Global Credit Crunch Forces Aussie Stocks Down

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This is fast turning into a January to forget for investors. Let’s just hope it doesn’t get any more memorable.

Yesterday and today have pretty well confirmed what we’ve been saying for the past year. Australian stocks are following U.S. stocks down as global investors finally factor in a bear market in global credit to share prices. The question now is where the floor will be for equities…and which sectors will find it first. Energy and gold-last year’s darlings, are leading contenders.

It probably won’t be big tech. Intel disappointed investors with earnings below what analysts expected. And thus the theme that multinational technology companies would lead the entire back to the promised land (above 14,000) is dead. It lasted exactly one day, hardly long enough to even trade.

But wait, we are being presumptuous. The Dow must first claw its way back to 13,000 before it gets to 14,000. Locally, the direction of the major indices doesn’t interest as much as the direction of the resource stocks.

From our vantage point in St. Kilda today, it looks like this will be the year for speculators in gold stocks. The blue chips are boring, underperforming, and face a tough earnings environment. Gold, despite losing US$10 in New York trading, is nearing its euphoria phase where people buy it because it’s going up. Not exactly rational. But useful to know if you’re looking for punts in the share market this year.

Shares or property? We’ve been told by some readers that Aussie investors don’t care about gold. It’s either shares or property, and there seems to be an impression that if one isn’t going up, the other must. Shares down? Buy property. Property down? Buy shares!

If it were that simple, we’d all be rich and you wouldn’t be reading this. You’d be at the tennis in Melbourne Park, avoiding clouds of pepper spray. Or perhaps at the beach. But of course it is not that simple.

For five years, all asset classes rose simultaneously with easy global credit conditions. Those conditions aren’t easy anymore. They’re very hard. Citigroup reported the biggest lost its 196-year history yesterday. It lost nearly US$10 billion in the fourth quarter and wrote down another US$18 billion in dodgy mortgage debt. Don’t worry, there’s more where that came from.

More financial losses will be realized as the fake wealth from the global credit boom goes up in digital smoke. The important thing to realize is that globally, this change in credit conditions isn’t the type of thing you can respond to with an axiom. “The share market is slowing down after a global credit boom and China’s epic industrialisation. It must be time to buy property!!”

The trouble with housing here in Australia and all the Anglo-Saxon economies is that it became financial zed. The link between financial innovation and the real economy was established in the mortgage market. It’s true here. It’s true in the U.K, in the States, and even Holland and Spain.

Protecting your capital, then, is not just an easy question of asset allocation. It involves thinking about how the world is changing and where the risk and opportunities really are. Right this moment, there are more risks than opportunities. But we’ll keep looking.

And here’s an idea. If Ben Bernanke wants to really help Wall Street, he can hire all those bankers Citigroup (NYSE: C) is about to fire and use them to hand out all the money he’s going to print later this week. After all, these are people who are used to giving away money indiscriminately. And it will save on fuel costs for Bernanke’s fleet of helicopters. Ben’s Banking Brigades…on the march to market near you soon!

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Hi Dan,

    The economy of the US is in tatters, but how much is this going to affect Australia? The credit bust over there is going to be a monumental disaster for the world, but do you believe that property prices will drop here, and by what percentage?

    I suppose in true Austrian economic speak you will say “I don’t know”. And I respect that, however my feeling is that property prices here have been appreciating at around 15%, which is out of whack with the historic trend of 4% per annum.

    It would not surprise me if property dropped by more than 20%.

    Keep up the good work Dan.

    Brian

    Reply
  2. I’d have to agree, prices would have to cool off by an average of 15% – 20% to get back to sanity.

    People in Australian capital cities are currently financing huge amounts against their homes – something like 20 years of savings.

    Reply
  3. well it’s snowing here in new hampshire and the recount has started. opps!

    as to real estate, well another 30% downside seems like paradise. i mean get cash at 30% belown current valuations.

    as too the credit crunch. ugly. credit cards going up in smoke. people feel poor with the 20% inverse wealth effect.

    everybody’s so stingy i had to take a call from florida to get 2-1 on the superbowl.

    well easy money is easy money.

    Reply
  4. ASFA chief executive officer Pauline Vamos today says don’t panic and that superannuation should be viewed is a long-term investment.

    In my opinion view Pauline is either dishonest, kidding herself or just plain incompetent. Strong words that require clarification.

    My key concerns are:

    1. Many fund managers see storm clouds coming but don’t, won’t or can’t do anything about it.
    2. If the fund managers were competent, the funds would access more asset class options – including energy and precious metals.
    3. Super industry commentators dishonestly suggest that there is no alternative but to join the mob on the rollercoaster ride to Hell.
    4. Pauline is correct in saying that Super is a long term investment but but so is Japanese stagflation.

    Stuff the super industry – or at least a lot of it. Yes there are competent managers and advisers out there but they are not the majority.

    As previously stated, the Australian and US economies are joined at the navel though trade and direct investment linkages.

    Coffee Addict
    January 17, 2008
    Reply
  5. It seems that the managing director of Mortgage House knows something that you guys don’t know (tongue in cheek)…

    Mortgage House managing director Ken Sayer said the non-bank lenders were facing the same funding pressures as the major retail banks.

    The group’s mortgage costs are up by 30 basis points and it relies solely on wholesale funds as it has no deposit base.

    “I think we are approaching the bottom of the credit crunch and while that sounds negative, I think it’s a positive,” Mr Sayer said.

    “I think in 30 to 60 days the ugly news will be in the past. The flip side of that is when it happens, investors will come back into the market and there will be a bit of stability over the next 18 months.”

    Ken Harrison
    January 17, 2008
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  6. well, excuse me… but there are some opportunities out there!
    It’s a kind of negative gearing thing… and i’ve been busy taking some writedowns of my own, but it’s fun putting the difference in my pocket whilst preparing the tax losses!
    accumulate!!
    this correction is worth it’s weight in gold!

    Carl Cashenout
    January 18, 2008
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  7. I agree the super options in Australia are very limited. Though I can see troubles coming but there is no way for an ordinary Australian like me to do anything about it except to change to the “cash” option. There is no access to energy or gold.

    Dan, can we have some expert comments on how Australian can protect their perhaps biggest investment of superannutation? Maybe you know some experts in the field? Thanks.

    Reply

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