Sometime around last Thursday afternoon the mood in the market went from concerned to "totally freaked out". It is a trifecta of concerns that have investors on the edge. Chinese growth is slowing. The American employment picture is not good. And Europe is in the middle of a dangerous debt crisis.
The result for Aussie stocks was a $25 billion wipe-out on Friday. Stocks made a three month low and fell by 2.3%. Aussie stocks are now 45% above their March lows. But the direction from here is anything but clear.
As cautious (and bearish) as we generally are, this could actually be a very good buying opportunity if you're a fearless trader. It felt this way in markets in December of 2008. There was a real sense of despair at the time. And at the time, we talked with Kris Sayce about whether or not to recommend any stocks that month in his newsletter.
The conclusion then was what we try do every month: give you our best idea. Kris' best idea at the time was to take a punt on some LNG stocks. As it turned out, it worked really well. The stocks were cheap and the point of maximum despair was a great entry point.
Does today present you with the same kind of entry point? Well that depends on if you think we've reached a bottom in bearish sentiment. A few weeks ago the Investor's Intelligence survey had the fewest number of bears in twenty years and the most bulls since the market top in 2007.
Then, within the space of a few weeks, the percentage of self-identified bulls slipped from 53% of those surveyed to 38.9%. The bull-to-bear ratio also declined from 3.36 to 1.75. Not that we have much skill at reading charts, but you can see from the chart below that the bull-to-bear ratio has had trouble getting and staying above 3.3 over the last three years.
If you were using investor sentiment as your timing mechanism to enter a long trade now, you might want to wait until a further decline in the bull-to-bear ratio. We'll duck into the research office later today and ask Murray what that might correspond to on the ASX/200. That said, he's just sent through a new "buy" alert via the Slipstream Trader on a stock he thinks is already over sold, so the timing of the trades may vary based on the business and the industry.
By that we mean the news in the banking and resource sectors may also be as big a driver of stock prices as sentiment. On the resource front, a stronger U.S. dollar means falling commodity prices. More importantly, there is the argument than China will dial back growth to restrain inflation.
Charles Dumas from Lombard Street Research writes that, "With China overheating and soon to repress its domestic demand, India ditto in the the throes of major inflation, and the commodity countries about to be caught in a collapse of their metal and energy export revenues, the second leg down of the 'W' could start by 2010 Q3."
That's obviously not a very bullish forecast for resource shares. He's arguing that this move in the share markets presages a bigger fall in the global economy. If that argument is correct, you'd expect bigger falls in commodity prices and commodity stocks and a weaker Aussie dollar.
Mind you, none of these seems to have bothered the markets much at today's opening. Stocks are up. And over the weekend Clive Palmer announced that his private firm Resourcehouse had signed a $70 billion deal to export coal for twenty years from Queensland to China. That's going to be a lot of coal.
It's estimated to be about 30 million tonnes a year, to be precise. China Power International Development will contribute US$5.6 billion in debt financing to build four underground and two surface coal mines in Queensland. Hmmn.
This not-so-little development suggests that even with tighter monetary policy, Chinese per-capita energy use is rising from a very low base. That means there could be much more growth ahead in Chinese energy imports, even if industrial production slows down.
That argument seems riddled with internal contradictions, of course. China will use less energy if China makes less stuff to send to consumers in the West. But if Chinese wage growth appreciates - which could also be accomplished without inflation by allowing the currency to strengthen - there might be more internal demand. Or, China might buy more of the stuff that it makes, which would hold up demand for resources.
None of that might matter much in the next few months if financial markets have another nervous breakdown. And what about the other major driver of Aussie indexes, the banks? A lot depends on how the market takes the news that the Federal government is withdrawing its guarantee on large deposits and wholesale funding for the banks.
The guarantee won't go away until March 31st. The government is convinced that the economy is strong enough now that banks can raise wholesale funds without its backing. Whether the banks choose to raise that money, or raise interest rates on consumers too, remains to be seen.
One big issue to watch: credit growth. If the banks feel adequately capitalised, are confident about the performance of their loan portfolios, and not worried about raising money from abroad, credit growth should resume and the economy would hum along. If banks tighten up, watch out.
Watch out is probably good advice in general at the moment. In 2008, the business model for investment banks broke. Leveraged players imploded in the credit crisis. Since then, the risks taken on by the financial system have been transferred to national governments. The result is higher annual deficits and larger debt-to-GDP ratios and a general concern that the deficits may never be paid back.
