The All Ordinaries Index Is Below 5,700 – How Low Will It Go?

MELBOURNE AUSTRALIA (Daily Reckoning): Following a hefty fall on Wall Street on Friday night we are left to wonder what the reaction will be on the Australian market this morning.  We certainly wouldn't be surprised if there was another clear out today prior to the start of the week in Europe and North America. 

After gloriously pushing through the 6,000 point mark on the previous Friday the All Ordinaries continued its form into last week, posting a small gain during Monday's trading.  After that, we are afraid, it was downhill all the way.

Having reached an all time closing high of 6,021.90 points on Tuesday, it took only another three days for the All Ordinaries to fall back to its closing price on Friday of 5,775.20.  This equated to a fall of 4.3%, and the indexes lowest closing point since the 31st January.

However, for the year, the index is still in the black by 2.3%, and has still produced a better return than if you had switched your portfolio to cash on the 31st December.

It was a reasonably similar story in the United States, although the Dow Jones Industrial Average had reached its all time closing peak about a week earlier when it closed at 12,786.64.  Since then the index has managed to record a loss of 4.4%, and whereas the Aussie market is still above water since the start of the year, courtesy of last week's activity, the Dow Jones is now trading 2.9% below the position is closed at the end of 2006.

Is there a chance that the Dow Jones could break back down through 12,000?  The last time it did so was in early November of last year.  And has the market taken a broader change in direction this time than it has since May of last year, the last time that equity markets really took a pasting?

Well, if we look at the domestic market nothing really seems to have changed at all.  Take a look at the top three stories from Bloomberg News; "Woolworths Could Pursue Multibillion-Dollar Acquisitions;" "Macquarie Bank Forecasts Second-Half Profit to Top First Half;" and "Retail Sales in Australia Rise Almost Twice Expectations on Jobs Growth."

Steve Marsh, fund manager at Trust Co. of Australia told Bloomberg News, "The market is in 'glass half-empty' mode after the past week, Foster's [Group] may have some problems in the US and that's borne out by its competitors [Constellation Brands] statement."

Aside from that it seems to be the same old, same old.  Has anything really changed since last Monday?  Is the US economy really that different?  Bernanke has made a statement saying that inflation could be a problem.  Well, frankly, if so called professional investors weren't already aware of this then perhaps they should hand back some of their bonus.

Has the Chinese economy really changed since last Monday?  We doubt it.  It has successfully grown at a 10% plus rate for the last however many years.  It is still producing items which are being bought in the West and elsewhere.  It is still ordering, and most importantly, paying for raw materials from Australia, Canada and the Middle East.

Although much of the finger pointing was aimed at China over the last seven days for the slump in global markets, we can almost guarantee that it isn't China whom is the biggest threat to the sustainability of world growth.  That position is reserved for the United States and their terminally ailing economy.

Kris Sayce
for The Daily Reckoning Australia

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