ASX Loses Another $45 Billion; US Fed to Cut Interest Rates Soon

With a one day loss of AU$45 billion on the local market, it’s hard to find any good news to report. Not that we’re looking. But with only 12 advancers for 172 decliners on the ASX/200, we were curious to see what went up on a day when everything else went down. We excluded cash and volatility, as they are not listed on the equity markets.

Builders and infrastructure stocks Multiplex (ASX:MXG) and Downer EDI (ASX:DOW) were up for the day. But there didn’t seem to be a common theme in yesterday’s winners. The Ridley Corporation (ASX:RIC) was up too. The company makes crude salt, stock feed and animal feed supplements. We’re not sure what you put in animal feed supplements…but it must be easier to digest that the toxic crap in the credit markets that no one wants to touch.

The local market has now lost a full 10% from its high, or AU$150 billion. This comes at a bad time, as many investors cashed out profits from real estate to pour into the stock market. “Crucio,” Lord Voldemort might say (the spell for causing great pain in Harry Potter world).

“Aveda Kedavara” is the spell that causes death. A 30% decline from the highs is not death. But it is certifiable correction. And that’s what we’re on the verge of now. While America’s top mortgage lender Countrywide (NYSE:CFC) loses the confidence of investors, the situation in the credit markets appears to be getting worse. “We have switched from a rational, normally functioning financial environment that would let the US economy have a soft landing to one where financial markets are at risk of not working properly and a much sharper and harder landing could happen,” says Tony Meer of Deutsche Bank.

The lack of a functioning market for mortgage-backed bonds may find its way into the corporate bond market. And if corporations are unable to find short-term financing, then the credit crunch will have well and truly reached the real economy.

We expect the Federal Reserve to cut rates, and soon, although we’re not sure it will make a large difference. One thing the Fed has going for it is that yesterday was the deadline for hedge fund investors to redeem funds for the third quarter. Anyone who wanted his money back by September 30th had to tell his hedge fund manager by yesterday (for those funds that are accepting redemptions).

Are hedge funds finished selling blue chips? If so, there might be some daylight just around the corner. But we’re not counting on it.

Dan Denning
The Daily Reckoning Australia

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