the worst days of trading that will be seen during the current bear phase.

Bears have the run of world markets

LAST week, global stock markets experienced possibly the worst days of trading that will be seen during the current bear phase. The global economic downturn has begun and a bear market in equities is definitely not over. Its effects will be seen through all of next year as global industrial production slows, unemployment rises and falling commodity prices lead to a deflation of Australia's commodity driven economic boom.

Flow-on effects from the global credit crunch, caused by irresponsible lending practices under a poor regulatory environment, most notably in the US, will reverberate for several years. However, Briefcase believes that, given the positive global financial and regulatory responses we have witnessed, there is reason to hope that markets will not again endure the sort of wide-eyed panic selling that was apparent last week.

In the short term, the All Ordinaries Index looks to have established some support at around 3,850 points. Any break at this level would set a target of around 3,450 points, which was the market peak in 2001, at the time of the dot.com/tech bubble. Despite the once-in-a-lifetime value now apparent on the Australian stock market, upward moves in share prices continue to be met with selling by over-geared investors and others seeking the relative safety of cash. Serious overhead resistance is apparent at 4,800 and 5,200 points, but Briefcase does not expect levels over 5,200 to be seen anytime in the near future.

In Australia, further government intervention in the form of pension payments, housing support and "nation building" initiatives will filter through into the nation's cash registers, keeping builders and real estate agents busier than they would otherwise have been. No doubt, Wesfarmers and Harvey Norman shareholders should be relieved by these measures.

These moves by government show how Sydney-centric government policy has become. In Western Australia, there has been no housing slump and if you have a pulse, you can get a job. Tradespeople are still running flat out, with utilisation of people and equipment still at stress levels. Even though activity in 2009 looks to be slower, there is considerable momentum in the local economy.

Briefcase is disappointed that the government is again choosing a quick fix and throwing money at housing, which is the least productive area of the economy over the long term. Sure, in the short term there are plenty of spin-offs from housing, in the form of immediate employment, building materials and furnishings. But the sector is also a huge importer so goods, which will keep pressure on Australia's balance of payments (with potentially inflationary implications). Just think of what goes into a house. Whitegoods, carpets, textiles and electronic equipment...all imported.

The government would be better advised to throw some money at public transport and national rail works, even though these things may be under the control of the states. If unemployment is going to be an issue, provide more training places and financial support for people to stay at school while jobs are scarce. This will equip the Australian economy for a better-balanced approach to growth in the future, without the inflationary impacts of artificially boosting housing.

Money spent on gifts to first home owners ends up in the pockets of real-estate agents and property speculators, without improving housing availability. If all new home buyers step out onto the street with the bonus in their hot little hands, they will simply find that the prices for first homes have just risen by almost exactly the amount of the bonus. The government's support for housing just perpetuates the high and grossly inflated prices for housing in Australia, which is the problem, not the solution to our current financial quagmire.


No amount of top-down, bottom up or even technical analysis can make any sense out of recent share market trading, witnessed on global markets during the past couple of weeks. An over-abundance of fear has gripped markets. All the greed that previously drove markets to unsustainable heights has evaporated. Stocks are simply being sold at the bid price in a desperate attempt by investors to liquidate their over-leveraged portfolios or in a rush to the comfort of cash.

Much of the selling is thought to have come from over-leveraged investors, many of whom may have felt quite secure with the debt levels of their portfolios, only 12 months previously. In many ways, those who were 'margin called out' of the market eight months ago are now seen as the lucky ones, while those who are only now coming up against their debt level covenants have seen the underlying value of their portfolios fall by another 20 per cent or more.

The list of walking wounded continues to rise, as does the list of gracious homes up for sale in many of Australia's leafier suburbs. The good thing about last week was that Rio traded down to $61.80 per share, while BHP hit $24.40 per share, a bit below the levels Briefcase thought that they might find support, but a realistic interpretation of their profit outlook over the coming two to three years. Having said that, both BHP and Rio appear to be trading with a share price at about six to seven times this year's expected earnings, which is not what you would call expensive.

The market however appears to be looking way out to earnings in 2010. Briefcase believes there is cause for a pause in the market, at least following the achievement of these low price targets, combined with some recognition of the positive impact of a weaker AUD on commodity prices and profits.

Warren Buffett says 'the time to be greedy is when everyone else if fearful and the time to be fearful is when everyone else if greedy'. He recently acted on this principle by taking big stakes in two of the US's premier companies Goldman Sachs and General Electric, at bargain basement knockdown levels.

Locally, Platinum Capital's Kerr Neilson has taken a similar stance, announcing that his listed portfolio manager is going to make a rights issue, because as the longstanding value investor explained, there are so many opportunities to add value for unit holders that he wants to raise money to take advantage of these low-cost investments. Mr Neilson has an enviable track record, most notably for being short the market at the time of the 1987 crash, when he was in charge of investments at Bankers Trust.


Briefcase notes reports of vastly reduced miles being driven by cars in the US and has worked out that these numbers should translate into a reduction of more than 5 per cent in the US's overall oil consumption. Recent IEA numbers confirm this trend, which was initially caused by the high oil price.

Since the oil price has almost halved in US dollar terms, it is more likely that the ongoing trend will be perpetuated by a loss of consumer confidence and the onset of spin-off effects of the US recession of 2008-09.

Numbers out of listed trust, Macquarie Infrastructure, show big falls in its toll road revenues, with falls of between 1.1 per cent and 13.8 per cent across its US and Canadian tollways, a fall of 12 per cent on the UK's M6 tollway, as well as weaker numbers from European assets.

These numbers support Briefcase's peak oil predictions and the recommendations flowing from that, pointing to the dangers of investment in toll roads, airports and any business that relies on cheap oil or petrol.


- Peter Strachan is the author of subscription-based analyst brief StockAnalysis, further information can be found at Stockanalysis.com.au


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