G’day investors
Wow, just when you thought we may have been returning to a more stable market place, along comes the week that was, reminding us all that these are indeed extraordinary times. International focus continues to fall upon America and unfortunately the sheer weight of negative sentiment maintains its strong grip over a severely jaded investor psychology. Optimism surrounding the preceding week’s Barrack Obama history making election victory took just 24 hours to sour as markets came to grips with the enormity of the challenges lying in wait for this remarkable orator - the flagrant contrast with G.W’s blundering is palpable. My gut feel suggests we have before us an individual willing to do all within his power to return America to a path of prosperity, however it may well be a long and difficult assignment and he will need every ounce of his political savvy. Let us pray he is afforded the necessary space and support of the nation and especially its media to turn things around.
The Markets
After slipping 3% over Monday and Tuesday night, America’s Dow Jones slipped badly again on Wednesday, when falling over 4.5% after rising concerns over the state of the US automobile industry. There is much confusion over the state of the economy, as well as mounting concern as more and more companies’ line up for assistance (witness leading auto makers Ford, General Motors, Chrysler and American Express converting itself to a bank) from the financial system rescue package and that translates into falling equity markets.
US treasury secretary Paulson and his team are likely to face a hostile Congress after committing all but US$60 billion of the first US$350bn made available. Law makers, especially Democratic, have indicated growing resentment over Paulson’s reluctance to aid the auto industry – one in ten US jobs are tied to this sector - plus its decision not to force banks receiving Government assistance to lend those funds to consumers and small business. The second $350bn of treasury assistance will more than likely come with many such strings attached. The enormity of what lies ahead is at the heart of market instability. Housing prices continue to fall, and without stabilisation or at least signs thereof, a sustained market recovery is proving very difficult. Credit and its availability remains key.
Thursday night saw the Dow snap a three day losing streak and offer our domestic market a welcome lead, when it bounced 552 points or 6.67%. Oh Yeah! It really was quite a dramatic comeback and holds much technical currency as all major US indexes tested their 2008 lows, with the Dow briefly dipping below 8,000, triggering a brief, but nonetheless sharp sell off before surging back into positive territory to end the day on session highs at 8,835. Such a key reversal has many market observers confident a pre-Christmas floor has been established and I remain cautiously optimistic such a platform is in place.
Some Perspective
With such a backdrop, Australia, our region and indeed the whole world has struggled this week, with yesterday’s price action granting some perspective of the sheer scale of the downturn we are currently working our way through. The All Ordinaries index closed Thursday at a new 2008 low of 3,672.4 translating as a -46.4% loss from Nov 1st 2007 high. It means we have fallen further than the 1987 crash, (-46%) That tells us there are now only two bear markets worse than this over the past 120 years.
1. The big daddy of them all – The Great Depression 1929-30, a 49% drop.
2 .The 1973-75 bear market, triggered by the “oil price shocks”, resulting in a 58% rout.
Before I leave you feeling depressed, remember in the 12 months post the 1987 crash, the Australian market rallied 24.6% and the US 21.4%. By the very nature of the pricing function serving equity markets, a significant rally from current levels may well be close at hand. Price to earnings ratios in Australia track a long term average of 15.4, they currently stand at 9.4, taking us back to levels last seen 28 years ago. That is significant and serves to illustrate why many companies present such attractive buying opportunities for the long term investor. Irrational fear driven momentum must at some stage meet value.
Fundamentally, the AUD$870 fiscal stimulus package unveiled by China on Monday will provide a welcome buffer for any lasting slowdown brought on by the US lead downturn, and will significantly benefit our resource sector. It will manifest itself through roads, rail, skyscrapers and other infrastructure crucial to maintaining Chinas growth trajectory, all of which require iron-ore. With the creation of 20 million new millionaires over the past few years alone, the societal importance of continued industrialisation remains paramount, lest authorities have any civil unrest stemming from a burgeoning middle class and the massive lower rural class relocation to the cities. It is one of the great stories of our time and its socio/ economic management, has, in the main been outstanding.
Australia will continue to play its part in our region’s growth and going forward we will break this bears back. Of that this writer is certain.
Have a great weekend.
Research Department
Storm Financial Ltd.
Date Updated: 16th November 2008
Market Data
All data values based on 6th - 13th November 2008
Best & Worst
Performing Australian Indices
(ex-GICS
sub-sector indices)
Market sub-sector GICS index performance
Best & Worst Performing Global Indices
Sources: The Australian
Financial Review, Business Review Weekly (BRW), The Economist,
The Age, The Australian, The Courier Mail, Sydney Morning Herald,
Australian Stock Exchange (ASX), Iress, The Australian Bureau
of Statistics (ABS), BIS Shrapnel, Bloomberg Online, Storm Financial
Ltd, Ignite Financial Systems & Research Pty Ltd.
* Storm Index
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