Wednesday, January 23, 2008

Share market jitters

As global share markets moved sharply lower yesterday (a fall of 7.1% in the all ods), Australia’s Treasurer Wayne Swan moved to reassure investors. After hearing Wayne I slept easier last night. Moreover the market obviously responded well to the sage words of the Labor Party’s economics guru – it bounced backed 4.3% today.

Swan’s helpful suggestions for reducing the cost of living fortified me during the last election campaign so I know he is on top of things!

It was a large market correction yesterday and something of the typical Australian market overreaction – we are better placed to weather shocks than the US. Our credit markets are in better shape and we will retain strongly growing export markets in raw materials and food.

I didn’t want to trade yesterday but I did want to look at the market. Too bad for other ComSec users since their webside went caput – it was still not functioning properly late last night. The same thing happened the last time there was a market slide – hardly comforting for ComSec’s customers!

I was intrigued by comments in The Australian and elsewhere about the terrible day share brokers had because of the price falls – they were ‘shell shocked, exhausted and depressed’. This seems doubtful though they were probably busy – the brokers do well on any day with high turnover which yesterday certainly was. The Age also described events as a ‘market failure’ – the ignorance of these journalists and sub-editors knows no bound.

Yesterday's events are probably the first phase of a bear market but I think the sell-off was very overdone. The US economy is still quite strong despite the bad press. Of course with enough pessimism a recession can become a self-fulfilling forecast. It is a worry.


conrad said...

I agree with the Comsec stuff -- I've had mine for years, and it always goes down at the most inoppurtune moments.
I'm not sure your last paragraph is especially logical. If its the first stage of a bear market, surely you should be getting out.

Anonymous said...


I think the fall in the stock market isn’t really a correction. I think it actually qualifies as a global crash since it started several weeks ago. Take a look at a chart and I think you’ll agree with me.

It’s more surprising that it actually took so long seeing that the problem began in the debt markets with the widening of corporate. In other words debt has senior ranking to equity so it’s hard to see how equities could hold up if the credit markets were getting mauled.

I think the worst is over in the US despite some hiccups along the way, especially after the Fed’s action last night. The big problem has actually been the Fed’s inability to get in front of the curve rather than playing defence and coming from behind throughout this episode.. I think Bernanke has finally begun to understand the gravity of the problem. I am also far more optimistic on the US banking system than before as there was no shortage of capital with the recent recapitalizations. Those banks that needed recaps are basically “ new “ banks now. A good sign that things may have turned around was that the US bank index was up last night. I bought two names a few days ago as I was anticipating this action by the Fed. I bought Morgan Stanley and Citigroup However I shorted a couple of Aussie regionals against those buys. Could be wrong though: but you never know your luck in a big city..

A few more observations.
The stubborn ECB has still not capitulated and it seems they will do so only when the Euroland markets reach some sort of riot point. Only then will we begin to see some light at the end of the tunnel. This either happens very quickly or they drag their feet for another month as their markets continue to slide/crash

The credit spread has begun to narrow recently which is a good sign that the credit markets are beginning to normalize.

Worried about Oz. Quite so. Despite the market rallying the banks performed quite badly egged on obviously by the horrible inflation number. I am actually quite worried about Oz. We’re a much leveraged economy so one major policy mistake could tip things over is certainly no a good thing. I could well imagine Rudd’s geniuses gluing up the labour market right at the wrong time. Combine this with the economic slowdown and we could be seeing middle Australia unemployed and wondering how they are going to service their debt.


T.Pettinger said...

Stock markets tend to predict recessions in the future, even if the US economy did enter into recession, I doubt the market would keep falling. Interesting to see the FED panicking by cutting rates by 75 points

Spiros said...

She'll be right as long as we keep ripping rocks out of the ground and selling them to China. And there's no sign that that is going to stop any time soon.

On the sub prime loans (don't you just love these euphemisms? Cancer should be renamed "sub glowing health") look out for the news that a lot of our local councils invested (sic) heavily in them. We're talking tens of millions. These idiots (the councils) fell for the line spun to them by slick salesmen that they could get a couple of extra % yield at no risk. State governments will have to bail them out.

whyisitso said...

"Stock markets tend to predict recessions in the future,"

Well the 1987 crash didn't. There was no recession until 1990, and this was caused by the loose monetary policies following the 1987 crash rather than being directly predicted by it.

Of course there's always a recession in the future. The statement "there will be a recession" is always 100% correct!