Australian markets should get a breather today and tomorrow as the US market shuts down for the Thanksgiving holiday. No one wanted to be long going into the long weekend in the States, apparently. The S&P 500’s 1.6% loss wiped out the indexes gains for the entire year with just seven weeks left until 2008.
The Dow closed at 12,799 - which incidentally is lower that in closed at any point during August’s credit crisis (round one). The intra-day low on the Dow on August 16th was 12,455. But from that point and through the first week and half of October, global stock markets pretended like the obvious bear market in credit would have no impact in the real economy. Investors are now rethinking that trading theme.
And why not? The credit pain is spreading to all different parts of the American body financial. Withdrawal symptoms are affecting financial balance sheets from banks to mortgage lenders. Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), who together guarantee more than 40% of the American mortgage market, have succumbed to the selling pressure. As Bill notes below, both stocks got clobbered this week.
BHP (ASX:BHP) is up 24% since August 16th. Rio (ASX:RIO), with the updraft from the merger talk with BHP, is up nearly 60%. These two shares have allowed the All Ordinaries to say about 13% higher than the intraday low of August 16th. And that’s where it stands year to date, about 13% higher than where it began. Since 2003, the ASX/200 is up 139%.
Can the base metals stocks continue to bear the leadership lode for the Aussie market? Well, investors have already significantly revalued BHP and Rio based on longer-term price forecasts for metals and on Chinese demand. We hesitate to say that the metals stocks have the China story “fully priced in.” But we are certainly thinking about it.
Then again, not much is making sense in financial markets these days. Investors who feared inflation used to sell bonds. Not these days. Spooked by the magnitude of losses in the credit market and the prospect for worse to come, stocks and risky currencies are being sold. People are buying bonds instead. But does this make any sense?
It does make sense if bonds are “safer” than equities. But we’re not at all certain that is the case. After all, why would you own a fixed income instrument when nearly all the world’s central bankers say their primary concern is inflation?
In the notes from its most recent policy meeting, the US Federal Open Market Committee said, “recent increases in energy and commodity prices, among other factors, may put renewed up-ward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.”
This came after the Fed has only recently said it was more concerned about growth than inflation. Roll the clock forward a few weeks and wham, inflation is the bogeyman again. Ben Bernanke’s Fed has vowed to be more transparent, but all it looks like lately is indecisive, bordering on incompetent.
Bond yields fell in the US as investors dumped stocks and bought Treasuries. This seems like moving from the business class cabin on a crashing jetliner to the toilet at the back. It may buy you some time. But you’re still going down.
Investors are accustomed to having a “bail out” asset class that preserves wealth when traditional inter-market relationships break down. The trouble with the bull market in credit is that all asset classes - stocks, bonds, commodities, real estate, and art - all went up at the same time on the same sea of money and credit.
This sea of liquidity destroyed the positive and negative correlations between asset classes. Everything just went up. Now that the sea is being drained, everything is going down. You’re seeing a general deflation in financial assets.
And given that so much of the economy has been financialised in the last ten years, even hard assets like gold are feeling the loss of liquidity. Don’t worry about gold though. It is fairly insensitive to the slings and arrows of outrageous fortune.
Oil will be US$100 soon. And it’s still cheap.
There’s a big vote this weekend, isn’t there? Prognostication is a fool’s game. But we feel foolish this morning. Natalie Gauci in a squeaker.
“You have too much iron in your blood,” the doctor told us this morning. After our mishap at Rockpool several weeks ago, in which your editor spoiled a perfectly good $110 rib eye by washing it down with an expensive, nausea-inducing cigar, we went to see the local apothecary for a check up. Everything else appears to be fine—although judging from the packed waiting room, there’s a bull market in sickness.
Dan Denning
The Daily Reckoning Australia
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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.