Last week, Moody's said as much. Specifically, it said U.S. economic growth would have to be much higher than projected for the country to grow its way out of its debts, which are themselves growing pretty fast. If America can't get its fiscal act together, Moody's said the triple A credit rating enjoyed by Uncle Sam is at risk.
"Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the triple A government bond rating." This year's $1.56 trillion budget deficit is 10.6% of GDP. And overall, when you include household debt, corporate debt, and state and local government debt, the ratio is well on its way to 100%."
Strange that despite all that the greenback is rallying. But as we said last week, we've seen it before. In a risk averse world, liquidity matters more than yield. That said, this year's permutation of the Global Financial Crisis is different. The problem with national governments in fiscal crisis is that there is no one to bail them out. This is what makes debt default for at least one of the struggling European nations so likely.
For America? Technically, a nation that can print the money in which its debts are denominated cannot default. It can always print more money (inflate) to pay off creditors. Practically, creditors know this too and plan ahead of time. First, they shift to shorter durations in their security purchases (which they have done). And they diversify into other currencies or hard assets, which they also have done.
Where does that leave us on a Monday? We're at the pointy edge of what feels like another financial panic. The trader with a pocketful of courage might double down on the negative sentiment and buy some oversold stocks for a rebound. And the investor?
At best, we reckon the markets will remain range bound with so much uncertainty coming from fiscal and monetary policy. The world's major economies are not exactly transmitting clear intentions either. And Australia, whose economic success derives from the economy in China and global capital flows, is caught in the middle of all of this. More tomorrow on what to expect.
Dan Denning
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Ned S on 9 February 2010:
I remember it! - DRA was right on top of the game in December 2008. Just looking for that point where "stocks were cheap" - That "point of maximum despair" - To get right back in there! Not like all the silly billy bears who were calling for Dow 4000 and such. And who totally missed the biggest rally in recorded history as a result. Screaming BUY! BUY!! BUY!!! DRA was in fact!
Then again, it "may" have been some other mob?
Comment by Ned S on 9 February 2010:
Hey chaps, FYI ... Even Steve Keen isn't sure if he believes Steve Keen anymore? :
http://www.switzer.com.au/the-experts/steve-keen-economy-expert/its-hard-being-a-bear-part-six-good-alternative-theory/
Comment by Ned S on 9 February 2010:
Hey Mr Denning ... Given what youse mob know all about Japan, whatcha reckon ... Was Hirohito up to his neck in WWII? Or just an enfeebled puppet, for whom all his mob wanted to commit seppuku, like the Yanks later figured out?
Just thought I'd ask, given that a revisionist view of some recent history seems to be becoming palatable with my favourite American DRA editor ...
Comment by John on 9 February 2010:
"So how will the market meet this surge in Asian demand? That's where LNG from nearby Australia comes in. The amount of money going here is just staggering. The Gorgon project alone - a joint venture between Exxon Mobil, Chevron and Shell in Australia - will cost some $50 billion. It already has supply contracts from India and China worth $60 billion and will surely get more before it opens in 2014.
"There are other firms pushing ahead with aggressive LNG ambitions. Woodside Petroleum, an Aussie oil and gas company, wants to be the leader in LNG by 2020.
"As a result of all this activity, Australia will challenge Qatar as the world's largest LNG exporter. One analyst quoted here said: 'The numbers are phenomenal. When you look at them, it's mind-boggling. It's going to be LNG boom times.'
"It's quite possible that in the next decade, LNG will surpass coal as Australia's most valuable export. The government is certainly supporting LNG projects - it will add a gush of tax revenues to its coffers. Look at what oil did for the Middle East; the same kind of thing could well happen for Australia."
ULP! There goes the property market... .
Comment by Dan on 9 February 2010:
So, DD is bullsh for Australia, but Bill is bearish on the US (which some technical analysis I read recently seems to suggest ... especially the low volumes and high volatility on which the rally there is trading). I just wonder how much any ongoing problems in the US markets will put a dampener on any booms here. The parking of US money in AU stocks is likely continuing ... how much does this affect energy stocks?
Comment by Ned S on 11 February 2010:
I reckon the following by DD deserves full points:
"And it's also why you'll find apparently contradictory statements and advice in the Daily Reckoning. Your editor thinks you should use any rallies in the market to gradually liquidate your stock portfolios. In other words, retire now before the government seizes your super assets or the market crashes.
Yet we work with experienced traders and analysts who've spent years in the markets finding great investments. We publish and sell their research and that contains buy recommendations on all sorts of Australian stocks. We publish that because fundamentally, we have no idea what will happen. It's what we're all trying to figure out."
http://www.dailyreckoning.com.au/cba-and-their-bad-debt-problem/2010/02/10/
Comment by Stillgotshoeson on 11 February 2010:
Ned S you seem to be one who reads what's written but not what is said...
