Market rallies – where to from here…?

“Trying to pick the timing of a halt to the current carnage is difficult. But I would make the following points. The fall in the current bear market in shares is already bigger than the average for such episodes. The Australian market is more than 40% below its peak; the average bear-market fall is about 33.3%. Also, if measured by conventional price/earnings ratios, share markets around the world are very cheap right now. Price/earnings ratios can mislead; they are only as good as the underlying earnings forecasts. But right now, world equity markets would be fairly priced (neither cheap nor expensive) if earnings were to fall by more than 40% next year. Do we really think that the crisis will be that bad? Remember that this is a very different episode from the worldwide bear market that began in 2000, from a position in which equities were ridiculously overpriced.”

“One rarely sees sustainable recoveries in share markets until economists and analysts start to factor in economic recovery (this process precedes recovery itself by several months), and we are months away from that. So we seem to know the following: markets are cheap right now and there is a sustainable recovery out there somewhere. We just don’t know whether fear and pessimism will become even more dominant in the weeks ahead. That said, there has to be a chance of a short, sharp rally in the coming weeks if market participants come to the conclusion that the market is oversold. I have been wrong on this before, I admit, but my personal view is that it is now ‘too late too sell’.

What about the dollar?

The fall in the currency has been amazing. ‘Fair value’ of the Australian dollar has probably fallen from about 90 cents in July, to about 78 cents now, so the currency has gone from too expensive to way too cheap. This means that it is likely to claw its way back up to the high-70s over the months ahead. This is good news for overseas travellers, but not so good news for investors. The falling currency in recent months has shielded investors with money offshore (and we all have money offshore!) from at least some of the market carnage. A rising $A in the months ahead will subtract from some of the future gains from investing abroad.

Chris Caton
Chief Economist

BT Financial Group

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24 Responses

  1. Where to from here is a very fair comment. Economic recovery? The level of uncertainty not only in the markets but more importantly in global economy is far from certain at this point, and may not be for sometime to come.

    I guess the question for investors to answer is; are market and economic conditions fundamentally sound or unsound?

  2. Dead Cat Bounce!

  3. Dead Cat Big Bounce – Few more bounces left in dead cat yet LOL

  4. Where the hell is Adrian?

  5. Dead BIG Cat Big Bounce I think.

  6. You know you are in a bubble when the supermarket conversation is about share price, as was the case recently. Wives (partners) of stockbrokers & lawyers talking about the success of their investments!! It was always bound to end in disaster (for them).

    Most margin calls are pretty well over, those that ahve been highly geared and under pressure have probably already sold. I think we can look forward to continuation of these lower market levels, hopefully with a little more cynicism.

    No one ever went broke by being too cynical about the market.

  7. I think that Tom is rightin saying that most people that would have been highly geared or under pressure have most likely already sold.

    I think there are actually quite a few good buying opportunities now.

  8. Dollar up 6pc, to US71c

  9. I agree with stuntreb and Tom.

    The hedge funds have virtually bailed out and those with margin calls would have sold or stumped up the cash by now.

    The market may stay low for some time as this has been a nasty shock to anyone who has never experienced a negative run on the stockmarket and those people may be shy for wuite some time now.

    As for myself I experienced it all in 1987, blip in the 90s and then 2001 while in the Bank. I will be looking for value shares now and buying slowly and steadily rather than jumping in feet first.

  10. Shane,

    If you are looking to invest in a stock for a long term advantage, rather than a short term gain look at Geodynamics.

    I never touch the stockmarket but I will be buying a very large tranche of shares in this company shortly.

  11. scaper

    thanks for the heads up will take a gander.

  12. scaper

    up 14C or 16% today

  13. Shane,

    I am used to getting regular updates but they have gone quiet over the last two weeks since the last well was successfully drilled in the Cooper Basin.

    Look at their corporate partners in this venture.

  14. Where the hell is Adrian? JMc

    Too much on finance, not enough on politics for Adrian, is my guess…we do need to “diversify” a bit more!

  15. I agree TB. The discussion is particularly narrow. How about I put up a post on my favourite topic(s)??

    I listed the diverse range of subjects I could discuss a few days ago.

    Send through the posting details and I’ll post away!!!

  16. Everyone – I was going to mention that too… we need to have some more diverse posts (which is why I put up the Intervention post). I understand that the economy/markets is a big issue at the moment, but if anyone has any suggestions for a post topic, just let me know.

    🙂

  17. Joni – seriously I wouldn’t be concerned about the breadth of topics. I think the participants on this site show a great willingness to hijack the topic if they feel like it. Certainly this is my inclination.

    It’s good fun to date.

  18. “Hijack the topic?”

    Surely not!

    BTW, some bloody lefty-leaning, latte-sipping, socialistic sod wants the government handouts to go to, wait for it..

    BLOODY DOLE BLUDGERS!!

    FMD.

  19. joni

    we just need to find our feet and make sure more people with objective views from both sides of politics and other opinions find their way to the site.

    It is great so far and I have no intention of going anywhere 🙂

    Hijacking a topic can be fun, it takes our eye off the ball and makes us refocus. Too much politics and economy without a comedic outlet at times becomes too serious.

    Thats what I liked about blogocracy and now blogocrats, while there is political and economic discussion, there is also allowance for off the track comments and any angle commentary within a friendly atmosphere.

  20. And another thing, can we keep posts to a limit in terms of maximum words.

    You know who you are…!!!!

  21. stuntreb 4.45pm

    See this is what I am talking about, off the cuff comments that immediately put a smile on your face 🙂

  22. joni,

    An interesting topic would be the demise of Australia’s manufacturing industry…maybe a series of threads.

    Cause and solution?

  23. Tim was in contact today, his message; Good to see Blogocrats kicking along. Well done.”

  24. Can we limit the number of threads over the weekend, like Tim did? I’m addicted to this site (as I was with Tim’s) but I find it hard to keep up when so many topics are going at once. I’m a Commonwealth public servant which automatically eliminates me from enjoying this site during working hours (wink wink).

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