Market recovery could take a while

29/10/2008 - 22:00


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LAST week, as global stock markets performed a swan dive in a grindingly painful bear market, Briefcase became increasingly angry at the market's bad behaviour.

Market recovery could take a while

LAST week, as global stock markets performed a swan dive in a grindingly painful bear market, Briefcase became increasingly angry at the market's bad behaviour.

Briefcase is convinced that in three years time, market moves we are now witnessing and the price-to-valuation ratios on offer for many stocks will be seen as being as silly, as were the over-valuations apparent in early 2007.

It turns out that in trying to pick market levels, Briefcase has been looking at the wrong bull market run.

In Australia, the dot-com bust of 2001 and subsequent market pull back in 2002, was largely a sideshow compared with the carnage it reaped on the US market.

In Australia, the economy did not go into recession in 2001, with the main market casualties being News Corporation and Telstra, along with a bunch of dot-com and media companies like OneTel and their backers, such as HIH Insurance.

The latest bull market run began after the bust of 1990/91, when Australia experienced Paul Keating's 'recession it had to have'.

This recession followed on from the over-geared, entrepreneur-led market crash of October 1987 and a subsequent property boom, which resulted in defaults by unlisted property trusts and eventually a huge and long lasting decline in the Japanese Nikkei Index, which fell from a peak of nearly 39,000 points in December 1989 to a new low of 7,650 today, 19 years after that boom!

Australia had a recession in 1991 and the latest 15-year bull market began in December 1992 when the the All Ords Index hit a low of 1,347, running to a peak in November 2007 at around 6,870 points.

Intriguingly, a Fibonacci retracement of 61.8 per cent of this 5,525 point bull run sets a downside target of around 3,460 points, which not only coincides with the top of the market at the time of the dot-com madness, but would also be almost exactly a 50 per cent total decline in the All Ords from its November 2007 highs.

This analysis produces the conclusion that if the market is to achieve this target, it will need to fall about a further 11 per cent from its current level.

Interestingly, the 38.2 per cent downside marker (another Fibonacci magic number) was at about 4,785, where some support was seen and 50 per cent is at 4,130, around which the market had been dancing up until last Friday.

In previous editions, Briefcase stated that if the All Ords Index broke below 4,700 points, then something in the broader global financial system would have to be badly broken.

As President Bush prepares to host a summit of world leaders to discuss ways to reform global commerce and as the All Ords trades down below 3,900 points, with an ultimate target set at 3,450 points, now looking increasingly likely in the short term, it is clear that the system is indeed badly bent, if not completely broken.

Briefcase is beginning to think that recovery from this bear phase will take a long time.

Before business can begin to function normally, the foundation bricks, making up the financial system will need to be reassembled.

This might take six months, but may take two years to be fully functional. Early interventions, most notably by the UK PM Gordon Brown and our very own Chairman Rudd, are steps in the right direction.

Guaranteeing bank deposits and underpinning interbank loans are vital steps in the process, making a lot more sense than just wading into the market to buy up dud mortgages with taxpayer's money, as proposed by US Treasury Secretary Hank Paulson.

These positive steps have already reduced bank-funding costs in Australia and around the world and are freeing up cash, which should open up debt markets enabling commerce to proceed.


On the bright side, a bounce could take the All Ords Index up to resistance at 4,600, allowing further de-leveraging by over geared individuals and funds.

It is notable that the smaller, less liquid stocks continue to be sold, while any short-term recovery is led by the major companies.

Globally, large hedge funds have cashed up, so a further short-term market recovery could be swift.

After playing the market perfectly for the past couple of years with 100 per cent of his own personal cash in government bonds, US investment guru Warren Buffett has begun to buy shares on his own private account.

Don't you love that guy!

The words and actions of Warren Buffett hold far more authority than either Hank Paulson or George Bush, so investors may gain confidence, until the next crisis rolls out from under the bonnets of the US automobile finance industry.

A peak in US sub-prime housing mortgage defaults is expected by January or February 2009.

Provided that there is no further ticking time bomb lurking out there, like a crash of the US auto leasing market, then some semblance of normality in debt markets might be expected to be seen by mid 2009, at which time, share prices should make tentative upward moves.

Australia's major banks are profitable, well capitalised and their ratio of bad debt to loans is running at a very low level, below 0.7 per cent.

While the Australian unemployment rate is rising, it remains low at less than 5 per cent, with the outlook for a move towards 6 per cent by the end of 2009. Business is generally in good shape, with low gearing levels.

Capacity utilisation rates, which have been running at well over technical full utilisation rates of 82 per cent for nearly four years, show signs of a slowdown in activity levels, which will serve to take the pressure off inflation and reduce wage costs.

The country's fiscal surplus is now being mobilised to create training places and employment, while stimulating activity with pension bonuses and support for first home construction.

Lastly, interbank lending rates, as set by the Reserve Bank cash rates, are set to fall a further 1 per cent by mid-2009, further supporting valuations for listed equities and providing stimulus to the housing market as mortgage rates decline.

In the meantime, a Barack Obama win in the US in two weeks time is likely to give global markets some encouragement (certainty) and could be the catalyst for a nice little recovery run on the market.

Some anecdotal indicators:

- Top restaurants in Melbourne, such as Verve and TAXI, have been seating fewer patrons for lunch, even with the spring horse racing carnival underway.

- Apparel sales at women's boutiques in Perth and around the nation have slumped dramatically, leading to the cancellation of purchase orders from overseas. One lady shopper was overheard telling the shop owner that she wished she'd married a cardiologist instead of a stockbroker! Looks like someone will need to get a second job.

- On that theme, doctors are seeing an increasing number of patients with stress-related illnesses, flowing-on from heart stopping market gyrations.

So please, look out for one another and look after yourselves.

We are heading into difficult and uncharted waters and there will be significant challenges of a personal and professional nature to overcome.

My advice would be to stay close to your family and work together.


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


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