"Hey chaps, FYI ... Even Steve Keen isn't sure if he believes Steve Keen anymore? :"
What Keen is saying is that if he is wrong then so to are all the conservatives that say government intervention does not, will not and can not support the economy.. if the housing market does indeed go through a correction then both are still right.. government intervention failed and the housing market busted anyway.. all the government would have succeeded then is inflating the bubble more and delaying the pop but getting a bigger pop as a result.
Comment by Biker Pete on 11 February 2010:
IF and IF... "If he is wrong..." and "...if the market goes through a correction"... . Sounds pretty IFfy to me!
Like the bloggers who responded to Keen's article, I interpreted it as doublespeak straight out of Orwell. It's a 'don't-blame-me' apology along the lines of 'Yes, but... '... a 'not-my-fault-I'm-wrong' bleating for understanding. What of the Aussie trait of being a good loser? What of the tens of thousands of Aussies duped by this guru of grief... ?!
IF your financial plan includes the necessity for a housing market collapse, allowing you to snatch up a cheap home in a good area, you really are gambling, Shoe-son. I presume you still have your shirt, but I think I'd hide my shoes... . (Maybe Steve K can lend you a T-shirt, mid-April?
)
Comment by Ned S on 11 February 2010:
The section of the article specifically written by Keen starts off:
"If the economy does in fact recover from the Global Financial Crisis—without private debt levels once again rising relative to GDP—then my approach to economics will be proven wrong.
But this won't prove conventional neoclassical economic theory right, because, ... "
And concludes with:
"I emphasise in closing my own comments that, if there is a genuine recovery not involving rising private debt to GDP levels, then Chartalism is the only theory left standing. Neoclassical economics is dead."
I guess each one of us can make his own call on whether that sounds to them like "Even Steve Keen isn't sure if he believes Steve Keen anymore?"
For what it's worth, I didn't and don't see anywhere in the article that Keen mentions the housing market. Although I'm quite sure that if one felt especially inclined, they could try and discuss the housing market from the perspectives of the three schools mentioned in the article - Namely Neoclassical, Circuitist and Chartalism ... It's not my thing though.
Comment by Stillgotshoeson on 11 February 2010:
Houses don't interest me.. I rent and invest the difference.. my investments have out performed the housing market. March to now capital is more than 50% up nett. + dividends on top.
Comment by Stillgotshoeson on 11 February 2010:
I had a house once.. my ex-wife got it after the divorce.. sort of put me off having another one for the time being.
18 months ago I was over 50K in debt, now I am debt free, returns on investments and driving down the debt with overtime has put me in a good position..
I am renting a unit off of a friend at below market rates.. helps me and he gets a good tenant..
I get to invest and regrow my financial position after being taken to the cleaners...
Comment by Biker Pete on 11 February 2010:
"I had a house once.. my ex-wife got it after the divorce..."
Only ONE house? Only ONE ex-wife?
Only ONE punch???!!!
M-a-t-e....
Comment by Stillgotshoeson on 11 February 2010:
"Only ONE ex-wife?"
If you've got more.. just proves I'm smarter than u.. at least I learnt..
Comment by Biker Pete on 11 February 2010:
Married happily 32 years, Shoe-son. Two great kids.
Yep, you're smarter... and no doubt _healthier_ and _wealthier_ than I am!
Never had to blame anyone else for my own steep learning curve, son.
Learned to roll with the punches, rather than give up.
Oh, I forgot. And you're _smarter_ than me, too.
Comment by Ned S on 12 February 2010:
Up to 70,000 new jobs for QLD in a recent coal mine deal - Not all the news everywhere is bad I guess.
http://www.abc.net.au/rural/content/2010/s2813509.htm?site=northqld
Comment by Biker Pete on 12 February 2010:
QLD and WA keeping Oz solvent, by the look of it, Ned... !
Unemployment here down to 5.3%, but most of our big projects haven't commenced yet. Have to wonder how we'll accommodate the rising population...
Comment by Ned S on 12 February 2010:
The project is based around Alpha it seems - All bar the dearest house is "under contract" now. Could still be OK maybe??? Although it's not the sort of thing I've ever given ANY thought to before! Next time a multi-billion dollar resource project pops up perhaps?
Course I'm conservative and figure 4% pa to keep up with inflation plus 3.5% pa rent is OK. And SE QLD seems to manage that (or more) most years.
If I was sandgroper, I reckon I'd vote for secession!